Banks warn shareholders, customers on costs of higher capital

This morning, APRA announced that the big four and Macquarie must increase the average risk weight for Australian residential mortgage exposures from approximately 16 per cent to “at least” 25 per cent.

The change will come into effect on 1 July 2016.

This means the Commonwealth Bank [ASX:CBA], ANZ [ASX:ANZ], Westpac [ASX:WBC], NAB [ASX:NAB], and Macquarie Bank [ASX:MQG]. “The impact to ANZ’s capital position of approximately 55 basis points is largely as expected following the financial [system] inquiry and is manageable during the APRA transition timetable to 1 July 2016”, ANZ said. The increase is also consistent with the direction of work being undertaken by the Basel Committee on Banking Supervision (Basel Committee) on changes to the global capital adequacy framework for banks.’.

Lim said he didn’t expect the requirements to “significantly slow mortgage growth” as they weren’t a surprise to the banks.

This re-calibration of risk weights is likely to impact competition in the mortgage market with many submissions to the Murray inquiry reflecting a belief that less capital means the majors could out-compete smaller rivals.

Most of the banks have made statements on how the changes will affect them.

It is possible that, as with NAB, CBA and the other two major banks, as well as Macquarie, may need to ask shareholders to tip in more funds through capital raisings.

But the biggest credit union in the country, CUA, which has about an $11 billion loan book – $6 billion of which are variable rates – said its main standard variable rate, which accounted for about 60 per cent of its variable mortgages, was linked to the average of the big fours’ standard variable rates, but set between 0.5 per cent and 1 per cent lower. It’ll ultimately lead to lower returns for shareholders than would otherwise be the case. The measure “will enhance the resilience” of the affected banks and the broader financial system, it said.

Due to its larger reliance on home lending, the Commonwealth Bank said it is expecting a 95-basis-point increase will be needed in its key “common equity tier one” capital ratio for residential mortgages.

APRA said in an announcement on its website the increased risk weights will apply to all Australian residential mortgages – but not lending to small businesses secured by residential mortgages.

“The impact of this change will require a further $3 billion of capital to lift the Group’s 8.5% 31 March 2015 pro-forma CET1 capital ratio towards the top end of our preferred range”.

“The additional capital “will better align the banks” capital positions with the growing tail risks arising from their residential mortgage exposures during a period of high investor demand and an associated rapid acceleration in house prices in Sydney and Melbourne”, Moody’s vice president Frank Mirenzi said.

In today’s announcement to the market Westpac’s King said: “While Westpac is well-placed to meet these changes, increased capital does come at a cost”.

“The terminology used remains “capital ratios” rather than CET1, showing that the regulator continues to hedge its bets on what exactly needs to change going forward”, Mr Wiblin said.

The additional 80 basis points of equity capital required by the mortgage risk weight changes will form part of the 200 basis points of extra capital that APRA said would be required to put the banks comfortably in the top quartile of worldwide peers based on capitalisation.

However, the increase in IRB mortgage risk weights announced today is an interim measure.