Big four will continue to raise capital ‘for some time’

Moody’s Investors Service believes the major Australian banks will continue to accumulate capital for some time despite completing a series of capital management initiatives in recent months.

In its latest edition of Inside Australia, a report examining major credit trends prevalent in the country, Moody’s vice-president - senior credit officer Ilya Serov said the banks’ capital management initiatives to date have been broadly aimed at neutralising the impact of increasing residential mortgage risk weights that will come into effect on 1 July 2016.

“Capital management has also improved the relative position of the banks’ capital levels in their global peer group,” Mr Serov said.

“These developments are credit positive since they enhance the banks’ loss-absorbing capacity at a time of rising economic uncertainty in Australia, as well as increasing banks’ resilience to downside risks in the housing market.

“Capital accumulation will continue to be the Australian banks’ key focus for some time, given the likely future changes in domestic and global regulatory capital settings stemming from the international Basel Committee on Banking Supervision (BCBS) and Australia’s Financial System Inquiry.”

However, Moody’s believes the need for further capital raisings has abated and the banks are now well positioned to meet future increases in capital requirements through organic capital generation and usage of discounted or, if needed, underwritten dividend reinvestment plans (DRPs).

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

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,” he stated.

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,” said Mr Byres.

 

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