Below is a series of responses to the final decisions in the Reserve Bank's review of bank regulatory capital requirements announced on Thursday. Detail on the key decisions is here, and coverage of the Reserve Ban's cost-benefit analysis is here.
ANZ Banking Group
In a statement the parent of ANZ NZ said the impact of the RBNZ's final capital decisions was lower than previously anticipated. The net impact will be an increase in Common Equity Tier 1 (CET1) capital of A$3 billion by July 2027 including a A$1 billion management buffer. This is net of NZ$1.5 billion retained in 2019, ie the total CET1 impact is put at A$4.5 billion.
The original estimate was that ANZ would need to boost its CET1 capital by NZ$6 billion to NZ$8 billion.
"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, " ANZ Group CEO Shayne Elliott said.
ANZ easily has the biggest exposure to NZ among the big four Aussie banks.
ASB's parent Commonwealth Bank of Australia (CBA)
CBA says ASB will require NZ$3 billion of Tier 1 capital of which NZ$2.5 billion needs to be CET1, by 2027.
"CBA is well placed to meet the changes," CBA says in a statement.
Parent the Westpac Banking Corporation says Westpac NZ will require NZ$2.3 billion to NZ$2.9 billion of Tier 1 capital by 2027. Here's Westpac's statement.
BNZ's parent National Australia Bank (NAB)
In its statement NAB says BNZ will require a CET1 increase of NZ$3 billion to NZ$4 billion by July 1, 2027.
Credit rating agency S&P Global Ratings
We expect the impact of the final capital framework announced by the Reserve Bank of New Zealand (RBNZ) today, following a comprehensive review over the past two and half years, to be broadly in line with our previous commentaries on this topic. (RBNZ's Proposed Capital Increase Is No Game Changer, June 26, 2019 and Higher Capital Requirements For New Zealand's Major Banks Could Create Significant Imposts For Their Australian Parents, February 24, 2019)
The key conclusions of our previous commentaries are as below:
• We estimate that to maintain a Tier 1 capital ratio at 1% point above the new standards, the four major New Zealand banks would need to raise their Tier 1 capital by about NZ$16.4 billon (or by about 47%) compared with their capital levels as of Sept. 30, 2018.
• We believe that the Australian Prudential Regulation Authority (APRA) already requires that the major Australian banks hold more capital on a Level 2 basis for their New Zealand subsidiaries than what they would be required to hold under the RBNZ proposal.
• Consequently, we expect the implementation of RBNZ's capital proposal should not materially reduce the availability of credit in New Zealand across the board.
• The New Zealand major banks could, however, cut lending to customer segments that require increased regulatory capital. In addition, these banks' reported return on equity (on a stand-alone basis) would considerably decline.
In our opinion, the final framework is broadly in line with the initial RBNZ proposals, and the two most significant aspects of the revised rules for the major banks remain: these banks are required to raise their Tier 1 capital ratios to a regulatory minimum of 16%; and these banks are required to measure their capital ratios in a more conservative way. At the same time, RBNZ has relaxed its definition of tier-1 instruments compared with its original proposal--RBNZ has now allowed redeemable preference shares to be considered as eligible tier-1 capital instruments. It had previously proposed that it would only consider non-redeemable preference shares as eligible Tier 1 capital instruments. In addition, RBNZ has now allowed the major banks a transition period of seven years to implement the new rules, compared with the five years it previously proposed. These changes should afford the major banks greater flexibility in strengthening their Common Equity Tier 1 (CET1) levels via retained earnings, in our view.
We also expect that given Australia and New Zealand Banking Group Ltd.’s (ANZ) larger investment in New Zealand compared with the other three major Australian major banks, ANZ will likely need to raise capital at the group level to meet the RBNZ proposal. This is partly because in October this year, APRA proposed a more punitive capital treatment of the banks’ investment into their banking subsidiaries if such investment exceeds 10% of the parent banks’ level 1 CET1.
Given the relatively modest impact of the RBNZ’s new capital rules on the consolidated capital of the four major Australian banking groups, we expect their overall creditworthiness to remain largely unchanged. We expect our ratings on the four major New Zealand banks to remain equalized with those on their respective parents, because we do not consider that the capital changes significantly weaken the likelihood of the Australian major banks’ support for their New Zealand banking subsidiaries, or the likelihood of the Australian government support being extended to the New Zealand banking subsidiaries.
Credit rating agency Moody's
We view the RBNZ’s decision to raise capital requirements – although slightly watered down from its earlier proposal – as broadly credit positive, as it will make the banking system more resilient to shocks.
At the same time, the higher capital requirements will weigh on the banks' returns on equity. As such, we expect the new measures will prompt higher lending rates in efforts to boost profitability, as well as constrain growth in more capital-intensive lending.
The RBNZ’s decision to extend the transition period to seven years from five years will ensure banks are well placed to meet the new targets, especially given APRA’s recent changes to further restrict the equity support Australia’s largest banks can provide to their New Zealand subsidiaries.
The Reserve Bank of New Zealand’s (RBNZ) finalised capital proposals give the banking industry clarity, ANZ Bank New Zealand Limited (ANZ NZ) said today.
ANZ NZ Acting CEO Antonia Watson said the industry consultation process with the RBNZ was thorough.
“We welcome the conclusion of the RBNZ’s review,” Ms Watson said.
“While the increase in capital remains significant, we acknowledge that as a result of the consultation process there have been changes to the capital instruments and the transition period to the new regime.
“We agree with the RBNZ that having a sound and efficient financial system is critical to the economic well-being of all Kiwis - the debate was always about how far that went and how that cost would be shared.”
She said any changes would be implemented gradually, bearing in mind the market was competitive for lending.
The bank had already started preparing for the change. Of ANZ NZ’s $1.8b net profit after tax in FY19, approximately 80% had been kept in New Zealand as retained earnings in response to the proposals.
“We’ve been in New Zealand since 1840 and prospered as the country has grown. We’re here for the long haul and continue to aspire to be New Zealand’s best bank.”
ASB acknowledges the Reserve Bank’s announcement today regarding its decision to increase bank capital levels.
From the outset, we have been supportive of the Reserve Bank adjusting New Zealand’s bank capital settings to a level that promotes a stable and resilient financial system.
Today’s announcement provides certainty around the levels of capital required to be held by banks. The Reserve Bank has released a number of comprehensive documents as part of the decision. We will take our time to thoroughly review the final recommendations in detail and develop implementation plans to meet the new capital requirements over the transition period.
We will be focused on working with our customers to ensure they are informed and supported as the transition occurs.
· Along with a wide range of banking industry stakeholders, Rabobank engaged with the Reserve Bank throughout the capital proposals review. We acknowledge the efforts made by the RBNZ to involve industry participants in the process and we are pleased they made some changes to their original proposal. In particular, we acknowledge the longer implementation timeframe of seven years instead of five, which commences in July 2020.
· While our current capital position is robust, the new rules will require Rabobank NZ to increase the level of capital we are required to hold and our intention is to work closely with the Reserve Bank on the detail of yesterday’s decisions to ensure a smooth implementation.
· As NZ’s only specialist agri-lending bank, we are fully committed to New Zealand’s rural lending market and these new requirements do not alter our strategy. As previously stated, our ambition is to sustainably grow our rural lending portfolio by supporting our clients and exploring new opportunities with leading food and agribusiness operations.
In relation to borrowing costs -
· As always, we will continue to monitor and take account of all market factors that impact on our borrowing costs. Moving forward, the Reserve Bank’s new capital requirements will be just one of those factors.
The New Zealand Bankers' Association
The New Zealand Bankers’ Association today welcomed the conclusion of the Reserve Bank’s review of how much capital New Zealand’s banks should hold.
“Today’s announcement provides our banks with certainty on the amount and type of capital they will need to hold in future, and brings an end to a robust consultation,” says New Zealand Bankers’ Association chief executive Roger Beaumont.
“We recognise that these decisions conclude the consultation and our banks will work constructively with the Reserve Bank to implement the new capital requirements.
“We are pleased the Reserve Bank has engaged with a wide range of stakeholders and made some changes to its original proposal. In particular we acknowledge the longer implementation timeframe of seven years instead of five, which commences in July 2020.
“We’re also pleased to see a recognition of the differences between the larger and the smaller banks.
“Today’s announcement will have an economic impact and each bank will now consider the implications for their business and customers, and will be developing their own commercial response.
“Our banks will continue to work closely with the Reserve Bank on the detail of today’s decisions to ensure a smooth implementation.
“We support a strong and stable banking system that can withstand significant shocks.
“We also acknowledge the Reserve Bank for encouraging a valuable public debate on this issue and for responding to feedback,” Beaumont says.