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BNZ will need to raise new equity under RBNZ proposals, NAB wary

Monday 1st July 2019

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Bank of New Zealand says it will need to raise equity if the Reserve Bank's proposals for stricter capital requirements go ahead, and may not be able to rely on parent National Australia Bank.

BNZ told the regulator that the proposals were a big change and a significant difference to Australian requirements.

"Raising equity is more expensive than raising debt, although lower debt funding costs may provide some limited offset," it said in its submission on the proposal. "Higher average funding costs would be partly passed on to customers and partly absorbed by BNZ as lower returns on equity and/or high productivity." 

The bank said it might need to shrink some of its risk-weighted assets because those higher costs would restrict its ability to raise equity. Shifting more customers online was the most obvious way to lift productivity, it said. 

In a separate submission, NAB said it would prefer to keep supporting its New Zealand arm, but the increased capital requirements would make that challenging - relative to competing investment opportunities. 

"NAB cannot contribute to, or continue to support our current investment in, our New Zealand business if the return on this capital is poor," it said. If NAB can't extract dividends from BNZ proportionate to the wider group's earnings, the bank would "need to divert capital away from our New Zealand business and toward assets with a more appropriate return profile, with proceeds that can be reinvested and distributed more freely."

The Reserve Bank today released almost all of the 161 written submissions on proposals requiring lenders to hold more high-quality capital to mitigate the impact of a severe financial crisis. The central bank wants to set a tier 1 capital requirement equal to 16 percent of a lender's risk-weighted assets for the big four and 15 percent for all other lenders. The current requirement is for a 6 percent minimum plus a 2.5 percent buffer, although the banks' current equity is around 12 percent.

The Banking Ombudsman Scheme said it supported the policy intent in seeking to improve the long-term resilience of the banking sector. It said the Reserve Bank should consider how the cost of changes will be passed on to consumers and whether changing risk appetites will reduce access to credit for people on low incomes. 

The Salvation Army said it believes the "systemic or macro-prudential risk associated with a financial crisis or banking collapse has been understated" and that government bailouts in the past have created a massive moral hazard where reckless behaviour can be repeated without regard for the public good. 

"The Reserve Bank’s proposed increase in the capital requirements of banks is in some ways a response to this moral hazard and is one of the reasons the Salvation Army supports this proposal in principle," it said. 

An anonymous submission by a licensed auditor and member of the Institute of Directors said if the banks don't raise all the capital they need from their parents, they will need to consider other options, such as initial public offerings. 

"This could be a partial IPO of the entire business or the packaging up of a particular sector of the loan book. One area that has been identified as a primary target would be the agri books of the banks being packaged and sold to an overseas party," the submission said. 

"I am not an economist and do not have the skills to calculate what the likely impact that the increase of capital to the 16 percent as suggested would have on deposit rates, lending rates, the level of credit availability and the likelihood of banks being sold /partially IPO’d or packaging up sections of their loan books might have.

"But what I am concerned about is whether by increasing the capital requirements to the levels proposed, the RBNZ would be congratulated on how safe it has made the banking sector but the making of it safe leads to a whole raft of unintended consequences, harming the rest of the NZ economy to an extent that was not expected."

BNZ warned the increased capital requirement will likely pose risks to the economy and business investment. It suggested keeping the 16 percent minimum but having a greater proportion coming from things like preference shares - classed as additional tier-1 capital. It also urged a longer transition period. 

ASB Bank said the Reserve Bank's proposals ran a significant risk of "over-insuring" and would have a broad impact on the economy and lending. It proposed a lower tier 1 capital requirement of 14 percent, including greater use of the preference share-type equity.

ANZ Bank New Zealand, the country's biggest lender, said the existing settings were adequate, and that the Reserve Bank's proposals would have a greater impact on pricing and access to credit than expected. 

"We think it is likely that banks subject to the proposals would pursue lending margin increases. The degree to which banks can achieve these will depend on the degree of competitive pressure in each sector," ANZ said. 

The bank said shareholders will probably have to bear some of the cost in the form of a lower return on equity, but expects lending spreads will widen to ensure they remain acceptable. 

"Alternatively, a smaller impact on credit spreads is possible, but this could be accompanied by a reduction in credit availability if the returns on equity on the New Zealand businesses are not attractive relative to alternative uses of the capital," it said. 


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