CANBERRA: Australia’s major banks have done the bulk of the heavy lifting on capital after the Commonwealth Bank and ANZ tapped shareholders for a combined $8 billion in the past week, and can probably satisfy the upward drift in capital requirements without more “big bang” capital raisings, analysts say.
In moves that will lower returns but make banks more resilient to shocks, CBA is this week raising $5 billion in a rights issue, after ANZ last week raised $3 billion.
This comes after National Australia Bank’s $5.5 billion raising in May and Westpac raised $2 billion through its dividend reinvestment plan in the same month.
Speculation the banks would need to raise capital – which provides a buffer for absorbing losses – has been a key reason for recent volatility in bank shares.
However, on Thursday analysts said the industry would probably meet further increases in capital requirements through retained earnings or their dividend reinvestment plans, rather than explicit raisings like the one launched by CBA.
While some in the market are questioning if Westpac may move, sources said it would not be hurried into issuing new shares after CBA and ANZ’s recent raisings.
Credit Suisse analyst Jarrod Martin said the big banks were more than half way through the task of raising $28 billion, an amount he estimates they will need to satisfy the banking regulator’s recent rules on mortgage “risk weights,” and lift their ratio of capital to assets towards 10 per cent. “They’ve raised $15 billion, so they have $13 billion to go,” Mr Martin said.
Mr Martin said the industry generates about $6 billion a year in capital via retained earnings, which would allow it to hit the 10 per cent capital ratio target in about two years. He said the sector – with the possible exception of Westpac – appeared “more firmly ex-raising.”
The spate of capital raisings are a response to regulatory requirements for banks to hold bigger capital buffers, a key recommendation of the financial system inquiry chaired by David Murray.
The Australian Prudential Regulation Authority last month implemented his recommendation for banks to adopt more conservative “risk weights,” giving the banks until next July to raise a combined $12 billion.
Some analysts believe APRA may further increase capital requirements early next year in response to global changes known as Basel IV, but the size of these changes or when they will take effect is not known.
Bell Potter analyst TS Lim said the banks had now done the majority of what Mr Murray had called for on capital, and further increases could be met without explicit capital raisings. “I think the bulk is over. I think we are probably in the clear now on the capital front,” he said.
CBA’s move takes its closely-watched core-equity tier 1 (CET-1) ratio to 9.5 per cent after APRA’s changes on “risk weights” are taken into account, according to Deutsche Bank analyst Andrew Triggs. This would give CBA the highest CET-1 ratio of the big four, while Westpac has the lowest at 8.5 per cent, Mr Triggs said.
Given the trends towards higher capital requirements overseas, analysts still believe banks may need to raise these up towards 10 per cent, but that it can be achieved without further rights issues or placements. In July, Westpac said it would need an extra $3 billion to meet APRA’s rules on risk weights.
In addition to the $2 billion it raised through a partially underwritten dividend reinvestment plan, the bank has also raised about $500 million by selling down its stake in funds management business BT.
Despite a soft second half from CBA, several analysts were also upbeat about how its future earnings would benefit from moves to raise mortgage rates in recent months. CBA delivered a $9.14 billion full-year profit on Wednesday, but earnings dipped in the second half amid stiff competition in the home loan market.
