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May 7 (Reuters) - (The following statement was released by the rating agency)
Australian bank capitalisation remains secure, despite the decision by the Australian Prudential Regulation Authority (APRA) to remove a capital benefit from debt issued by intermediate holding companies related primarily to the banks’ wealth management operations, says Fitch Ratings. The rule changes will not have a major impact on large bank capital positions. The transition arrangements run through to 2017, so the ‘Big Four’ banks have the time and internal capital generation capacity to adjust to the change.
The equity invested in intermediate holding companies has up to now been deducted from group capital ratios, with debt issued by the subsidiaries used to reduce this deduction. This has effectively allowed banks to create CET1 capital through subsidiary debt issuance. The rule change applies directly to AUD2.2bn in capital benefits for CBA, AUD2.0bn for NAB and AUD800m for ANZ. This in turn is equivalent to 66bp of CET1 capital for CBA, 53bp for NAB and 20bp for ANZ, based on each bank’s most recent reported capital position. Westpac will be unaffected.
We believe the impact of the recent changes to capital requirements is manageable for all four major banks - with a relatively strong profitability and capital base, and improved funding positions. Additional equity-raising is unlikely to be required, as we expect internal capital generation to be sufficient to maintain adequate CET1 ratios for their current rating level (AA-).
The rule change follows the December APRA decision to increase the minimum CET1 ratio for domestic-systemically important (D-SIB) banks by 100bp - to 8.0% - by 2016. Together, the decisions raise capital requirements for the big banks by 1ppt-2ppt above full Basel III requirements over the next four years.
This will strengthen bank capital ratios, which is important for maintaining investor confidence and access to wholesale funding markets. There is a structural shortage of deposits in Australia, and the sector’s reliance on offshore funding should continue through the medium term. The banks have been boosting holdings of high-quality liquid assets since 2008, helping to offset refinancing risks. Further Basel III capital instrument issuance would also provide an additional layer of protection for senior unsecured bondholders.