Australian Banks Seen Needing $25 Billion in Capital

Commonwealth Bank of Australia and its three main competitors may need as much as A$30 billion ($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 System Inquiry report released yesterday in Sydney by 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. Banks should be strong enough to withstand shocks, particularly given their reliance on overseas investors for funding, the report said. “The onus on capital is in line with global changes and Australia has to fall in line,” John Buonaccorsi, a Sydney-based analyst at CIMB Group Holdings Bhd. said in a phone interview after the report was released. “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. Photographer: Nelson Ching/Bloomberg David Murray, former Commonwealth Bank of Australia chief executive officer. Buonaccorsi expects a shortfall 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. Cost of Failure 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 will 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. It will seek bipartisan political support when taking decisions on the review, which will probably be after the first quarter of 2015, he said. “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.” U.S., Europe The inquiry received more than 6,800 submissions and met with over 50 financial institutions, market participants and regulators from the U.S., Europe, U.K., Asia and New Zealand. The nation’s four largest lenders -- Commonwealth Bank, Australia & New Zealand Banking Corp. (ANZ), National Australia Bank Ltd. (NAB) and Westpac Banking Corp. (WBC) -- added A$34.6 billion in common equity Tier 1 capital from October 2010 to September this year as they boasted five straight years of record profits, filings show. The banks raised A$17.7 billion through share sales in 2008 and 2009 to bolster their balance sheets in the wake of the global financial crisis, data compiled by Bloomberg show. “Murray’s recommendations around capital, while not entirely surprising, are a negative for the major banks and incrementally positive for the regional lenders,” Watermark’s Joshi said. “However, it is interesting to note that Murray has left the final decision with the regulator rather than making an actual recommendation on a particular capital ratio.” Commonwealth Bank and National Australia said they would now consider the recommendations, in e-mailed statements. ANZ’s Deputy Chief Executive Officer Graham Hodges said increasing mortgage weights for major banks was at odds with the Basel Committee on Banking Supervision’s risk-based approach. contact the reporter on this story: Narayanan Somasundaram in Sydney at nsomasundara@bloomberg.net

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