So much for the rubbish on Tuesday about how the banks would be hit by big capital calls in the new rules from key regulator, APRA.
That saw bank shares fall around 1.7%, yesterday they jumped more than 3%, with the ANZ out the front with a near 4% plus rise.
ANZ soared 3.9%, Westpac gained 3.8%, NAB rose 3.1% and Commonwealth Bank closed 3% higher, for a cumulative gain of about $14 billion in value. That was more than double the $6.7 billion cut on Tuesday.
APRA said the country’s largest lenders would need to increase top tier capital by about 1 percentage point under the new regime to achieve a core equity tier one capital ratio of 10.5% of assets by 2020 at the latest. The news from APRA saw the local market jump 48 points yesterday – 20 points though shy of Tuesday’s panicky sell off.
ANZ, when it announced its first-half results in May, said its common equity Tier 1 capital ratio was at 10.1%. Westpac’s was 10.0% at the same time, while National Australia Bank’s was also 10.1%.
The country’s largest bank, Commonwealth Bank, had the lowest tier one capital ratio at 9.6% at the time of its third-quarter trading update in May. It said yesterday it would provide more details on how it will close the gap when it announces its full year results next month.
Smaller banks that allocate capital more conservatively will need to increase their capital ratios by about 0.5 percentage points.
Capital provides a loss-absorbing cushion for banks in times of financial stress. Australia’s banks have already raised tens of billions in new equity capital since the global financial crisis in response to a global push from regulators for safer banks.
Because the gaps between the APRA targets and the big four’s current capital levels, APRA’s changes can easily be met by banks conducting capital raisings by issuing shares under their dividend reinvestment plans or by retaining a higher share of profits, which could lead to cuts in dividends.
More likely there will be a freeze on dividend for the next year to 18 months at least. Rights issues to shareholders look a remote chance.
APRA will give the banks several years to meet the target, which it wants them to meet by 2020 at the latest. Some analysts believe such a long timeframe makes "big bang" capital raisings less likely, but APRA also said it encouraged banks to "consider whether they can achieve the capital benchmarks more quickly."
