Australia's largest banks still face billions in capital shortfalls

Getty/Cameron Spencer

The Commonwealth Bank of Australia and its key competitors, which together raised record amounts of capital in 2015, face a combined $6.1 billion shortfall and may need to sell more shares as early as this year.

Three of the four largest lenders –Commonwealth Bank, National Australia Bank Ltd., and Westpac Banking Corp.– don’t have enough capital to meet a 10 percent minimum common equity tier 1 capital, Morgan Stanley analysts led by Richard Wiles said in an investor note.

The capital requirements stem from global banking regulations known as Basel III, aimed at avoiding future banking crises by increasing the buffers of hard capital held by financial institutions worldwide.

Australia & New Zealand Banking Group Ltd., which has sold assets in China and New Zealand, boasts surplus capital, according to the analysts.

Initiatives such as the dividend reinvestment plans, where lenders entice investors to swap all or part of their dividends into new shares, will not be enough bridge the deficit.

Morgan Stanley estimates a capital shortfall of $3 billion at Commonwealth Bank, $1.8 billion at Westpac and $1.3 billion at National Australia, with ANZ’s surplus at $700 million. The calculation is based on the assumption that the banking regulator, APRA, will mandate the lenders to hold a common equity tier 1 capital of 10 percent.

APRA said in November it plans finalize capital standards in 2017.

After factoring in asset sales and other capital addition measures, Commonwealth Bank’s capital ratio stands at 9.3 percent, Westpac at 9.6 percent, National Australia at 9.7 percent and ANZ at 10.2 percent, Morgan Stanley analysts said. The lenders together could raise about $2.6 billion from dividend reinvestment plans with Commonwealth Bank alone accounting for $1.1 billion of that, they said.

The four banks last tapped equity markets in 2015 to raise a record $20 billion when the regulator imposed new rules including the minimum amount of capital they needed to allocate against home loans. APRA is awaiting global capital rules to finalize its own regulation to ensure Australian banks hold “unquestionably strong” capital levels.

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