Banking industry is a highly regulated space. In any economy, each bank must comply with the regulatory requirement set by its financial regulatory authority. There are many regulatory requirements which a bank needs to comply, and capital requirements is one of them. Reserve Bank, generally a banking regulatory authority in any country keeps a check on the banks’ capital requirement so that bank can absorb the shock, if any arising from credit or market risk.
On 5 December 2019, Reserve Bank of New Zealand (RBNZ) provided an update on the capital requirement framework that are going to be effective from 1 July 2020, with an expected timeline of 7 years in which all the banks need to comply the new requirements.
Below are the key points from the RBNZ’s announcement
- Common Equity Tier I ratio should be 13.5% for systematically important banks and 11.5%% for others;
- Tier I capital should be 16% for systematically important banks and 14% for others;
- Capital Adequacy ratio should be 18% for systematically important banks and 16% for others.
Let’s look how four Australian banking giants viz NAB, ANZ, CBA and WBC are up against the new requirements.
National Australia Bank Limited (ASX: NAB)
National Australia Bank Limited (ASX: NAB) is into banking services such as leasing, credit and access card facilities etc. Following the announcement, NAB provided the impact and requirement of capital requirements for Bank of New Zealand (BNZ), which is NAB’s subsidiary operating in New Zealand. Below are the key points:
- BNZ needs to raise another NZ$ 3 billion to NZ$ 4 billion to meet CET 1 requirement by 2027;
- Level 2 CET 1 ratio is expected to remain unaffected;
- Since BNZ is a systematically important bank, it needs to comply with higher requirements;
- This will also result in an increase in risk-weighted assets for internal ratings-based banks.
The stock of NAB last traded at $25.1 per share, with an increase of 0.28% as on 11 December 2019. The market capitalisation of the bank stands at $72.16 billion. The stock of NAB has delivered returns of -12.11% and -8.05% within the time frame of the last three months and six months, respectively.
Australia And New Zealand Banking Group Limited (ASX: ANZ)
Australia based, ANZ is one of the largest banks in Australia and it provides service individual and business customers. The bank operates in and throughout 33 markets. Following the announcement, ANZ provided the impact and requirement of capital requirements for ANZ Bank New Zealand. Below are the key points:
- ANZ needs to raise ~A$ 3 billion of capital to meet the requirement July 2027, which includes a management buffer of ~A$ 1 billion.
- The impact is net of ~ NZ$ 1.5 billion of profits, accumulated by New Zealand segment of ANZ in anticipation of higher requirements.
- There is no change in the requirement for the ANZ Bank New Zealand.
Apart from the impact of RBNZ announcement, ANZ confirmed that it got an approval from Australian Prudential Regulation Authority in relation for the sale of OnePath Pensions & Investments business of the bank to IOOF Holdings Limited. The bank is expecting the transaction to wrap up by Q1 CY20 and estimates it would help in increasing ANZ’s CET1 capital ratio by around 20bps.
The stock of ANZ last traded at $24.530 per share, with an increase of 0.45% as on 11 December 2019. The market capitalisation of the ANZ stands at $69.22 billion. The stock of ANZ has delivered returns of -10.32% and -14.76% within the time span of the last three months and six months, respectively.
Commonwealth Bank of Australia
Commonwealth Bank of Australia (ASX: CBA) is one of the leading providers of financial services in Australia, where it serves the needs of over 17.4 million customers with a focus on retail as well as commercial banking. Following the announcement, CBA provided the impact and requirement of capital requirements for ASB Bank, CBA’s New Zealand subsidiary. Below are the key points:
- ASB needs to raise ~ NZ$ 2.5 billion as CET 1 capital and additional NZ$ 0.5 billion as tier 1 capital by July 2027.
- This equity infusion in ASB will result in ~30 bps decline in CBA’s level 1 CET 1 ratio. However, Cab’s level 2 CET 1 ratio is expected to remain unaffected.
Apart from the impact of RBNZ announcement, the bank announced that it has ceased to become a substantial holder in NRW Holdings Limited on 4th December 2019.
Also Read: How the bank has performed in the quarter?
The stock of CBA last traded at $80.31 per share, with an increase of 1.363% as on 11 December 2019. The market capitalisation of the CBA stands at $140.26 billion. CBA stock has delivered returns of -0.83% and -2.12% within the time span of the last three months and six months, respectively.
Westpac Banking Corporation
Being Australia’s first bank, Westpac Banking Corporation (ASX: WBC) provides banking and wealth management services to both individuals and businesses. Following the announcement, WBC provided the impact and requirement of capital requirements for Westpac New Zealand Limited (WNZL). Below are the key points:
- WNZL needs to raise ~ NZ$ 2.3 billion to NZ$ 2.9 billion;
- These implementations are expected to reduce WBC’s Level 1 capital by ~28 to 41 basis points.
Apart from RBNZ impact announcement, the bank raised A$ 770 million via Share Purchase Plan by issuing 31.9 million shares.
The stock of WBC last traded at $24.380 per share, with an increase of 0.702% as on 11 December 2019. The market capitalisation of the WBC stands at $86.4 billion. On three months and six months basis, WBC has delivered returns of -16.86% and -14.45%, respectively.
Comparative Chart of Banks (Source: Thomson Reuters)
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