From the always excellent Brian Johnson:
The Basel 3 global bank regulatory reforms seem to be slipping back slightly. We expect APRA to finalise its regulatory framework for the Australian banks in 1QCY17 as opposed to the previously flagged December 2016 deadline.
APRA has released its draft proposed Net Stable Funding Ratio proposal, to apply from 1 January 2018, which has made some favourable concessions to the banks relative to its March 2016 proposal which likely boosts the Australian bank NSFRs by 4-5% from around 100% to around 105%. HOWEVER every recent speech by APRA has expressed concern about the ~20% of funding the Australian banks derive from short-term funding, in particular short-term offshore funding. APRA Chairman Wayne Byres stating – ‘Some further lengthening of Australian bank maturity profiles is therefore likely to be needed over time to truly strengthen their funding resilience’
Separately APRA has notified Australian banks of their CY17 access to the Committed Liquidity Facility (CLF). CLF is an undrawn line of credit from the RBA that counts towards the Liquidity Coverage Ratio given that the Australian bond market issuance would become illiquid if the Australian banks solely met the CLF with cash and Government bonds. The CLF pricing (15bp undrawn / 40bp drawn) is far cheaper than holding an Australian Government bond (ie, funded with three year debt at +100bp over swap vs bond yield earning -70bp below swap). However there is a sting in the tail given (i) access to the CLF is granted once a year and cannot be increased, and (ii) in applying for the CLF banks must prove to APRA they are attempting to use their best endeavours to minimise its usage (ie, lengthen wholesale funding duration, grow proportion of funding from “stable” deposits or slow loan growth). The Australian banks’ respective CY17 CLF allocations are again reduced – The practical implication of CLF access, which will continue to decline, is that loan growth will have to lag planned deposit growth or alternatively Australian banks will have to further lengthen term funding durations.
The Revised APRA NSFR Proposal – APRA’s previous NSFR proposal had been particularly onerous for the Australian banks given (i) only 10% of Committed Liquidity Facility, which counts 100% to the Liquidity Coverage Ratio was to count towards the NSFR, and (ii) “internally securitised” assets, which count towards the LCR, did not get a concessional treatment for the NSFR (ie, they were treated with a 65% NSFR weight). Under the revised NSFR proposal self securitised mortgages have a 10% weighting. In addition the changes have recognised the value of some deposits from superannuation funds, which were previously treated as financial institution deposits and had a zero NSFR weighting. We expect these changes will optically increase Australian bank reported NSFRs by 4-5% from ~100% to ~105%, however APRA’s concerns over the Australian banks’ over-reliance on offshore short-term wholesale funding, which accounts for ~20% of funding remain and we expect APRA will similarly increase the NSFR buffers to target NSFRs around 110%.
The Australian bank regulatory reform wave – Over and above our expectation that the four Australian major banks are ~A$29bn proforma short of CET1 capital, and will raise dilutive capital in the medium term / cut ~70% Dividend Payout Ratios the requirement to lengthen funding durations / hold more liquidity will drag on Net Interest Margins. Add in the commencement of even a modest loan loss cycle as the recent writeback gains on previously provisioned exposures do not recur and it’s not looking good for the Australian banks which have been over-earning, over-distributing and even now look over-bought.
We reiterate our sectoral underweight stance and our SELL ratings on WBC and CBA.
Yep, plus:
- rising bad loans to worsen with economy;
- rising commercial property risk;
- rising European crisis risk;
- rising FOMC risk;
- rising end of cycle risk, and
- excessive payout ratios making balance sheets very sensitive to macro changes.
