The major banks need to raise an extra $20 billion over the next three years in order to satisfy APRA their capital levels are “unquestionably strong”, says Morningstar.
In a new report about hybrid securities, Morningstar said it would not be a “difficult task” for the big four banks to adequately beef up their tier one capital ratios.
The commentary comes in the wake of an APRA report that found Australian banks are not ‘unquestionably strong’ when compared to their global banking peers.
APRA found that the big four bank’s capital adequacy ratios were not in the top quartile of global peers.
The regulator suggested that an increase of 70 basis points relative to their June 2014 capital ratios would get them to the bottom of the top quartile, while a 200-basis-point increase would see them ‘comfortably’ in the top quartile (ie. ‘unquestionably strong’).
Morningstar forecast the big four banks would need to raise $20 billion during the next three years based on June 2014 benchmarks.
In order to boost levels by 200 basis points, ANZ would have to do the heaviest lifting by raising $7 billion, with the Commonwealth Bank needing to raise $6.6 billion, said Morningstar.
Westpac would have to raise $4.2 billion, while NAB would only need to raise $2 billion.
“Reassuringly for investors across the capital structure, APRA remains committed to the required capital being raised in an orderly manner over a reasonable transition period,” Morningstar said.
“Furthermore, APRA continues to maintain its position as one of the more proactive and conservative regulators worldwide.
“We expect hybrid capital to continue to remain an important funding avenue for the major banks. If supply outweighs redemptions over the medium term, as we anticipate, hybrid prices can be expected to face downward pressure…
“Such price pressure will require higher coupons and yields to continue to attract investors, particularly in an increasing interest rate environment,” said Morningstar.
Economists agree that the Reserve Bank is likely to remain in inflation fighting mode until December. ...