The Reserve Bank of New Zealand has released its final decisions for the capital framework for banks, modifying capital requirements for the banking companies in the jurisdiction.
The governor of the bank stated that the new requirement would make the banking system of the country much more resilient for the customers, and ensure that the owners of the banking companies have a meaningful stake in the business.
The changes to capital requirements are supposed to be implemented over a seven-year period, allowing the banking companies to have a smooth and cost-effective transition. The new requirements ensure that the banks are resilient to overcome economic volatilities while delivering better long-term outcomes for customers.
As a result of increased regulatory capital, the chances of bank failure are lower as the slabs of the capital are designed to bear the losses suffered by the banks sequentially.
Starting from 1 July 2020, the banking companies in NZ are required to keep a minimum total capital buffer of 18 per cent for big four banks, and 16% for the rest of smaller banks. Previously, the minimum total capital requirement was 10.5 per cent, and presently, the average level of capital held by banks is 14.1 per cent.
Further, it was also noted that the regulator had taken industry feedback in the last two years, and adjustments were made to the proposals, allowing the banks to minimise the economic impacts of these changes.
Let’s look at how the big four banks have reacted to these developments
Australia & New Zealand Banking Group (ASX: ANZ)
ANZ settled with an increase of 2.1 per cent by the close of the trading session yesterday. Today, on 6 December 2019, the stock is trading at $24.56, down 0.57% (1:54 PM AEST). The annual dividend yield of the stock stands at 6.48 per cent, according to data available on ASX. ANZ is having a market capitalisation of approximately $70 billion.
In a release to the exchange on 5 December 2019, ANZ noted that the final impact to the bank is an increase in CET1 capital of $3 billion by July 2027 (according to the balance sheet as of 30 September 2019), which considers $1 billion management buffer.
Some key changes compared to the previous consultation period includes;
- Unchanged tier 1 capital requirement for ANZ (New Zealand) at 16 per cent, but with seven-year transition period with reduced impact on CET1 capital for the group.
- An increase in Additional Tier 1 capital of 1 per cent against proposed 1.5 per cent, allowing reduced capital in CET1.
- Redeemable Preference capital is allowed as AT1.
The bank said that the announcement provides certainty for the business, and would not need additional capital to fund requirements.
Late in November, the banking group clarified on the shareholder queries related to its actions to prevent financial crime in the domestic banking system and reiterated that the bank is not aware of any impending litigation from AUSTRAC.
It was noted that the bank is presently reviewing its systems and processes for money transfers, and the bank has joined the Fintel Alliance to combat serious financial crime, including child exploitation.
In November, the bank notified about the issue of EUR 1 billion 1.125 per cent Subordinated Notes under its USD 60 billion Euro Medium Term Note Programme.
National Australia Bank Limited (ASX: NAB)
NAB settled with an increase of 2.04 per cent by the close of the trading session yesterday. Today, on 6 December 2019, the stock is trading at $25.375, down 0.14% (1:54 PM AEST). The annual dividend yield of the stock stands at 6.63 per cent, according to data available on ASX. NAB is having a market capitalisation of approximately $73.26 billion.
NAB also responded with an announcement on the exchange on 5 December 2019; the bank said final requirements include the following:
- An increase to risk-weighted assets (RWA) to approx. 90% against the standardised approach for internal ratings banks like NAB’s subsidiary – Bank of New Zealand (BNZ).
- An uplift in CET1 capital to 13.5 per cent of RWA for systematically important banks which include Bank of New Zealand (BNZ).
- For systematically important banks, an increase in the Tier 1 capital requirement equal to 16 per cent of RWA.
- An increase to 18 per cent for the total capital requirement.
According to the balance sheet at 30 September 2019, the change means an increase of NZD 3 to 4 billion for BNZ by 1 July 2027. It is anticipated that there would be no impact to NAB’s Level 2 CET1 ratio by the changes to BNZ. However, under the APRA APS 111, any further equity investment in BNZ would reduce Level 1 CET1 capital of NAB.
Recently, the bank notified about the establishment of wholesale capital notes programme – a non-underwritten debt issuance programme wherein the issuer might elect to issue Capital Notes in Australia.
Capital Notes are compulsorily convertible subordinated perpetual debt securities that would be issued at a price in the relevant pricing supplement with a principal amount and denomination of $1k.
In November, the bank announced to settle a class action related to Consumer Credit Insurance (CCI), and the litigation commenced in last year in September against NAB and MLC Ltd in Federal Courts. NAB would be making a payment of $49.5 million dependent on the approval by the Federal Court.
Commonwealth Bank of Australia (ASX: CBA)
On 5 December 2019, CBA settled with an increase of 1.04 per cent by the close of the trading session. Today, on 6 December 2019, the stock is trading at $78.89, up 0.34% (1:54 PM AEST). The annual dividend yield of the stock stands at 5.48 per cent, according to data available on ASX. CBA is having a market capitalisation of approximately $139.18 billion.
On 5 December 2019, the bank responded to the capital requirement development;
- An increase to risk-weighted assets (RWA) to approx. 90% against the standardised approach for internal ratings banks like ASB Bank Limited (ASB).
- Tier 1 capital requirement increased to 16 per cent of RWA for systematically important banks which includes ASB, and 13.5 per cent of tier 1 capital would be Common Equity Tier 1 (CET1) capital.
According to CBA’s balance sheet as of 30 September 2019 on a pro-forma basis;
- ASB would need an additional NZD 3 billion in tier 1 capital by 1 July 2027.
- Under APS 111, any further equity investment in ASB would reduce Level 1 CET1 capital ratio by approx. 30 bps.
Further, the bank said that it remains well to meet the capital requirements, while any significant increase in capital requirement impacts the cost of providing loans adversely. However, CBA remains committed to optimising financial impact from additional requirements.
Westpac Banking Corporation (ASX: WBC)
On 5 December 2019, WBC settled with an increase of 1.2 per cent by the close of the trading session. Today, on 6 December 2019, the stock is trading at $24.24, down 0.37% (1:54 PM AEST). The annual dividend yield of the stock stands at 7.15 per cent, according to the data available on ASX. CBA is having a market capitalisation of approximately $86.83 billion.
On 5 December 2019, the bank also responded to the development by the Reserve Bank of New Zealand and provided the decisions taken by banking regulator of New Zealand, similar to what discussed above.
Pro-forma impact on Westpac New Zealand Limited (systematically important bank);
- As of 30 September 2019, WNZL is strongly capitalised with a Tier 1 capital ratio of 13.9 per cent.
- Assuming a Tier 1 capital ratio of 16-17 per cent, WNZL would require additional NZD 2.3 to NZD 2.9 billion to meet the requirement by 2027.
Pro-forma impact on Westpac Group;
- Considering the APRA APS 111 and recently raised capital through placement & Share purchase plan, the group’s Level 1 CET1 capital ratio would be 11.21 per cent on a pro-forma basis at 30 September 2019.
- On a pro-forma basis at 30 September 2019, the new requirement by RBNZ would lower the group’s Level 1 CET1 capital by NZD 1.2 billion to NZD 1.8 billion. And, the additional capital injection in WNZL could be funded externally.
In November, the bank has been in the news after the revelation of multiple violations of anti-money laundering and counter-terrorism financing provisions. This had led to major shuffle in the Board of the bank with CEO quitting immediately, and Chairman bringing forward his retirement. In addition, the bank notified that a comprehensive plan is being implemented, and it expects to cost up to $80 million pre-tax.
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