Another good day yesterday for the big four banks as investors and analysts realised their gloom and doom has been misplaced.
ANZ added another 2.9% taking its two gain to 6.8%, while Westpac lifted 2.4% (its two day gain is now 6.2%, the NAB was up 1.6% (4.7% for two days) and the CBA was up just 0.9% (for a two day rise of 3.9%).
It wasn’t good news for all bank shareholders. Bendigo & Adelaide Bank dropped 0.3% (after a 7 cents gain on Wednesday) as investors took notice of analyst comments that the regional bank looks like it has “the most work to do” in meeting the regulator’s newly clarified capital requirements. Macquarie lost 1.2% after a small 24 cents rise on Wednesday.
APRA on Wednesday said the big four banks would have until 2020 to increase their levels of top-tier capital, by about 1 percentage point, to 10.5%.
It is now clear the big banks can do this via dividend reinvestment programs for the next 18 months to two years, and keeping dividends flat.
The market sees the CBA and the NAB as being worst placed, the ANZ and Westpac are the best placed (judging by their 6% plus price rises).
In fact it wouldn’t be surprising if one or two analysts started talking about a possible buyback for the ANZ, especially if it can sell its wealth business for the rumoured $4.5 billion the bank has valued it at.
Obtaining a price around that level would also allow the ANZ to start lifting dividends again.
Meanwhile the three major global global ratings agencies have backed APRA’s move to lift the banks’ equity target, saying the bigger buffer will create a banking system more resilient to shocks, which in turn will support the banks’ credit profiles.
S&P Global Ratings said as the major banks build higher levels of equity, this could see its ‘risk adjusted capital (RAC) ratio’ for the major banks rise towards 10% or more.
That could see the banks looking at an upgrade to their stand-alone credit profiles (SACPs) from the current level of “a-“ to “a”. (that is before the implied support from the government via the Reserve Bak.
That would lift ratings on their subordinated bonds and hybrids, although senior ratings would be unchanged.
APRA also said on Wednesday that having an S&P RAC ratio of more than 10% would make it more likely that international investors see the banks as being “unquestionably strong”.
S&P and the other ratings agencies have not changed any ratings on the banks. They said the APRA changes – a new target for the major banks’ common equity tier 1 (CET1) ratios of 10.5% for the big four banks – were well-flagged by the regulator and already had been been factored into senior ratings.
S&P said the increase in capital “should support Australian major banks’ creditworthiness" and "the consequent buildup of capital for the four major banks would naturally be a net credit positive". APRA’s action “would afford them some protection against downgrades in some of our previously published downside scenarios," S&P said.
Fitch Ratings said in a statement:
"However, the new capital requirements are unlikely to create significant pressures for any of the four major banks, with APRA estimating that the additional capital could be raised by the deadline without any changes in business growth plans or dividend policies," Fitch said. It said the new target will “support their credit profiles and bolster the banking system’s resilience to downturns". It added that they could do a fund raising if it was advantageous (cheap) and lending rates could be increased to offset the cost of holding more capital. But that would put them on the track to a clash with the Federal Government.
Moody’s Investors Service said the additional capital burden would be manageable, given the banks’ strong profitability and ability to generate additional capital through their dividend reinvestment plans.
APRA’s moves “will improve the banking system’s resilience to any weakening in credit conditions,” according to Moody’s
