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.