Australia's big banks are over a vital threshold


After a rough day on the stock market yesterday amid fears that a Royal Commision into Australian banking is a chance after the election result Australia’s prudential banking regulator, APRA, released some good news for shareholders late yesterday.

In its latest comparison of the capital position of Australia’s big banks against their global peers, APRA said that after significant capital raisings in 2015 the big banks now substantially satisfied the benchmark for capital strength set by David Murray’s Financial Services Inquiry.

This benchmark – that Australia’s big banks should have capital ratios in the top 25% of internationally active banks – has been satisfied because of the lift in “the major banks’ weighted average comparison CET1 [common equity tier one] ratio” from 11.7% in June 2014 to 13.5% by December 2015.

APRA said “this increase was the result of a range of factors, but the largest single driver was the substantial capital raisings by the major banks in the latter part of 2015”.

Due to timing differences between its own evaluation of Australian banks capital and that undertaken by the global banking regulators in Basel means that the relative performance of the local banks is somewhat overstated.

“Nevertheless, notwithstanding this timing difference, the relative positioning of the Australian major banks’ CET1 ratios now seems broadly in line with the benchmark suggested by the FSI,” APRA said.

At present APRA’s confidence that the Majors have now satisfied an important FSI benchmark suggests that shareholders can take some comfort that this regulatory headwind, and the need for further capital raising, has diminished.

That should take some pressure of the Major banks share prices.

But “the trend of international peer banks strengthening their capital ratios continues,” APRA said suggesting further improvements in capital ratios will be required for the banks to retain their top quartile position.

It also added that “Forthcoming international policy developments will also likely mean that Australian banks need to continue to improve their capital ratios in order to at least maintain, if not improve, their relative positioning”.

So they’ll still need to raise more capital in the future.

But the hard work appears to have been done. And, at least for the moment, while the banking boffins in Basel finalise the design of new rules APRA is satisfied that the “improvement in the major banks’ international capital comparison, provide the necessary time for APRA to consider the full range of factors that are relevant to satisfy the FSI’s unquestionably strong recommendation”.

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