Australia’s major banks should increase their capital ratios by at least 200 basis points to put them on par with international peers, the financial regulator said on Monday, quantifying its recommended level of increase for the first time.
Capital ratios at Australia’s major banks – Commonwealth Bank of Australia, Westpac Banking Corp, ANZ Banking Group and National Australia Bank – stand at 11.7 percent, the study found. By comparison, the tier-I capital ratio for U.S. banks stand at 12.7 percent, according to Thomson Reuters data.
The Australian Prudential Regulatory Authority (APRA) has in the past called on the banks to increase this ratio, but it had not recommended a range.
In its latest recommendations, APRA said a 200 basis point increase would make the banks’ balance sheets “unquestionably strong” and place them among the top quartile of international lenders.
The regulator, however, has yet to make a final decision on the matter, or set banks a deadline for lifting their capital. Any strengthening should be done “over a reasonable transition period”, the APRA added.
“The key difference is they’ve actually quantified the impact,” said Omkar Joshi, an investment analyst who helps oversee about A$1 billion ($743.4 million) at Watermark Funds Management Pty, referring to the APRA report.
The regulator also flagged it would “shortly” announce standardised measures to evaluate mortgage risks for the banks, which have already taken steps to boost capital and rein in risky mortgage lending amid fears of a housing bubble in Sydney and Melbourne.
Analysts expect the APRA to enforce an increase in risk weights on mortgages to 25-30 percent, significantly higher than the 15-21 percent they currently hold.
Among the banks, ANZ’s capital ratios look the weakest, analysts said, while NAB, which recently raised A$5.5 billion through a rights issue of shares, is seen as having the strongest balance sheet.
The banks would together need between A$22 billion and A$41 billion to move to the top quartile, according to estimates from five analysts.
The “big four” have already taken steps to boost capital by selling assets and through share sales, and analysts say the banks are likely to take similar measures soon. ($1 = 1.3452 Australian dollars)