Big 4 to carry heavier capital burden

The Reserve Bank of New Zealand (RBNZ) has announced its final capital requirements for ADIs in New Zealand, many of which are subsidiaries of Australia’s major banks.

RBNZ has confirmed that the risk-weighted assets (RWA) of internal ratings based banks – including ANZ’s New Zealand, CBA subsidiary ASB Bank and NAB subsidiary Bank of New Zealand – will increase to approximately 90 per cent of that required under a standardised approach.

Additionally, for those banks deemed “systemically important”, the tier 1 capital requirement will increase to 16 per cent of RWA, 13.5 per cent of which must be in the form of common equity tier 1 (CET1) capital.

Tier 2 capital, which will remain in the regulatory framework, can comprise 2 per cent of the minimum total capital ratio of 18 per cent.

Moreover, RBNZ has noted that existing “additional tier 1 and tier 2 contingent instruments”, issued by New Zealand banks, will no longer be eligible under RBNZ’s new capital criteria and will be phased out over the transition period.

RBNZ has set a seven-year transition period for banks to comply with the new framework, starting from 1 July 2020.

ANZ

ANZ halted trading on the ASX in anticipation of the announcement and will resume trading upon the commencement of trading this morning.  

Following the RBNZ’s announcement, ANZ provided an update on the impact of the new capital requirements.

According to ANZ, the net impact on ANZ is an increase in CET1 capital of $3 billion by July 2027, which includes a $1-billion management buffer.

The impact is net of NZ$1.5 billion of profits that ANZ NZ has retained in 2019 in anticipation of the new requirements.

Commenting on the changes, ANZ CEO Shayne Elliott said: “Today’s announcement provides the certainty required to prepare our business for the future.

“While the increased capital requirements remain significant, the consultation was thorough, and the concerns of industry were given a fair hearing.

“We remain aligned with the RBNZ’s objective to ensure a sound and efficient financial system in New Zealand.”

Mr Elliott concluded: “We have been planning for these changes since the original consultation.

“Given the extended transition period and our strong capital position, we are confident we can meet the higher requirements without the need to raise additional capital.”

CBA

CBA stated that it is well positioned to meet the new capital requirements over the implementation period.

According to CBA, its subsidiary ASB will require an additional NZ$3 billion in tier 1 capital, of which NZ$2.5 billion must be in CET1 capital, by 1 July 2027.

Further, CBA noted that under APRA’s proposed revisions to APS111, an equity injection of this additional capital into ASB over the transition period would result in a reduction in CBA’s Level 1 CET1 ratio of approximately 30 bps.

CBA has warned that while it believes it is well placed to meet the additional requirements, “a significant increase in capital” could ultimately “increases the cost of providing loans to customers”.

“We will consider ways to minimise the financial impact from the requirements while supporting our customers and growth in the New Zealand economy,” the bank said.

NAB

Meanwhile, NAB has reported that, based on its subsidiary BNZ’s balance sheet as at 30 September 2019, the changes represent a CET1 capital increase of NZ$3-4 billion for BNZ by 1 July 2027.

NAB added that there is expected to be no impact on its Level 2 CET1 ratio from the increased BNZ capital requirements or the changes to BNZ RWA.

Westpac

Westpac also acknowledged RBNZ’s new capital requirements.

Westpac revealed that the new framework would require the bank’s NZ division to require a further NZ$2.3-$2.9 billion of tier 1 capital to meet the new requirements.

[Related: BOQ opens second phase of capital raising]