Bank capital not enough: APRA

APRA chairman Wayne Byres has stressed that banks require "more than just plenty of capital" to be considered 'unquestionably strong'

In two separate speeches delivered by Mr Byres this week, the APRA boss said that while the capital position of Australia’s banks is an important measure of their strength, a broader perspective needs to be taken.

“In banking, asset quality, liquidity and funding, earnings and management quality are also highly relevant to financial strength,” he said.

“In fact, if a bank is weak in these areas, a strong capital position won’t last long. What is ‘unquestionably strong’ therefore needs to be viewed in the context of the other risks to which a bank is exposed and the environment in which it operates.”

Mr Byres said the ability to handle a period of severe adversity is another key consideration in demonstrating whether or not an approved deposit-taking institution (ADI) is ‘unquestionably strong’.

“If ADIs are unable to demonstrate that they can successfully navigate difficult environments, then their resilience needs to be bolstered further,” he said.

“They can, of course, be aided in this regard by the official sector ensuring its powers and tools for managing crises are in order – and this was also an important recommendation of the FSI.

“But official sector action is intended to be the last resort; a higher degree of self-sufficiency is needed.”

Mr Byres concluded that the financial health and resilience of the banking sector has improved overall, but it is hard to determine how much of that improvement is in response to regulation rather than more prudent management or market pressure.

“Regardless, the banking sector has been able to adjust and respond to the changes in the regulatory framework, and the broader financial environment, in an orderly fashion,” he said.

“That said, there are still some challenges and risks to grapple with, a few more regulatory changes in the pipeline, and the environment will inevitably evolve further.

“Being able to respond and adapt to these events without too much difficulty will be important for demonstrating that the Australian community, and international investors, can continue to have confidence in the strength and resilience of the Australian banking industry.”

Mr Byres’ comments come as Australia’s major banks look to strengthen their mortgage books through a series of capital raisings.

Last month, ANZ and CBA announced plans to raise $2.5 billion and $3 billion respectively through retail shareholders. However, recent volatility in financial markets meant that CBA was only able to raise $1.5 billion from retail shareholders, falling short of its target by 50 per cent.

NAB announced a $5.5 billion capital raising in May and Westpac raised $2 billion the same month through its dividend reinvestment plan.

Morningstar estimates that Westpac needs to raise about $3 billion in capital before 1 July 2016 to boost its CET1 ratio closer to the ‘new normal’ of 10 per cent.

In a research note last month, Morningstar analyst David Ellis said that each of the four major lenders need a CET1 ratio near 10 per cent to be ranked in the top quartile of global peers based on APRA’s conservative calculation.

“To achieve a 10 per cent CET1 ratio, we estimate Westpac needs a total of $6 billion in additional core equity capital before the end of fiscal 2018, of which $3 billion is needed before 1 July 2016,” he said.

“Either a $3 billion entitlements issue or an institutional placement and SPP is a real possibility in coming months.

“The additional capital required in 2017 and 2018 will likely be raised from future retained earnings, dividend reinvestment plans (DRPs), DRP underwrites and asset sales.”

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