Australia: APRA capitulates to Big Four banks

From Clancy Yeates at The Age:

Quelling investor fears over moves to strengthen the financial system, the Australian Prudential Regulation Authority on Wednesday said major banks would have until 2020 to increase their levels of top-tier capital by about 1 percentage point, to 10.5 per cent.

The target was much more favourable to banks than some analyst predictions, with some bank watchers in recent months warning lenders may need to raise large amounts of equity or cut dividends to satisfy APRA’s long-running push for “unquestionably strong” banks.

Markets are now confident banks will hit APRA’s target, estimated to require about $8 billion in extra capital from the big four, through retained earnings or by selling new shares through their dividend reinvestment plans…..

“The scenario where banks had to raise significant capital appears to be off the table for now,” said managing partner at Arnhem Asset Management, Mark Nathan.

Mr Nathan said the banks’ highly prized dividends also looked “safer”, though were not likely to increase. National Australia Bank and Westpac in particular have high dividend payout ratios, which could put dividends at risk from other factors, such as a rise in bad debts……

APRA’s chair Wayne Byres said the changes could be achieved in an “orderly” way, and the new target would lower the need for any future taxpayer support for banks.

“APRA’s objective in establishing unquestionably strong capital requirements is to establish a banking system that can readily withstand periods of adversity without jeopardising its core function of financial intermediation for the Australian community,” he said.

APRA chairman Wayne Byres used the words “lower the need for any future taxpayer support.” Not “remove the need…..” That means banks are not “unquestionably strong” and taxpayers are still on the hook.

A capital ratio of 10.5% sounds reasonable but the devil is in the detail. Tier 1 Capital includes convertible (hybrid) debt and risk-weighted assets are a poor reflection of total credit exposure, including only that portion of assets that banks consider to be at risk.

Recent bailout experiences in Europe revealed regulators reluctant to convert hybrid capital, included in Tier 1, because of fears of panicking financial markets.

Take Commonwealth Bank (Capital Adequacy and Risks Disclosures as at 31 March 2017) as a local example.

The Tier 1 Capital Ratio is 11.6% while Common Equity Tier 1 Capital (CET1), ignoring hybrids, is more than 17% lower at 9.6%.

But CBA risk-weighted assets of $430 billion also significantly understate total credit exposure of $1,012 billion.

The real acid-test is the leverage ratio which compares CET1 to total credit exposure. For Commonwealth this works out at just over 4.0%. How can that be described as “unquestionably strong”?

Minneapolis Fed President Neel Kashkari conducted a study last year in the US and concluded that banks need a leverage ratio of at least 15% to avoid future bailouts. Even higher if they are considered too-big-to-fail.

4 thoughts on “Australia: APRA capitulates to Big Four banks

  1. […] and short-term support at 8500. Twiggs Money Flow continues to warn of selling pressure despite indications from APRA that they are unlikely to require further capital raising. Reversal below 8500 would warn of another test of primary support at […]

  2. […] that respects support at 8500 would be a bullish sign, signaling continuation of the up-trend. The industry is still light on capital but recent remarks by APRA chair Wayne Byres indicate that they are prepared to tolerate a more […]

  3. Glen says:

    This means :
    Continue to Buy the Banks …………….. and the ASX 200 , therefore.

    Why bearishness continues ( for the last two months, or so) prevailing is beyond me, truly. I feel that pessimistic commentators start out – sometimes, as has been the case for the last two months – with a preconceived view, then attempt to support it with subsequent convenient data = cognitive bias.

    Have a look at the medium-term ASX chart : It’s a bull market since 2009 – the small 2015 correction was the one we ‘had to have’ in this up-trending market. The Banks will prosper going forward … it’s as easy as that. Contrary argument ignores the dynamic of corporate profit-making.

    Click on the MAX tab in this chart – then you tell me what support you have for being a doomsday prepper? … It’s been going up – correctly, as it discounts net favourable economic, financial and corporate outlooks. The tape never lies – *end-of-story*. In other words, respect the trend, as it correctly interprets these net outlooks. Complications of charting interpretations with various others ” indicators” are futile, as they ignore the “net outlooks” implicit in the line graph of the index = they are a waste of time and money, and credibility.

    http://www.asx.com.au/prices/charting/?code=XJO&compareCode=&chartType=LINE&priceMovingAverage1=&priceMovingAverage2=&volumeIndicator=BAR&volumeMovingAverage=&timeframe=daily

    • ColinTwiggs says:

      Appreciate the comments but I think you missed the point. The message was not “sell the banks”. APRA’s capitulation will ease pressure on the big four to raise further capital and we should expect bank stocks to respond positively to this. The issue I have is with APRA’s pronouncement that the banks will soon be “unquestionably strong”. With CET1 leverage ratios between 4 and 5 percent, that is nonsense. Bank shareholders will continue to enjoy an unwritten taxpayer guarantee for years to come.

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