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ANZ CEO says he's taking Adrian Orr at his word on bank capital consultation

Wednesday 1st May 2019

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ANZ’s New Zealand chief executive says he’s taking Adrian Orr at his word that the Reserve Bank governor has an open mind on bank capital requirements and will treat the current consultation period as genuine.

David Hisco says Orr has personally assured him it will be a true consultation, in addition to Orr’s repeated public comments to that effect.

That’s contrary to a prevailing view in business circles that Orr is adamant that the big four banks – and ANZ is the largest of the four – will be forced to increase their tier 1 capital to 16 percent of risk-weighted assets.

“I have to take him at his word. I suspect we will have plenty of good discussions” before final decisions are made," Hisco says.

In December last year, after the proposed new Reserve Bank requirements were published, ANZ said its group tier 1 capital at Sept. 30 was 11.4 percent and that the proposals would require it to add another $6-8 billion to its existing capital.

Consultation on the proposals is set to end on May 17, a deadline that has been extended twice.

Hisco says the proposals are “a bit of an outlier” – the Australian Prudential Regulation Authority regards a tier 1 capital level of 10.5 percent as “unquestionably strong” and the ANZ group’s tier 1 capital is about A$3.7 billion above that level.

“I think the real difficulty in this is that this is a very dry topic – you don’t want this to end up like Brexit. The difficulty is getting the general public to pay any sort of interest to this,” he says.

If the big four local banks – which are all owned by Australia’s big four banks – have to raise about $20 billion of new capital, even if the parent banks accept only a 12 percent return on equity, less than they’re currently earning from their New Zealand subsidiaries, that will cost local customers about $2.4 billion a year, Hisco says.

“It’s very hard to get traction with the consumer until it hits their pocket. That’s usually after the even when it’s just too late.”

ANZ, along with all the major banks, has had little to say publicly but Hisco says ANZ will be putting in a submission on the proposals. The Reserve Bank has said it will make all submissions public and that it had received 42 by April 16.

Earlier today, ANZ New Zealand reported first-half net profit fell 4 percent as profits from retail lending eased amid a slowing housing market.

Net profit for the six months ended March fell to $929 million from $964 million in the same six months a year earlier and despite a 3 percent rise in net interest income to $1.63 billion.

Profits from retail lending fell 3 percent to $510 million while profit from commercial and agri lending rose 3 percent to $286 million.

Also earlier today, Business NZ called for caution on the bank capital proposals.

BusinessNZ chief executive Kirk Hope said the $20 billion in additional capital requirements would mean increased mortgage costs for borrowers or credit being rationed by the banks, making financing for business owners and home owners more difficult and expensive.

"Reducing risk always comes at a cost, and we should ensure the costs involved don’t outweigh the risks,” Hope said.

"New Zealand’s risk of bank failure, given the quality of our regulatory systems, would be comparatively low, while the costs to the economy of the proposed requirements could be high.

"BusinessNZ recommends a cost/benefit analysis of the proposals before any further steps are taken."

In a paper on the proposals released on April 8, the Reserve Bank revealed that it hasn’t yet done a cost/benefit analysis, something many observers have said should have been done before the consultation process began.


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