Big banks rally on NZ capital changes

The share prices of Australia’s biggest banks have ticked up upon the release of final guidelines on capital from the New Zealand regulator which have been relaxed after a long period of consultation.

On Thursday, the Reserve Bank of New Zealand – a dual regulator which acts as the prudential regulator as well as the central bank – confirmed the proposal requiring Australian banks to hold an additional $NZ20 billion worth of capital but will give the banks two more years to get there.

“This will reduce the chances of banks failing in New Zealand,” the RBNZ said in a statement.

Bank shares responded immediately to the news and by 10.30am had CBA popping 1.4 per cent, NAB rallied 1.5 per cent and Westpac rose 1.3 per cent.

ANZ – which is New Zealand’s biggest bank – was placed in a trading halt at the request of the bank earlier on Thursday morning and is yet to emerge.

RBNZ said it expected the new rules to increase the cost of credit to New Zealand borrowers by 20.5 basis points or a little more than one-fifth of 1 per cent.

Free market think tank The New Zealand Initiative seized on the rising cost of credit, saying it would hit those who could least afford it.

“The effects are likely to be felt most acutely by high loan-to-value borrowers, the rural sector and small-to-medium-sized enterprises,” the institute said in a statement.

Among the key concessions made by RBNZ was the decision to allow banks seven years up from five to reach the new tier one capital benchmark of 16 per cent and to allow preference shares to contribute up to 2.5 per cent of the new requirement.

Total capital required is 18 per cent of risk weighted assets with ‘tier 2’ debt instruments permitted to make up the final 2 per cent.

The New Zealand Banker’s Association CEO Roger Beaumont said the final proposal would bring some much needed certainty to its members and their customers.

“We are pleased the Reserve Bank has engaged with a wide range of stakeholders and made some changes to its original proposal,” Mr Beaumont said in a statement.

RBNZ governor Adrian Orr put the fear into Australian banks in 2018 after news first broke it wanted subsidiary banks operating within its borders to withstand a ‘once-in-two-hundred-year event’.

AFR

The big four banks were expecting a five year transition period to meet the new benchmark. AAP

The former head of the country’s highly regarded national super fund NZ Super has also embarrassed the local arms of ANZ and NAB after imposing capital penalties for running and signing off on inaccurate capital plans.

In a remarkable coincidence, both banks had openly criticised the regulator’s plans to lift capital levels by warning RBNZ they may be forced to scale back operations or restrict lending in order to meet the new hurdles.

ANZ which has 39 per cent of the NZ market was the first cab off the rank when CEO Shayne Elliott said the bank “was not shy of taking hard decisions” and had options about how it would deploy capital in New Zealand.

During NAB’s November results call chief financial officer Gary Lennon said the bank would consider “repricing, reduced spending and constrained investment” in response to what many regarded as a punitive proposal.

ANZ’s New Zealand division was thrown into turmoil in May after the dual central bank and prudential regulator ordered it to raise its operational risk by NZ$277 million after discovering it was running unapproved models.

Shortly after the whack from the central bank, ANZ New Zealand’s country head David Hisco departed over an expenses scandal after it was revealed the bank was paying for limousine travel and storage of his wine collection.

Several months later in November NAB suffered a similar fate after RBNZ found near identical issues with capital models employed by its subsidiary Bank of New Zealand and was slapped with a $NZ250 million.

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James Frost writes about banking, funds management and superannuation. Based in Melbourne, James has been reporting on specialist business and finance topics for 15 years. Connect with James on Twitter. Email James at james.frost@afr.com

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