Australia’s big four banks look set to meet the regulator’s target of being in the top quartile of capitalised banks, globally, but they are far from done as far as capital raisings are concerned.
On Monday, a study released by the Australian Prudential Regulation Authority showed that Australia’s major banks made the top quartile cut-off of capitalised banks in the world, with the average sitting 40 basis points above the common equity target at December 2015.
However, the regulator told the banks that their capital ratios would need to increase further as new rules forced international banks to increase their capital ratios.
UBS analyst Jon Mott said that given new global rules dubbed ‘Basel IV’ have yet to be finalised and APRA’s interpretation of “unquestionably strong” is yet to be set, estimating the quantum of capital still required was difficult.
“However, we believe it is likely to be substantial, potentially exceeding the capital raisings undertaken in 2015,” he said.
Banks are required to hold capital to absorb expected and unexpected losses that may arise from bad debts. Capital is predominantly made up of shareholder equity. The more capital a bank is required to hold, the lower the return on that equity.
In 2015, Australia’s banks raised $21.5 billion of capital via discounted rights issues share purchase plans, placements to institutions and dividend reinvestment plans. The banks also divested assets, offshore businesses and other holdings to boost capital in an effort to meet new higher capital standards.
The next leg of the race for capital could begin sooner rather than later, he said.