(19 January 2019 – New Zealand) New Zealand regulators proposed lift to bank capital requirements are “unnecessary and potentially damaging” according to UBS analysts.
The Reserve Bank of New Zealand’s (RBNZ’s) amended capital initiatives announced in December 2018 and under consultation until 29 March 2019 pose significant implications for Australia’s banks which account for 88 percent of Kiwi banking assets. The changes would materially increase the amount of capital held by NZ banks, with the RBNZ suggesting a 20 percent to 60 percent increase. The RBNZ has suggested a transition period of five years through to 2024 for the proposed higher capital requirements. Under the RBNZ proposals, the central bank may change risk weightings applied to the assets and drive a jump in the so-called “prudential buffer” banks hold. That would see a tier-one capital requirement equal to 16 percent of risk-weighted assets for large banks imposed.
“While we are firm believers in strong, well-capitalised banks, we believe the proposals by the RBNZ to lift New Zealand bank capital requirements to the highest in the developed world, justified by academic hypotheses, appear excessive,” UBS analysts commented in a client report. “This begs the question: is New Zealand’s proposed bank-capital initiative worth it and what are the risks? The RBNZ capital proposals appear unnecessary and potentially damaging,” Jonathon Mott said, adding that the move to strengthen the banks could come “at a significant cost” to the NZ economy. “They appear to be materially underestimating the likely mortgage repricing. That said, if the RBNZ proceeds with its capital proposals, it may be the final catalyst for dividend cuts at the Australian Big Four majors (potential range from about 11 percent cut at ANZ to about a 29 percent cut at NAB).”
A report by NAB’s credit team suggested that if the proposal was implemented in its current form, the big four Australian banks’ subsidiaries in NZ would require at least NZ$9 billion in additional capital. UBS said it disagreed with statements by several Australian banks that the NZ measures would not materially affect their overall capital levels. “Migrating group capital to NZ would reduce the capital maintained by the Australian ADI (Level 1). This would place at risk the banks’ ability to meet the requirements of the FSI that APRA ‘set capital standards such that ADIs’ capital ratios are unquestionably strong’. A stronger NZ would be dilutive to Australia unless fresh capital is raised” Mr Mott said. Deutsche Bank analysts announced short positions in the major banks had increased since October to sit at an average of 1.4 percent of all shares outstanding. “Over a three-month period, all of the majors saw an increase in short positions, with an average increase of 58 basis points. Currently, CBA is the most shorted (at 2.1 percent of shares on issue), while NAB is the least shorted (at 0.7 percent). The regionals are higher, with Bendigo and Adelaide Bank at 6.1 percent and BoQ at 6.2 percent.”