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Last updated: July 20, 2015 10:16 am
Australia’s banks told to boost mortgage capital
Jennifer Hughes in Hong Kong
Australia’s biggest banks will have to find about $9bn in fresh capital in the next year, in the latest threat to the profitability of one of the developed world’s most richly valued financial sectors.
The capital requirement comes as a result of regulations detailed on Monday demanding that the biggest lenders hold more capital against their home mortgage books — their most profitable product.
A parliamentary inquiry last year called for Australian banks to be “unquestionably strong” with capital reserves that would put them in the top quartile globally.
Globally the average core tier one equity capital ratio — the standard measure of a bank’s capital strength — is 11.7 per cent, according to the Australian Prudential Regulation Authority. Over time, Australian banks will need to raise their ratios by about 200 bps to hit the top quartile.
While those targets will require banks to raise some A$27bn ($20bn) combined over the medium term, the latest rules focus on the average risk weighting that Australia’s biggest banks are required to apply to home mortgages, which will increase from 16 per cent to about 25 per cent, APRA said on Monday.
The banks affected are ANZ, Commonwealth Bank of Australia, Macquarie, National Australia Bank and Westpac.
The changes are based on narrowing the difference between capital held under standardised risk weighting, and the lower levels held by larger lenders allowed to use their own internal models.
Analysts estimated that Commonwealth Bank and Westpac would need to find about A$4bn ($3bn) apiece, with ANZ Bank and NAB each needing roughly half that.
Bank stocks closed slightly higher in line with the broader mood, although ANZ, which has the smallest domestic mortgage book of the big four, beat the market and added 1.3 per cent. Analysts said the latest regulatory demands were already priced in and were expected to be delivered via retained earnings and scrip dividends.
However, the need for more capital comes as Australia’s banks face an ageing population more interested in saving than in borrowing, and high house prices. The country’s lenders also serve a household sector that is more highly geared than either the US or UK were at their pre-crisis 2007 peaks, according to Goldman Sachs.
Mortgages were banks’ most profitable product in 2014, delivering a return on tangible equity of about 35 per cent. If the effect of the entire A$27bn were applied to last year’s earnings, ROTE would have fallen to 24 per cent, according to Goldman estimates. Overall bank returns would have dropped to 16.3 per cent from the 18.9 per cent reported.
Australia’s banks trade on price-to-book ratios of almost two, compared with European and US banks which trade much closer to their actual book values.
Last updated: July 20, 2015 10:16 am
Australia’s banks told to boost mortgage capital
Jennifer Hughes in Hong Kong
Australia’s biggest banks will have to find about $9bn in fresh capital in the next year, in the latest threat to the profitability of one of the developed world’s most richly valued financial sectors.
The capital requirement comes as a result of regulations detailed on Monday demanding that the biggest lenders hold more capital against their home mortgage books — their most profitable product.
A parliamentary inquiry last year called for Australian banks to be “unquestionably strong” with capital reserves that would put them in the top quartile globally.
Globally the average core tier one equity capital ratio — the standard measure of a bank’s capital strength — is 11.7 per cent, according to the Australian Prudential Regulation Authority. Over time, Australian banks will need to raise their ratios by about 200 bps to hit the top quartile.
While those targets will require banks to raise some A$27bn ($20bn) combined over the medium term, the latest rules focus on the average risk weighting that Australia’s biggest banks are required to apply to home mortgages, which will increase from 16 per cent to about 25 per cent, APRA said on Monday.
The banks affected are ANZ, Commonwealth Bank of Australia, Macquarie, National Australia Bank and Westpac.
The changes are based on narrowing the difference between capital held under standardised risk weighting, and the lower levels held by larger lenders allowed to use their own internal models.
Analysts estimated that Commonwealth Bank and Westpac would need to find about A$4bn ($3bn) apiece, with ANZ Bank and NAB each needing roughly half that.
Bank stocks closed slightly higher in line with the broader mood, although ANZ, which has the smallest domestic mortgage book of the big four, beat the market and added 1.3 per cent. Analysts said the latest regulatory demands were already priced in and were expected to be delivered via retained earnings and scrip dividends.
However, the need for more capital comes as Australia’s banks face an ageing population more interested in saving than in borrowing, and high house prices. The country’s lenders also serve a household sector that is more highly geared than either the US or UK were at their pre-crisis 2007 peaks, according to Goldman Sachs.
Mortgages were banks’ most profitable product in 2014, delivering a return on tangible equity of about 35 per cent. If the effect of the entire A$27bn were applied to last year’s earnings, ROTE would have fallen to 24 per cent, according to Goldman estimates. Overall bank returns would have dropped to 16.3 per cent from the 18.9 per cent reported.
Australia’s banks trade on price-to-book ratios of almost two, compared with European and US banks which trade much closer to their actual book values.
