MS: Banks need $31 billion

From Morgan Stanley via The Australian:

Morgan Stanley says Australia’s major banks will need to raise a further $31bn of equity capital by the end of FY17 – a potential concern for any investors with overweight holdings of bank shares.

“While APRA has flagged the prospect of higher mortgage risk weightings, we also assume that it will lift the D-SIB (domestic systemically important bank or “too big to fail”) buffer to ensure that major banks’ capital levels are ‘unquestionably strong’ and broadly in line with the top quartile of internationally active banks.”

The broker expects the major banks to use a combination of normal DRP participation and DRP underwriting and/or share placements.

“In our view, ANZ will need to raise the most capital due to its lower pro-forma CET1 (common equity tier 1) ratio, stronger asset growth and lower ROE. While it could sell assets, we believe this may be a more EPS-dilutive option.”

“Westpac has the least capital to raise, given a higher pro-forma CET1 ratio and no life company non-recourse debt deductions (vs ANZ: ~A$0.8bn; CBA: ~A$1.6bn; NAB: ~A$0.9bn by FY17E). However, it would be more vulnerable if APRA lifted risk weightings on investor property loans even higher than on owner-occupied loans.”

And all of that before bad loans begin to rise and more is required.

David Llewellyn-Smith
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  1. mine-otour in a china shop

    Westpac and risk ratings on investor property loans? The disaster waiting to happen – what odds Westpac gets into trouble first? Is the TAB offering odds on this?


      Appears that Westpac’s alley cat ( St George) just lost a few ‘lives’ in a tangle over by the BBY dumpster.

      Why would the regulators prevent a B2B transfer and elect to just close them out?

      • “The losses will run into the tens of millions for clients because the regulators wouldn’t let them transition positions to other brokers,” one broker caught up in the drama told the ABC.

      • “ASIC and the ASX have taken control of their positions and thrown them out the door.”
      • “The integrity of the market has now been put at risk, because anyone buying options through a broker risks the regulator coming in and potentially cancelling their positions,” he said.

      • Even StevenMEMBER

        Sounds like whinging to me. If the clients were sitting on losses, they would still be sitting on losses irrespective of whether ASIC closed out the positions, or the positions were transferred to another broker.

  2. Isn’t it rediculous a poor person runs into trouble and has to get money from a payday lender at 400% per annum whilst a bank runs into trouble and they get there money for free. I am so looking forward to our banks evaporating though I am learning to temper my mood for whenever we are close to reaching the finale there is some sort of bail out (cheap interest rates, gov buying mortgatge debt etc). Need to learn to be patient, though it will eventually happen

    • Well we’re already half-way there with Rudd’s guarantee and historically low IR aren’t we? Just need deposits confiscated and endless central bank purchases to perfectly mimic our friends overseas.

    • Even StevenMEMBER

      Our banks will never evaporate. Government will support them if needed. However, equity holders might be forced to bear very high losses before the government steps in.

    • You can cut that Y axis by about 60% and still capture 99.9% of the economy, which means no one’s borrowing more than $600K under that arrangement. Good luck Sydneysiders.

    • This is great! When the top 10% earners cant afford an average inner city Brisbane apartment, we must be close to meeting the reaper! I can smell the shit, and hear the fan!

    • +1
      Logic… well some sort of logic… is being applied finally.
      Those people barely coping losing money on investment properties hoping they can sell their house 2-3 years down the line and make more than their total losses and profit are in for a rude awakening.

      Buying that 600K house hoping it’ll be 750K in 3 years time will be shocked to know the market can only pay 600K max… effectively making their investment struggles not worth it and actually at a loss accounting the effort, energy and money spent.

      • flyingfoxMEMBER

        Yeap. The maths shows that it is a false promise with the exception of Sydney of late. The only people that made serious money were those that bought prior to the 2003 (2005-2007 in some other parts) booms and sold after. Sydney aside, hardly anyone who bought after 2008 is making any money. The RPData pain and gain report proves this.

  3. “And all of that before bad loans begin to rise and more is required”
    Absolutely. 50% of the X trillion $ aussie RE market price is above value. Once mean reversion kicks in the equity banks are going to need will skyrocket and rightfully so. APRA should have been demanding $1 for $1 equity/loan for 2 decades now. Hopefully they keep tightening the screws and don’t stop here because they’ve “done something”.

  4. I will be surprised if Westpac has the least capital to raise. They have the lowest risk weighting on mortgages of the big four banks IIRC. Any other thoughts here?
    It only matters when it comes to choosing which bank(s) to short. 🙂

    • mine-otour in a china shop

      Westpac has the lowest risk rating for now…. as the report points out when it changes they will be F8cked over more than the rest.

  5. Maybe those good looking, rich, long time business partners of theirs, the common garden variety specufestor can return the favour by giving them some of their offset/redraw!

  6. “And all of that before bad loans begin to rise and more is required.”

    And when bad loans strike their existing equity base will also be pulled. Just a matter of time before equity leaks faster than banks can refill.

    In reply to matts interesting link I think this might be a good read for those above to better quantify their position with in our property/share market.

    I’ll stick with my knowledge.

    Just a wiki page, can simply google it yourself for more indepth papers.