Westpac to shine a light on Murray recommendations

INVESTORS will look at Westpac to shine some light on the Murray financial system inquiry’s call for higher bank capital levels.

INVESTORS will look at Westpac today to shine some light on the Murray financial system inquiry’s call for higher bank capital levels, after a leading analyst revealed the range of uncertainties has even managed to stump a brand new forecasting model.

After a week of silence by the big four banks, Westpac chairman Lindsay Maxsted and chief Gail Kelly are expected to update shareholders on the Murray inquiry’s recommendations at its annual meeting in Brisbane today.

It marks the end of a big week for the banks, including new rules from the banking regulator to curb riskier lending and a review by the corporate cop into investor lending.

“What is clear, in our view, is that there is no definitive answer on bank capital requirements emerging from the financial system inquiry’s recommendations,” UBS analyst Jon Mott told clients yesterday as he unveiled his new “Aussie bank capital scenario model”.

The comments are notable, given Mr Mott is closely followed and there is a range of views on how much capital the big four may need to raise should the inquiry’s recommendations be adopted, from $8 billion to more than $30bn.

After laying low this week, Westpac’s response will give an insight into the direction of the big four’s powerful lobbying in the consultation period for the inquiry to the end of March. ANZ and NAB hold AGMs next week.

One chief of the big four told The Australian that while being forced to hold a bit more capital over time was not overly concerning, the uncertainty of being tied to ever-rising capital requirements globally should be further debated. The issue has arisen after the David Murray-led inquiry this week told the government all banks should have capital levels in the “top quartile” globally so they were “unquestionably strong”, given Australia’s reliance on offshore funding.

Mr Mott said the “conjecture” on how much the banks would need had overlooked several variables, including how much common equity tier-one (CET1) capital global banks raised over the implementation period set for the big four.

He added that global capital levels could be materially changed by a review on how risk weights were set globally, which would not be finished until later next year.

Risk weights are how much risk of default that banks assign to loans.

The Murray inquiry recommended forcing the big banks to have sharply higher risk weights for mortgages of between 25 per cent and 30 per cent, up from an average 16 per cent.

Mr Mott said ultimate capital levels were also clouded by the banks’ potential capital raising strategies and “operational drivers”, such as moves in net interest margins and bad debts.

The inquiry said the big four banks’ CET1 ratios were between 10 per cent and 11.6 per cent, below the top quartile at a minimum of 12.2 per cent.

But Mr Mott said the top quartile had probably already risen “at least 50 to 100 basis points” and would “continue to grow”.

He found the big four could need to raise CET1 levels by $21bn next year, but stressed that it was impossible to forecast and his model allowed users to change the range of variables.