Following the Reserve Bank of New Zealand (RBNZ) looking to implement higher capital standards for Kiwi banks, APRA has proposed changes to the capital treatment of investments in subsidiaries.
Namely, it means more capital for large investments, but less capital for smaller investments.
As the four major Australian banks all own New Zealand’s four largest banks, the potential new rules limit the major banks’ ability to use capital “recycling” to meet Kiwi standards, Morgan Stanley has said. The analysis has urged for more focus on distributable payout ratios.
An analysis from the investment manager stated the risk of dividends eroding across Westpac, ANZ and Westpac has all risen, adding Westpac and NAB will both need to build further capital.
Under current rules, the majors excluding ANZ, could meet RBNZ requirements by distributing New Zealand earnings and “recycling” capital back into NZ subsidiaries.
Morgan Stanley noted APRA’s latest proposal would limit the ability for NAB and Westpac to further leverage Australian capital – which means the two banks along with ANZ will need to retain earnings in New Zealand to meet the RBNZ targets.
“We believe that Level 1 [Common Equity Tier] CET1 ratios are likely to become the primary constraint on major banks’ capital, and we note that APRA’s latest proposals lower these ratios for ANZ and Westpac,” the analysis read.
“We also calculate that pro forma ratios at ANZ, NAB and Westpac are at or around APRA’s 10.5 per cent minimum, leaving them in a tight capital position.
“At the same time, the RBNZ proposals imply group CET1 ratios above 11 per cent, with APRA stating that ‘reforms to strengthen capital in offshore subsidiaries… could require a substantial amount of additional capital beyond APRA’s unquestionably strong benchmarks.’”
Morgan Stanley has called for new capital management plans across the banks:
• For ANZ, an approximate 10 per cent dividend cut in financial year 2020 with no buybacks
• At Westpac, around a 15 per cent dividend cut at the 2H19 result and DRP underwriting to raise about $2 billion of capital
• NAB – flat dividend but a roughly 80 per cent payout ratio, ongoing capital build and rising risk risk of another dividend cut in FY20
• CBA – a flat dividend with approximate 85 per cent payout ratio and around $2 billion of future buybacks
The investment manager estimated that the major banks will need to retain earnings in New Zealand for around three years, even in a “no growth” scenario.
“Existing RBNZ and APRA proposals already create challenges for ANZ, while APRA’s latest proposals will raise the bar for Westpac and NAB given their relatively low Level 1 capital ratios and high distributable payout ratios,” Morgan Stanley said.
