The Commonwealth Bank of Australia and its three main competitors might need as much as A$30 billion (US$25 billion) after a government-commissioned inquiry called for “unquestionably strong” capital levels, analysts said.
The shortfall is based on lenders needing to boost levels to within the top quartile of their global peers and set aside additional funds against potential losses on home mortgages, as recommended by the Financial Systems Inquiry (FSI) report released yesterday in Sydney by Australian Treasurer Joe Hockey.
Australia’s major lenders hold about 10 percent to 11.6 percent of their assets as Tier 1 capital compared with at least 12.2 percent at the world’s safest banks, the government’s first inquiry into the financial system since 1997 said.
Given banks’ reliance on overseas investors for debt funding, the financial system must be robust, the report said.
“The onus on capital is in line with global changes and Australia has to fall in line,” said John Buonaccorsi, a Sydney-based analyst at CIMB Group Holdings Bhd. “I don’t expect a straight capital raising yet.”
Australia’s largest banks are initially more likely to resort to dividend reinvestment plans, where investors swap all or part of their dividend for new shares, and limiting increases in payout ratios, he added.
Buonaccorsi expects a shortfall of between A$25 billion and A$30 billion. Omkar Joshi, who helps oversee A$1 billion as an investment analyst at Watermark Funds Management, estimated a A$15 billion to A$20 billion gap.
Their predictions were based on an average mortgage risk weight of 25 percent to 30 percent and systemically important bank buffer of 2 percent.
The inquiry led by former Commonwealth Bank head David Murray said policies must be tuned to reduce the cost of failure by ensuring lenders have sufficient loss-absorbing capacity.
Australia’s government plan to consult widely with consumers and industry on the report, which contained 44 recommendations aimed at bolstering the nation’s financial sector, Hockey said after its release.
“I have long stated that our banks must be well capitalized and they are,” Hockey told reporters in Sydney. “What the Murray inquiry is recommending is a further look at increasing those levels of capital and that’s something that needs to be dealt with appropriately by the regulators.”
“We believe we are strongly capitalized,” Westpac deputy chief executive officer Phil Coffey said in an e-mailed statement. “As the FSI panel noted, comparing capital levels with global peers is a complex issue and we will be consulting with the Australian Prudential Regulation Authority on defining fact-based international capital comparators.”
Four regional lenders — Suncorp Group Ltd, Bendigo & Adelaide Bank Ltd, Bank of Queensland Ltd and ME Bank — said in a statement that the recommendations would create a more level playing field with the larger banks by closing the gap in risk-weighting of mortgages.
The panel recommended a mortgage risk weighting of 25 to 30 percent.
The four biggest lenders have an average mortgage risk weighting of 18 percent, UBS analysts led by Jonathan Mott said in a note on Sept. 8.
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