How much capital did you say the banks need?

From Morgan Stanley:


The Financial System Inquiry has recommended a “baseline target in the top quartile of internationally active banks” so that Australian bank capital ratios are “unquestionably strong”. It concluded that the major banks’ ratios are currently above the global median, but below the top quartile, implying a Basel CET1 ratio of ~11.4%. This equates to a capital shortfall of ~A$12bn vs the ~12.2% ratio for the 75th percentile of global banks at December 2013. However, the FSI notes that “the global distribution of capital levels will continue to rise for some time yet”. With this in mind, we forecast the major banks to raise ~A$38bn of common equity via a combination of DRP, share placements and asset sales over the next three years. Our Chart of the Week shows their Basel CET1 ratios would reach ~14.5% under this scenario. However, it’s not clear whether this would place them in the top quartile of global banks.


David Llewellyn-Smith
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    • Dont need to, Andy. They would underwrite their dividend reinvestment plans to pass through the franking credits. Shareholders not reinvesting their dividends get diluted.

      I don’t think DRP will be big enough or fast enough to meet the targets – not that I or anyone else knows what they are. A modest uptick in doubtful debts from current very low levels would tear holes in profits, dividends and share prices.

      I note MS talks of DRP, share placements and asset sales, but not of asset reduction via credit rationing – heaven forbid!

      Disclosure: DC owns ANZ.

      • Thanks DC great insight, and yes dividends being DRP’d to capital could work.

        Giving the banks a 3 year timeframe to do this is a ridiculous risk IMO, especially now economic conditions are fast changing and they’re estimating $38b (!!) needing to be added to capital.

      • Hi David and Andy,
        The REAL question is this : Why, when our banks were insolvent in the early days of October 2008, didn’t our banks start to provide for more capital from November 2008.
        I’ll just beat both of you to the answer: a complete disregard of the banks’ CEOs for their shareholders and their total abrogation of responsibility to this nation and their people.

        When it all hits the fan, I strongly believe the bank CEOs of this era should be held responsible, and at the very least repay half their salaries towards the bail-in.

      • @ath, totally 100% yes agreed. Don’t forget scum regulators who couldn’t regulate the flow of tap water. And don’t forget the moron who agreed to short-sale bans on financial institutions lol. 2008 was the time for a crash and reformation – Rudd fkd the best chance in decades for this, and will not be forgiven.

      • Yeah Andy, Rudd et al just played follow the leader (Japan & US).
        The problem was debt, and now there is 45% more of it, encouraged by low interest rates from central banks, and as you’ve said, they missed the chance for a correction…and allowed the banks to become even more powerful.
        History will laugh it’s head off.
        Hope I live long enough to tell the grandkids (before they learn about this in History class) that as individuals, we didn’t fall for it.

  1. Everyone seems surprised when ASX listed stocks can fall 50, 60, 70, 80 percent plus in a number of weeks, yet their values before then were endorsed by the experts.
    Housing can go the same way, can our banks accommodate this?? WW

  2. The whole system is too arrogant to utilise the massively overvalued equity now to patch this hole.

    It will take the property market to dump and bad debts to rise before they apply the patches at deeply discounted prices from here.

    I still can’t believe the CBA got the PD issue away at those prices – the thing has never traded above par.

    Mugs would line up for a rights issue here – but the CEO/CFOs will wait and keep kiting the DRP concept such to maximise the hope of a 2015 bonus before leaving ‘to spend more time with family’.

    • … pursue other oppurtunities.

      In the scenrio you are talking about, would expect divorce rates to go up considerably, so the leaving to spend more time with family will not be a viable option.

      • Haha – depends on whether they make it to end of financial year guess?

        I wonder how much 32 South Kloppers will be taking up in his personal account?