S&P estimates the RBNZ plan will increase high quality capital in the system by 43 per cent and by 47 per cent for the big four Australia banks’ New Zealand subsidiaries.
$6.6b to $8.1b impost
The major banks currently operate with buffers in New Zealand above the required minimum level, so the ultimate amount of new capital depends on whether banks continue to operate with those buffers or fall back to the new minimum requirements.
At the new minimum levels, S&P said ANZ Bank will have to raise $1.9 billion, Commonwealth Bank $1.6 billion, National Australia Bank $2 billion, and Westpac $1.1 billion – a total of $6.6 billion.
At a 1 per cent buffer – the same level banks are running at present – even more fresh equity would be required to maintain CET1 ratios in Australia: ANZ would need $2.4 billion, CBA $1.9 billion, NAB $2.4 billion and Westpac $1.4 billion – a total of $8.1 billion.
If this later amount of new equity was raised, the bank response to the RBNZ’s measures would be half of what they were forced to raise in 2015 – around $15 billion – responding to the financial system inquiry’s demand for capital buffers in Australia to be “unquestionably strong”.
The standard was introduced to ensure international investors continue to provide funding for the Australian economy in times of trouble.
The Reserve Bank of New Zealand’s move is also designed to protect its economy from external shocks. And it wants bank shareholders – and potentially borrowers, if the banks decide to raise interest rates to compensate them for higher costs of more equity capital – to be on the hook if conditions deteriorate, rather than the NZ taxpayer.
Banks had been hoping they could pressure the RBNZ to pull back on its plans but this looks unlikely following tough comments from RBNZ governor Adrian Orr two weeks ago, who attacked the returns generated by the sector and defended the central bank’s plans.
UBS banking analyst Jonathan Mott said he disagrees with the RBNZ’s conclusion that the proposal will only have a minor impact on borrowing rates for customers.
“Equity is expensive, with a cost of capital of around 11 per cent, and we think shareholders will demand at least this return,” he said in a note last month.
UBS expects the banks will increase interest rates on their NZ mortgage books by around 80 basis points to maintain current returns on equity.
Another way the major banks could meet the higher capital in New Zealand would be via retained earnings, which would require a cut to dividend payouts to shareholders.
S&P said repricing could provide an opportunity for smaller competitors to attack the majors in New Zealand, noting the outlooks for non-banks and some smaller banks could “benefit over the longer term from an improving competitive position given the capital headwinds facing the country’s major banks”. However, given their strong market position, “we believe that the competitive advantages that the major banks have are not going to disappear anytime soon,” S&P said.