The shares of Australia’s big four banks rose strongly yesterday after the Reserve Bank of New Zealand watered down its new capital requirements.
The new rules are far less onerous than alarmist and silly Australian bank analysts had feared who preferred to write nonsensical commentaries without knowing what the RBNZ would finally decide.
While the RBNZ is sticking with a plan to lift capital requirements by $NZ20 billion ($A19 billion), it made several concessions to soften the blow – most notably changing the way they can raise the new capital and account for it, and giving them until 2027 to meet the new requirements.
Investors in Australia loved the news and the shares of the big four jumped, taking the finance sector of the ASX 200 up 1.4% and leading the wider market higher after two days of big losses.
The ASX 200 ended up 1.1%, helped by talk that the China trade deal might be progressing (but then earlier in the week it wasn’t).
CBA shares rose 1%, ANZ by 2.1%, NAB shares were up 2% as well and Westpac closed added 1.2% (bringing some relief to the under-pressure stock).
The RBNZ says “systemically important” banks in the country would need to lift their total capital to 18% of risk-weighted assets, from the current 10.5%.
Subsidiaries of ANZ Bank, Westpac, National Australia Bank, and the Commonwealth Bank also dominate the NZ banking market, with ANZ the most exposed (and the one that has drawn greater supervision and criticism from the RBNZ for poor management).
Tier one (the best quality capital) will have to rise to 16%. The remainder would be tier 2.
But in a significant compromise, banks would be able to raise up to about $NZ9 billion (or 45%) of the total by issuing redeemable preference shares to investors.
That is rather than having raise all the $NZ20 billion through additional equity or by retaining more of their profits.
The concession could make it cheaper for banks to raise the extra capital.
In another compromise, the big four banks will have seven years – starting from July – to find the extra billions, rather than five years as the Reserve Bank had originally proposed.
“These adjustments maintain the financial system resilience provided by the 2018 proposal, while reducing the estimated average interest rate impact of higher capital. As a consequence, the estimated annual net benefit of reform is higher than it would otherwise be,” the RBNZ said.