From Chris Joye:
In grim news for equity investors chasing returns, NAB’s senior credit analyst Simon Fletcher has concluded that “more capital [or less leverage] is coming” for the big banks in what will be an integrity test for the insular regulator.
The new NAB report also argues that the Australian Prudential Regulation Authority (APRA) will implement the government’s directive to minimise implicit taxpayer guarantees of the major banks by explicitly exposing their highest-ranking bonds to the risk of loss.
…This is directionally consistent with this column’s views, the projections of CBA’s chief credit strategist Scott Rundell and recent remarks from the regulator itself.
When APRA comes to define what an “unquestionably strong” bank is at the end of this year, NAB believes it will lift the majors’ too-big-to-fail (or “systematically important”) equity buffers from 1 per cent to 2 per cent.
This means the majors’ minimum CET1 ratios will rise from 8 per cent to 9 per cent. The forecast 10 per cent CET1 ratio is based on NAB’s observation that the banks “run CET1 levels of between 0.75-1.25 per cent above regulatory minimums”.
The ensuing equity shortfall across the majors is estimated to be $15.4 billion, which is more benign than the $25-$30 billion band posited by CBA’s credit team.
Good. Depending upon how troublesome Brexit is for markets, more macroprudential may be needed as well as rates are cut.