Deutsche: Banks to need $23 billion

From Deutsche:

We estimate that the FSI report is likely to see the major banks need $16bn

– $23bn of CET1 over the next 3-5yrs with organic capital generation and DRP’s (at ~20% participation) more than sufficient to meet the capital increase.

From an ROE perspective this can be offset through a ~14-18bps of asset repricing.  The impost on ANZ and NAB is the highest while the regional banks will also likely need to boost capital levels. Overall this review is largely inline with our expectations and unlikely to negatively impact share prices.

The FSI has suggested that all ADI’s will need capital ratios in the 75th percentile of global banks.  This is not a straight forward target with no global comparable CET1 ratio adjusted for all national discretion available.

That said piecing together what the FSI, APRA and BCBS are saying we estimate the major banks would need to increase capital by $16bn to get to the 75th percentile or $23.5bn allowing for a 50bps buffer.  We also estimate an additional $1.5bn for regionals or $2.2bn with a 50bps buffer.

The FSI also suggested increasing RW on housing to an average of 25%-30%.

This is well above the current global levels and would require additional capital of $9.5bn–$16bn.  We would caution against adding this onto the capital required to meet the 75th percentile target as other international banks are not subject to this requirement and hence the RW increase would be excluded in the group harmonised calculation.

We do not believe the banks will attempt to raise capital in the near term with implementation likely to take 3-5yrs given: i) the government review will take 6mth, ii) the FSI recommending that sufficient implementation time be given and iii) APRA still has to figure out how to benchmark Australian banks vs international peers.  We estimate organic capital generation and DRP’s (20%
participation) over the next 3-4yrs sufficient to meet the higher capital levels.

Our estimates suggest that the banks can offset the impact of higher capital through a 14-20bps repricing of gross loans.  Assuming housing is the mechanism for repricing then the increase is 25bps – 35bps.

Comments

  1. But, but, but, Joe Muppet next door was banking on ever falling interest rates to keep his “property ponzi specufestors incorporated” business alive.

    How will he eat????

  2. Why only 75% of international banks target? We didn’t have any housing crash, which has to be inevitable, so why only 75% of what is required for other international banks? Our target must be 100% even higher, we are going to have a crisis and the risk for the banks is much higher.

  3. This will all be fine and dandy, but the resultant fall in demand for private debt will need to be offset by government spending

    • LNP are libertarian?

      Ah, no.

      I cant think of any other political party that disrespects markets and liberal freedom more than the LNP.

      ALP maybe on the former.

      • Libertarianism is a hard right quasi religious ethos.

        “Libertarianism is, at its simplest, the antonym of authoritarianism.[2] The term has been around since the beginning of the 20th century or earlier and was primarily used for self-identification with anarcho-syndicalism and labor movements. In the USA, the term was adopted by the Foundation for Economic Education think tank in the 1950’s to describe a political and social philosophy that advocates laissez-faire capitalism as a panacea for virtually everything. Non-libertarians view this as synonymous with oligarchic plutocracy after the fashion of the American Gilded Age, while the reality-based community tends to realize that one cannot just yank economic theories out of the air and magically expect them to work.

        This anti-government phenomenon is found primarily in the United States, likely due to Americans’ extensive experience with dysfunctional government, coupled with their unawareness of the existence of other countries. Historically, and almost everywhere other than America still today, the term has been associated with libertarian socialism and anarchism. The adoption of the libertarian label by advocates of free market economics is an ironic example of their tendency to take credit for other people’s ideas.”

        http://rationalwiki.org/wiki/Libertarianism

        Skip here… that’s just a quick link but can provide quite a wide scope of corroborating studies. It should be pointed out that American libertarianism is hard right whilst the European is left of center.

        Chris for those that have been watching the political seen for a few decades have noticed the bleed over from America to Australia as a marketed best business practices and media import. Sort of like a soft velvet glove approach instead of the full Pinochet treatment.

        Skippy… and yes the LNP [almost the entire party] and the ALP [center to right side] are entirely of the American version.

      • WOW Chris,

        A clarifying statement which had zero personalization in it gets the treatment. Are we suppressing information now?

        Edit, that was two cases in a row imo. Still the relevant information is within this comment.

        http://www.macrobusiness.com.au/2014/12/murray-inquiry-targets-negative-gearing-housing-debt-2/#comment-936299

        Skippy… no accusing you personally [tho probability begs the question imo], still no link spam or other filter problem I could see.

        • text is too long for spam filter mate, its not me. I cleared it for you.

          I disagree on the term, but agree on the description. You can have pro-government libertarian, we’re not all Ron Swansons, real libertarianism is rooted in the Swiss style of government. i.e a government that does not govern the people, but is actually THE people.

          Prefer you use neo-libertarian or neo-conservative instead of libertarian, we’re more “fuselage” than “winged” if you get my drift.

      • Understand your more European views and agree with that premiss. It was my intent to make the distinction between the two, American and European.

        Skippy… still I would caution that both party’s have increasing embraced the American version, LNP due to natural tendency’s and ALP as a political necessity.

        Edit. I actually revived a spam notification in the bottom yellow text box FYI.

    • It could push up the AUD marginally if international funds get in on the capital raising’s. IB’s will be seriously pushing for these recommendations to be implemented – as there is bloody good fees involved – even if the clip is only 1.5-2%.

      The big retail banks will be dumb though – they will fight this tooth and tail. But this is the great irony, (a) if the did the capital raise now it would be near record heights and overall dilution will be minimal. Think FMG as an example, before 2008 crash, imagine if they doubled the shareholding at $10ps, yes current shareholders would suffer dilution, but they would have virtually no debt (net cash?), and would not be looking at equity oblivion by 2Q15. The banks are not being asked to raise anywhere near that amount! ; and (b) when the financial pressure comes on, bank share prices will tumble, but their loan book will not, in fact it will grow if the overseas debt component is priced in USD. The current crop of bank management will held accountable by suffering enormous losses, when they could have easily mitigated that requirement utilising virtually record share price highs. And that is assuming they can actually raise the capital. We did some of HSBC, which was the least affected bank at the time financially, but as soon as the capital raising was publicly announced, the share price dropped right through the set capital raising price, crucifying some of our clients

      There will be a whole generation of boomers will will have their super wiped out (i.e. bank stocks) – and their stored retirement savings (i.e. their houses) drop enormously too – so those greedy little money lovers (especially Gen X – of which I am one) will notional get their cheaper house.

      They won’t of course, because many will find they no longer qualify for a loan – and many will lose their jobs.

      • Thanks RT, good points on the raising timings. I’m assuming you mean the Big 4 (and wholly owned subs) with “retail” versus the IB being Citi, JP, etc?

      • Yeah, the big raisers would be Goldies, BOA, MGQ, as well…

        But the big four will never allow this to happen. ANZ is very exposed to Asia (their big growth engine), CBA to its Bankwest division (WA), and WBC to the Sydney property market…

  4. “We do not believe the banks will attempt to raise capital in the near term with implementation likely to take 3-5yrs ”
    —Deutsche

    Does anyone seriously believe we have 3-5yrs before the next crash?

    • If history is any guide… 😉

      Any ideas on how many suspended dividends the capital requirements could be met by?