Australia’s prudential regulator is tipped to provide more clarity on bank capital requirements late next month and it looks as though the Commonwealth Bank will be more affected than peers by any changes.
Currently, CBA has the lowest APRA common equity tier one capital ratio and the lowest mortgage risk weightings of the major banks, so the lender will be under the most pressure if the regulator’s new rule is overly onerous.
Further, the arrival of a new finance director at the end of June could well drive a change in CBA’s capital management strategy. CBA chief financial officer David Craig will be replaced by Rob Jesudason next month.
Morgan Stanley analyst Richard Wiles is expecting APRA to set a new minimum CET1 ratio in its bid to make Australian banks 'unquestionably strong' although mortgage risk weightings may not be finalised until late 2017.
In what he views as his base case scenario, Wiles is anticipating a CET1 ratio of 10 per cent and a further 3 percentage point lift in mortgage risk weights to 27.5 per cent.
“The majors are now well placed for such a scenario, and we assign a probability of 60 per cent to this or a similar outcome," he said in a client note.
The banking analyst reminded clients that every 50-basis-point increase in the CET1 target adds $8 billion to the major banks' capital requirement, while every 1 percentage point lift in mortgage risk weights adds $1.8 billion.
Trouble is, Wiles thinks the chances of a more onerous outcome are mounting. Worse, a higher-than-expected capital demand comes just as the government slapped a new $6.2 billion levy on the big four banks and Macquarie.
“In our view, systemic risk is greater in Australia than in most other countries due to the major banks' high mortgage exposure and reliance on offshore funding," he said.
“We also believe APRA's determination to mitigate this concern may have risen due to 'heightened risk' in the residential lending market. At the same time, recent comments from APRA and from Westpac suggest that 'further strengthening' is required."
In addition to offering a base-case scenario, the Morgan Stanley banking specialist also sketched a more bullish case where APRA concluded that banks are already "unquestionably strong".
“This would remove the risk of further initiatives to build capital and make investors more comfortable with current payout ratios.”
Wiles is assigning a probability of only 5 per cent to this outcome in coming months.
The bear case scenario is much more worrying.
“Under a bear case, there would be a meaningful lift in the target CET1 ratio and/or even higher mortgage risk weights, and we assign a 35 per cent probability to such an outcome," he said.
As he sees it, the bear case scenario would see the CET1 minimum rise to 11 per cent and the average mortgage risk weight to 31.5 per cent, which would cause a $26 billion shortfall in the major banks' pro forma capital.
In his view, ANZ's capital requirement would be the least affected by either a higher target CET1 ratio or a lift in mortgage risk weights, while CBA's would be the most impacted.
The analyst’s base case outcome, leaves CBA with a capital deficit of $1 billion. Worse, a bear case outcome would see a capital deficit of $9.2 billion at CBA.
“This scenario increases the chance of a capital raising in August and raises concerns about sustainability of the 75 per cent dividend payout ratio.”
ANZ would see a deficit of $3.3 billion in a bear case scenario.