APRA Shows Confidence In Credit Quality of Australian Banks

The Australian Prudential Regulation Authority (APRA) has asked major Australian banks to boost capital, which is the second time in two years but has also concluded after a review that the banks are fundamentally strong.

Australia’s four biggest banks – Westpac Banking Corp, Commonwealth Bank of Australia, National Australia Bank Ltd and ANZ Banking Group Ltd – together hold nearly 80 percent of market share. The regulator has stated that banks must hold around 10.5 percent of common equity tier one capital ratios by year 2020. But the increase is not dramatic as the current levels are at around 9.5 per cent.

For the non-major banks, the increase in capital would be around 50 basis points according to APRA. The regulator noted that the Big Four banks were well positioned to meet the new benchmarks.

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The vote of confidence lifted the share prices of the key banks but the additional capital requirement would need substantial funding. Morgan Stanley analyst Richard Wiles noted that even the 50 basis point addition would require further A$2.2 billion in capital. APRA Chairman Wayne Byres said that strong capital levels will ensure that the sector is able to withstand financial shocks. Some analysts remain concerned about APRA possibly changing the risk weightages on mortgages. The APRA hinted in its statement that it might shift the weightage from the current level of 25 percent.

The booming property market has caused a massive jump in home loan books of the banks increasing their exposure. A rise in the weightage means that banks will need to set aside at least $2.62 for every $100 of mortgages, or $3.67 if the weightage is hiked to 35 percent.

In a statement Omkar Joshi, portfolio manager at Regal Funds Management said

We'll be watching for the risk weights on mortgages. The real question is how much will that go up to. If it rises to 30 percent from 25 now it is probably okay, but any more than that would be significant.

Ratings firm Standard & Poor's said that APRA’s verdict on the bank’s capital stability was a good sign for credit quality of the banks. It pointed out that the additional capital requirements would provide some more buffer against the risks raised by it in earlier notes regarding the debt situation in the country.

ANZ's interest rate strategist Martin Whetton pointed out that the move to force banks to hold more liquid assets will result in a boost for the ACGB [Australian commonwealth government bonds] sector.