Major banks could offload local subsidiaries

Increasing regulatory capital requirements could erode the strategic importance and creditworthiness of the big four banks’ subsidiaries, according to a major credit ratings agency.

Standard & Poor’s (S&P) said in a statement that increasing capital requirements have forced banking groups to be more selective with their allocation of capital projects, products and divisions according to their outlook on return on equity.

The agency said this drive for capital efficiency is also forcing banking groups to look more closely at the value in keeping on their balance sheets all products and services they distribute.

“Against this background, we consider that the strategic importance of life insurance, wealth management, and banking subsidiaries of Australian banking groups could weaken within their parent groups,” S&P said.

“We believe that the businesses most susceptible to reducing strategic importance, and possible sale, would likely exhibit certain characteristics including the following: businesses showing weak underlying operating performance or earnings growth prospects; businesses becoming subject to increasingly intrusive regulation and oversight; and businesses selling products that may be white-labelled.”

S&P said that the big four banks’ New Zealand subsidiaries are least likely to be sold or otherwise reduced in strategic importance.

“These subsidiaries do not show any of the above listed characteristics and meet our criteria for ratings equalisation with their respective parent[s],” it said.

[Related: Capital requirements hit bank profits]

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