APRA this week announced the capital adequacy requirements for Australian banks, with the big four and Macquarie group tasked with holding CET1 ratios of at least 10.5 per cent by January 2020.
Citi analysts said the announcement finalises a key concern for investors. The group’s equities research division called out Commonwealth Bank as having the biggest capital gap to fill among the big four.
“CBA has most work to do on capital adequacy and may be tempted to raise capital at the next results to quicken the pace to the target, in our view,” the Citi research report said.
“Based on our FY17 CET 1 capital forecast of 9.9 per cebt, CBA is ~$2.7 billion behind the 'Unquestionably Strong' benchmark.”
With CBA’s full-year results to be announced next month, Citi believes the bank’s board and management will need to weigh up the decision to raise capital via a 100 per cent underwritten dividend reinvestment plan (DRP) or attempt to grow organically over the next two and a half years.
“Our base case is that CBA reaches the target using organic capital generation,” Citi said.
Meanwhile, Morningstar believes that pressure from investors could drive CBA to launch an on-market capital raise of $3 billion.
“Based on 31 March 2017 common equity tier 1 ratios, to comfortably exceed the new 10.5 per cent common equity tier 1 ratio minimum, we believe ANZ needs to raise or release $1.8 billion, CBA $3 billion, NAB $1.8 billion and Westpac $2.5 billion,” Morningstar analyst David Ellis said.
“In our view, ANZ is best placed to meet the tougher capital requirements due to ongoing asset sales,” he said.
ANZ is currently courting potential buyers of its wealth business, tipped to be worth more than $4 billion. Meanwhile the group has been divesting its Asian assets as CEO Shayne Elliott reverses his predecessor Mike Smith’s super regional strategy and focuses on domestic banking.
ANZ’s asset sales and consequent capital position could spark CBA to begin shopping around its wares. It is understood the bank has already started reviewing its life insurance business.
It is expected that CBA will acquire the remaining 20 per cent stake in Aussie Home Loans later this year.
[Related: Rate hikes to follow APRA’s latest move]