Could Australian banks float their NZ subsidiaries?

Monday 17th December 2018

The Australian parents of New Zealand’s four largest banks would need to transfer about A$18 billion of capital to their subsidiaries to meet proposed new capital rules, according to Macquarie Equities.

In announcing the proposed rules on Friday, the Reserve Bank estimated the big four banks would need to increase their tier 1 capital by $12.8 billion and replace another $6.2 billion of preference shares because they will no longer count as tier 1 capital.

“We would be surprised if APRA (Australian Prudential Regulation Authority) was comfortable with about A$18 billion of capital leaving the system,” the broking firm said in a note.

“While some of this could be achieved organically in a low growth environment, this would put pressure on banks’ dividends, reduce banks’ ability to offer capital management initiatives and increase risk of capital raisings in the event of a downturn.”

Capital management initiatives usually means returning capital to shareholders, often through share buybacks

Should the changes be implemented, Macquarie said the banks are likely to raise capital, re-price their portfolios, reduce capital flows here and "potentially look to divest or partially divest their NZ operations."

Macquarie’s view is at odds with that of the Reserve Bank which estimated the big four could achieve the new capital rules by retaining about 70 percent of their average $4.4 billion of annual earnings.

Macquarie is also sceptical about the central bank’s view that the bank’s pricing response is likely to be immaterial.

“While theoretically, this may be conceivable, in practice we believe it is highly unlikely,” it said.

“We estimate the banks’ return on capital in New Zealand would decline by about 40 percent ... suggesting that, on average, New Zealand returns would fall below the cost of equity,” it said.

Macquarie estimates banks would need to raise their pricing, or the interest rates charged on loans, by about 90-140 basis points.

“Given New Zealand is an importer of capital, the proposed changes would arguably increase the cost and availability of funding,” it said.

“We expect to see a number of risks raised during the consultation period and see scope for the New Zealand regulator to soften their stance on capital, alleviating pressure on the Australian banks.”

The changes would be phased in over five years and the central bank is also proposing new minimum levels for the big four’s internal capital models to bring their capital requirements more in line with the rest of the sector which has to use standardised models.

That will greatly reduce but not eliminate the competitive advantage the big four have over the rest of the banking sector.

New Zealand’s largest bank, ANZ, expects the proposed new bank capital rules could mean it would have to increase its capital in New Zealand by $6-8 billion while the other three Australian-owned banks say they’re reviewing the situation.

“The overall impact on the ANZ Group depends on a number of factors. These include the outcome of the consultation, ANZ’s New Zealand balance sheet at the time of implementation and the outcome of other reviews currently underway by APRA,” ANZ said.

“Therefore, it remains too early to determine the extent to which this could impact capital levels,” it said in a statement.

ANZ Group’s ratio of common equity, the only type of capital that will count as tier 1 under the proposed new rules, was 11.4 percent at Sept. 30, about A$3.7 billion above APRA’s stated “unquestionably strong” level of 10.5 percent, the bank said.

Its New Zealand subsidiary’s tier 1 capital stood at $11.86 billion at Sept. 30, giving it a ratio of 14.4 percent. However, $2.78 billion of that will no longer qualify as tier 1 capital under the new regime.

Westpac said its New Zealand subsidiary is already strongly capitalised with a tier 1 capital ratio of 14.5 percent at Sept. 30.

That’s below the Reserve Bank’s proposed 16 percent minimum and Westpac’s $7.79 billion of tier 1 capital currently includes $1.5 billion of non-qualifying tier 1 capital under the proposed new rules.

Excluding that non-qualifying capital, Westpac’s tier 1 ratio is 11.7 percent.

Westpac is already holding about $1 billion more in capital than it would otherwise have to carry, a penalty imposed on it in 2017 after it was revealed it had failed to get Reserve Bank approval for the internal capital models it uses, an oversight dating back to 2008.

Commonwealth Bank of Australia, which owns ASB Bank, said it is “reviewing the paper to determine potential impacts.”

ASB’s common equity tier 1 ratio was 10.6 percent at June 30 and it had a further $1 billion of capital that will need to be replaced with equity.

National Australia Bank’s statement about its Bank of New Zealand subsidiary was a model of brevity: “NAB is currently reviewing the consultation paper and will participate in the consultation process.”

BNZ’s common equity ratio at Sept. 30 was 10.56 percent and it has another $900 million of capital that will no longer qualify at tier one under the new rules.

The Reserve Bank has set a March 29 deadline for submissions on the proposed new capital rules.

(BusinessDesk)

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