From CLSA:
ASIC have commenced proceedings against ANZ for alleged market manipulation in setting the bank bill reference rate on 44 separate days between 9 March 2010 and 25 May 2012. ANZ have rejected the assertions and will vigorously defend itself effectively claiming that “our practices in the BBSW market were consistent with Australian market practices in wholesale financial markets and we reject ASIC’s characterisation of the transactions in question”. BJ notes that any civil penalty is not likely to be that material for ANZ, a few million $ to $300m, but worries more about a potential class action if in fact it is revealed that other counter parties have been disadvantaged. ANZ are more exposed to financial markets than peers having expanded this business under previous the Asia super regional banking strategy.
While ANZ may look cheap on near term PEs 9.4x ’17 and dividend yields 7.5% ANZ’s 70% payout ratio looks more vulnerable than peers due to lower capital generation and insufficient “organic” generation of dividend franking credits. BJ also believes that a dispassionate review of ANZ’s operations could lead to write offs of more than $4b which would reduce ’15 NBV by $1.40 or 7% to $18.33.
Our Brian is not to messed with. And this too from the same source:
The Basel Committee on Banking Supervision (BCBS) has released its proposed revision to the operational risk framework for banks. Under the proposal the four different operational risk approaches (three separate standardised approaches plus the Advanced Measurement Approach) will be replaced with a “financial statement based measure of operational risk – the Basic Indicator – combined with an individual bank’s past operational losses over the last three years. The BCBS plans to conduct a Quantitative Impact Study to help with the final calibration. “For most banks the Committee expects that these proposals will have a relatively neutral impact on capital. While the objective of these proposals is not to significantly increase overall capital requirements, it is inevitable that minimum capital requirements will increase for some banks.”
The four major Australian banks are Advanced IRB banks, and in order to attain Advanced status had to be Advanced Measurement Approach accredited for operational risk. While the Australian major banks have been particularly aggressive in modelling down their credit risk weighted assets (see Figures 1 and 2) they don’t seem to have been able to release regulatory capital for operational risk and in fact the operational risk for the Standardised BEN is broadly in line with those of ANZ, CBA and WBC (see Figures 4 and 5). Interestingly the historically accident prone NAB still carries a markedly higher operational risk impost the other banks notwithstanding that the “new” NAB has now exited the troublesome assets. While APRA clearly ratcheted up op risk around September 2012 yet another increase cannot be ruled out!
Brian and Ed remain of the view that the Australian major banks are A$31bn short of CET1 capital. In a speech on 29 January 2015 APRA noted that (i) for banks “changes in the pipeline will, in all likelihood, lift capital requirements somewhat higher, but still well within the capacity of the banking sector to absorb in an orderly fashion over the next few years”, (ii) “While APRA doesn’t have a competition objective per se, we’re also mindful of the FSI’s desire for the banking sector to be more competitive. So we’ll be looking at policy choices that, where possible, add to the competitive dynamic of the industry when this doesn’t undermine prudential outcomes” – this could imply further increasing the housing capital requirements for the Advanced IRB major banks even higher towards those of the Standardised regional banks. APRA’s commentary should be viewed within the context of the Basel Committee of Banking Supervision press release from 11 January ) confirming that it will“complete its work to address the problem of excessive variability in risk weighted assets by the end of CY2016”
We repeat our view that rhetoric from Australian banks of capital sufficiency sounds increasingly at odds with commentary from the BCBS and APRA. Notwithstanding the recent de-rating of Australian banks Brian and Ed recommend continuing to underweight the sector.
