NZ move could cut bank payouts

UBS has warned of payout cuts as a result of proposed ‘damaging’ changes to New Zealand’s capital buffer regime.

The Reserve Bank of New Zealand headquarters in Wellington. Picture: Bloomberg

New Zealand’s proposed higher bank capital requirements are “unnecessary and potentially damaging” and could prompt Australia’s major banks to cut ­dividends, UBS analysts have warned.

UBS came out swinging after taking a closer look at the Reserve Bank of New Zealand’s revised capital initiatives — announced last month and open for consultation until March 29 — and found they have huge implications for Australia’s banks, which account for 88 per cent of NZ’s banking assets.

Other analysts have said what the RBNZ is proposing would be likely to see Australian banks shift more capital to their NZ entities or possibly raise new capital, depending on the final shape of the requirements.

The slated changes materially increase the amount of capital held by NZ banks, with the RBNZ suggesting increases will range from 20 per cent to 60 per cent.

“While we are firm believers in strong, well-capitalised banks, we believe the proposals by the RBNZ to lift New Zealand bank capital requirements to the highest in the developed world, justified by academic hypotheses, appear excessive,” UBS analysts, led by Jonathan Mott, said in a report sent to clients. “This begs the question: is New Zealand’s proposed bank-capital initiative worth it and what are the risks?”

Under the RBNZ proposals, the central bank may change risk weightings applied to the assets and drive a jump in the so-called “prudential buffer” banks hold. That would see a tier-one capital requirement equal to 16 per cent of risk-weighted assets for large banks imposed.

“The RBNZ capital proposals appear unnecessary and potentially damaging,” Mr Mott said, adding that the move to strengthen the banks could come “at a significant cost” to the NZ economy.

“They appear to be materially underestimating the likely mortgage repricing. That said, if the RBNZ proceeds with its capital proposals, it may be the final catalyst for dividend cuts at the Aussie majors (potential range from about 11 per cent cut at ANZ to about a 29 per cent cut at NAB).”

A report by National Australia Bank’s credit desk last month suggested that if the proposal was implemented in its current form, the big four Australian banks’ subsidiaries in NZ would require at least $NZ9 billion ($8.5bn) in additional capital.

UBS said it disagreed with statements by several Australian banks that the NZ measures would not materially affect their overall capital levels.

“Migrating group capital to NZ would reduce the capital maintained by the Australian Authorised Deposit-taking Institution (Level 1),” Mr Mott said.

“This would place at risk the banks’ ability to meet the requirements of the Financial System Inquiry that APRA ‘set capital standards such that ADIs’ capital ratios are unquestionably strong’. A stronger NZ would be dilutive to Australia unless fresh capital is raised.”

UBS also expects NZ banks to reprice their mortgage interest rates by about 80 basis points in light of the proposed capital changes, as they seek to maintain their current return on equity.

The RBNZ has suggested a five-year transition period for the proposed higher capital requirements.

In other research, Deutsche Bank analysts said short positions in the major banks had increased since October to sit at an average of 1.4 per cent of all shares outstanding.

“Over a three-month period, all of the majors saw an increase in short positions, with an average increase of 58 basis points,” it said.

“Currently, CBA is the most shorted (at 2.1 per cent of shares on issue), while NAB is the least shorted (at 0.7 per cent).

“The regionals are higher, with Bendigo and Adelaide Bank at 6.1 per cent and Bank of Queensland at 6.2 per cent.”

A short-seller profits if a share price falls.