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The ANZ Banking Group says ANZ NZ would need up to NZ$8 bln of new capital to meet RBNZ's new bank capital proposals

The ANZ Banking Group says ANZ NZ would need up to NZ$8 bln of new capital to meet RBNZ's new bank capital proposals

Australia's ANZ Banking Group says its New Zealand subsidiary, ANZ NZ, would need between NZ$6 billion and NZ$8 billion of new capital to meet the Reserve Bank's proposed new capital requirements.

This comes after the Reserve Bank issued a consultation paper on Friday. The Reserve Bank is proposing that banks will have to hold between 20% and 60% more "high quality" capital, noting this represents about 70% of the banking sector's expected profits over a five-year transition period. Nonetheless the regulator expects only a "minor impact" on customers' borrowing interest rates.

The Reserve Bank's consultation paper suggests the proposed increase to banks' regulatory capital requirements means NZ banks collectively would need $13.7 billion more Tier 1 capital than they held at March 31. They'll also need to replace $6.3 billion of what's known as Additional Tier 1 capital, which the Reserve Bank says will be non-compliant.

"Based on the potential changes set out in the consultation paper, and ANZ’s New Zealand balance sheet as at 30 September 2018, the changes imply a potential capital increase in New Zealand of NZ$6 billion to NZ$8 billion (A$5.7 billion to A$7.7 billion). ANZ New Zealand currently has approximately NZ$12 billion of Tier 1 capital (A$11.3 billion)," ANZ says.

"The overall impact on the ANZ Group depends on a number of factors. These include the outcome of the consultation, ANZ’s New Zealand balance sheet at the time of implementation, and the outcome of other reviews currently underway by the Australian Prudential Regulation Authority. Therefore, it remains too early to determine the extent to which this could impact the capital levels held by the ANZ Group. The ANZ Group Common Equity Tier 1 Capital Ratio at 30 September 2018 was 11.4% which is approximately A$3.7 billion above the APRA stated Unquestionably Strong level of 10.5%."

ANZ notes responses to the Reserve Bank consultation paper are due on March 29 next year.

"The consultation paper refers to a proposed implementation period of five years and sets out:
• Potential increases in the risk weighting applied to the assets of banks in New Zealand; and
• Potential increases to the percentage of capital held against those risk weights in New Zealand.

ANZ has a number of questions and comments in relation to the consultation paper. ANZ will engage with RBNZ and APRA on these throughout the consultation period," says ANZ.

Subsidiaries of Australia's big four banks dominate the NZ banking sector with ANZ NZ having the biggest marketshare, meaning the ANZ Group has the most exposure to NZ of the major Aussie banks.

ASB, Westpac NZ & BNZ's parents respond

ASB's parent Commonwealth Bank of Australia (CBA) issued a brief statement on the Reserve Bank proposals.

"The discussion paper outlines RBNZ’s proposed approach to increase the minimum level of regulatory capital in the New Zealand banking system. RBNZ proposes a staged transition of the different components of the revised capital framework over the next 5 years. RBNZ is seeking submissions on the proposals by 29 March 2019," CBA says. 

"CBA is reviewing the paper to determine potential impacts on the Group’s capital requirements and will participate in the consultation process through its New Zealand based subsidiary, ASB Bank (ASB). As at 30 June 2018, ASB’s Total Common Equity Tier One Capital was NZ$5.9bn, Total Tier One Capital was NZ$6.9bn and Total Capital was NZ$7.7bn. CBA’s Total Capital as at 30 June 2018 was A$69bn."

The Westpac Banking Group says Westpac NZ was already strongly capitalised with a Tier 1 capital ratio of 14.5% at September 30.

"Westpac will provide a submission to the RBNZ and will update the market once details become clearer," Westpac, whose full statement is here, says.

BNZ's parent National Australia Bank (NAB) says it's reviewing the consultation paper and will participate in the consultation process. In a second announcement NAB said the Reserve Bank proposals imply BNZ would need to increase Tier 1 capital by NZ$4 billion to NZ$5 billion. The impact on the NAB group capital position was expected to be materially lower. 

Controlling 88% of NZ banking system assets, NZ's Australian owned banks this year made combined net profit after tax of $5.128 billion. That was an increase of $433 million, or 9% year-on-year. They paid annual dividends of $3.39 billion.

Impact on borrowing costs & GDP

Meanwhile the Reserve Bank paper suggests higher bank capital requirements will increase borrowing costs, and reduce Gross Domestic Product. It suggests a one percentage point increase in a banking system's Tier 1 capital ratio may lead to a six basis point increase in the price of credit for borrowers, whilst a one percentage point increase in the Tier 1 capital ratio could lead to a three basis point decline in "the steady-state level" of GDP.

The focus of the Reserve Bank paper is Tier 1, or going-concern, capital. It describes this as the highest quality of capital, which includes paid-up ordinary shares, share premium resulting from the issue of ordinary shares, and retained earnings. There's also Additional Tier 1 capital, such as capital instruments that are continuous given there's no fixed maturity including preferred shares.

Tier 2, or gone-concern capital, consists primarily of long-dated subordinated debt. Unlike going-concern capital, the value of gone-concern will typically only absorb losses once the bank is close to insolvency, meaning there is no value in Tier 1 capital left to absorb losses. As the Reserve Bank puts it, gone concern capital only absorbs losses and thus protects senior creditors and depositors once the bank has become a ‘gone concern.'

The Reserve Bank is not currently proposing to change the regulatory requirements for Tier 2 capital, but is "open to discussing whether Tier 2 should continue to play a role in the capital framework."

'Pricing of mortgage and other lending rates will have to rise in response'

in their weekly update Kiwibank's economists Jarrod Kerr and Jeremy Couchman suggest pricing of mortgage and other lending rates will have to rise in response to the Reserve Bank proposals.

"Bank owners are being asked to stump up with a truck load more capital as a buffer against adverse shocks. Owners of banks are the first to take a hit in a financial stress event. Once in effect, the new capital requirements will be phased in over a period of five years. Importantly though, these changes have specific implications for the economy. First, credit growth is likely to be slower as banks will need to hold more capital against all lending. Second, customers will likely pay more to borrow," Kerr and Couchman say.

"A sharp lift in capital raises the cost of doing business for banks and may restrict the supply of credit (loans). No doubt the RBNZ will receive fierce feedback on the proposal, the time to do so ends on 29th March 2019. Even if the proposals are scaled back a bit, they are still likely to go well beyond what we are seeing offshore. This is not catch up to global standards, it goes well beyond. Our system will be that much safer in five years, but at the expense of growth near term. Credit is the oil in the economic engine, and the oil is now that much more expensive and in stricter supply."

"As the RBNZ points out there are two main sources that banks can raise funding from: creditors (bond holders and depositors) and owners (shareholders). Capital comes from owners and the retained earnings created with the help of capital. The expected effect on banks’ capital is an increase of between 20 and 60%. This represents about 70% of the banking sector’s expected profits over the five-year transition period. We expect only a minor impact on borrowing rates for customers,” add Kerr and Couchman.

"So the 'shortfall' of capital is over $20 billion. That’s a lot for a market of our size. The press has mis-represented the above statement that bank’s profit will be down 70%. Bank profitability will be severely impacted, especially the smaller (non-Australian) banks at a comparative disadvantage. But pricing of mortgage and other lending rates will have to rise in response. The RBNZ’s last line referring to a minor impact on borrowing rates in itself, acts as a light warning only. If you told a plumber they must use pipes that are twice as large, twice as thick, and at twice the price, it wouldn’t surprise anyone that the cost of the job goes up. There’s no business that takes on twice the cost, twice the time, for 70% less."

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Some of the language surrounding this makes me laugh:

APRA stated Unquestionably Strong level of 10.5%

Does that mean it is impossible to level-down once you reach "Unquestionably Strong"? Sounds like a computer game, and I'll warrant that some bank bosses sure feel like it is.

I think we have learned this year that APRA does not have a clue on anything to do with financial stability.

the Australian numbers may not be what they seem.
- then add it to their method (Royal Commish-wise).

APRA is legally not allowed to report on individual banks.

even at $8b, for our largest financial institution with such a massive concentration in RE assets - that is peanuts!!!

Yeah, I wonder where the extra $8B of asset value will come from?

it may slow down the high dividend payments flowing across the Tasman. (at least for a while at any rate!)

Don't forget,a lot of those yummy dividends stay in the hands of NZers.
Maybe the RBNZ think that those NZ rich pricks have enough.

A quick check shows the top 20 shareholders in ANZ all have "nominees" in their name or are other known investment brokers. And thats 58% of the company. Not sure there are many mum'n'dad investors in the banks

Edit: I meant NZ mum'n'dad investors.

Nominees can be funds under management but it's typically a requirement for use of margin lending or if you are offshore.

Vanguard and Blackrock own 10% and they are investment/retirement funds.

I realise this, but I'd still say there is about 3/5ths of bugger all ownership of the Aussie banks in NZ Mum'n'Dad portfolios. Blackrock owns 5% of ANZ (~USD 2.5Billion) which is 0.04% of Blackrocks AUM.

It might be 3/5ths of bugger all but still a juicy dividend to receive in the bank.
Very small shareholder myself and have enjoyed the ride as have other small shareholders.

No, i'm saying the NZ ownership of the Aussie banks is bugger all, not that the dividend is bugger all.

I'm sure you've done okay out of holding bank shares, but NZers overall haven't done well out of the banks profits because we collectively own sod all of them. I'd like to see more NZ ownership of our banking sector, but personally won't look at buying shares of the Aussie banks till the Royal Comission and the Aussie property market meltdown are cleared away. Or until as somebody mentioned in another comment they sell the NZ arm off as a separate entity.

Put to one side the argument over whether Australian Banks are gauging or not.
I'm not following your point?

The Aussie banks are owned in large part by nominee accounts - which in turn, the beneficial owners will likely be large fund managers... managing diversified global portfolios for, ultimately, "Mum & Dad" clients around the world.

That is a really good thing.
I want my savings in a diversified basket of stocks around the world.
Having a small piece of the Aussie banks is great - they may be gauging now they may be asked to throw in twice as much capital tomorrow and then the stock will get slammed. I don't want to be over-exposed to that - a lot of kiwis also have deposits in these Banks so concentrated positions would leave them doubly exposed to any failure.

My KiwiSaver is invested in BlackRock - if the holding is 0.4% of AUM then I'm happy about that.

I'm also happy that they have small holdings in numerous asset classes across various countries around the world. That's free, interdependent markets. It's a beautiful thing compared to nationalistic rubbish.

Key point " for, ultimately, "Mum & Dad" clients around the world."

Around the world.. Not NZ Mum and Dads.

I was responding to ngakonui gold's claim that "Don't forget,a lot of those yummy dividends stay in the hands of NZers."

4 Millionish NZers, (out of a developed world population of something like a billion people) with typically very low holdings of equities in any form (but improving now with Kiwisaver), end up with bugger all of the dividends of the Banks.

Just refuting the narrative that the banks making profits and paying dividends ends up in any significant way in NZ hands. The vast majority goes offshore, I doubt if more than 5% of the dividends the Aussie banks pay ends up in the financial wealth of NZers.

Yeah, my point is so what?

NZ Mum & Dads' investment funds are directed to an investment universe comprising hundreds of thousands, if not millions, of other companies around the world that, for all I know, may have the same reputation in their home country or worse.

The Banks make ~15%-20% ROE - other assets make far more than that.
If you think 15%-20% ROE is an outrageous super-normal return then direct all your money into it and rest assured with the smug feeling that you are playing a small part in resolving this perceived 'issue'.

If anything institutional investors are having hard words with these banks for running the social contract too hard. I wouldn't want to be in them right now anyway.

All that would happen is that dividends would be reduced, share price should increase in direct proportion, as net tangible assets will increase; if reduced dividends is the source of capital improvement.

Share value is tied to income. Less income = less value, and in short term there will be less income.

Or the banks will band together, charge higher interest and pay out less to feather their nest. They are all in the same boat after all.

What will this add to a mortgage interest rate?

Sounds good to me its about time they upped the interest rates for depositors. Of course the government could drop the tax on bank deposits to encourage savings and we would have that extra cash injection pretty quickly.

I look forward to much higher Term Deposit Rates being offered to help shore up these banks finances.

Macquarie Equities saying that the Aussie big banks could float off their NZ subsidiaries.

The quality of the RBNZ consultation paper and the thought that has gone into it is quite frankly embarrassing. There is no math or justification in terms of the capital ratios proposed.... they have simply pulled them out of thin air.

Moreover, where every other regulator in the world is insisting that banks spend significantly on their internal models for measuring and managing risk the RBNZ has basically gone the other way by flooring the internal models benefit relative to standard models at 90%.

This will actually make banks and the banking system in NZ more risky, not less.

Its an appallingly flawed approach and NZ depositors and the NZ economy deserve significantly better than this.

It'll mean higher mortgage rates, lower deposit rates, more profit to justify the increased levels of capital and an inherently riskier banking system because all risk modelling will effectively get done in excel.

Reading between the lines the Aussie Banks won't be able to move surplus profits back to Aus for a number of years.

I think the Aussie banks are vunerable to Dividend cuts..especially at the rate the Aussie property market is going.

It all sounds quite bad for the NZ economy

Not sure why its bad for the economy. Bad is when the banks fall over in a crisis and I really really don't want that to happen with what I have invested. The more they shore up the windows for a bad weather event, the better it is for investors.

Sure is bad when banks fall over... but it'll be bad for the economy before that because banks will ultimately ration how they allocate their capital and require a better return on any loan. If anything I can see an RBNZ induced recession hurting the banks all in the name of making the banks safer. Ironic.

Luckily for us the RBNZs mandate isn't helping the banks make profits, its ensuring financial stability. Which is what they are doing. A good move for NZers.

Its pretty clear that banks are already making record profits, perhaps they should "Hold" some of that profit for a rainy day.

Well said andyb, you understand how things work. Most cannot see that the banks won't just "absorb" the lower profit. It will mean lower GDP and more expensive costs —> bad for NZ

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