APRA has indicated a willingness to 'bend the rules' when it comes to the Basel III capital requirements to ensure they do not affect Australia's major banks, says global equity investment manager Ranger International.
In a report on the Australian banking sector, Ranger International said the big four will continue to offer attractive dividends despite the effect of Basel III capital requirements.
APRA has been "proactive" in applying the Basel standards to Australia's banks by increasing capital requirements ahead of the Basel deadlines, said the report.
As a result, Australia's four largest banks are among the best capitalised in the world (as of July, Westpac, CBA, ANZ and NAB were ranked second, third, fifth and twelfth, respectively).
In its initial announcement about bank capital ratios in July 2015, APRA said it would be targeting an average risk weight on Australian residential mortgage exposures of at least 25 per cent.
But because other changes to banking risk models are likely to take the mortgage risk ratings above 25 per cent, the prudential regulator appears willing to "limit the actual impact to 25 per cent", according to the report.
"APRA seems to be bending the rules a little to keep the ultimate impact on the banks limited to the announcements made in July 2015," Ranger International said.
"The concern for investors in bank stocks is that APRA will call for another significant increase in the capital ratios of Australian banks, leading to more dilutive equity issuances and possible dividend cuts.
"While anything is possible, we believe that such a dramatic increase in capital requirement is unlikely," the report said.
All of the major Australian banks have targeted capital ratios of between 8.75 and 9.25 per cent, and they all expect to be in the middle of that range after adjustment for the new mortgage weightings (which took effect on 1 July 2016).
The report noted that dividend payout ratios are below 80 per cent for all of the big four.
"We believe the Australian banks still offer attractive opportunities for dividend investors who go in with reasonable expectations," the report stated.
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