APRA flags end of debt benefit

The regulatory risk to the nation’s banking sector exposed again by rule change.

The regulatory risk to the nation’s banking sector has again been exposed, with the prudential regulator advising the major banks that the capital benefit from debt issued by their wealth management subsidiaries will be phased out by the end of 2017.

Westpac will not be affected, but almost $5 billion of debt held in the wealth businesses of Commonwealth Bank, National Australia Bank and ANZ Bank will come under the new treatment.

CBA, with $2.2bn of debt funding in the Colonial group, gets a 61 basis-point benefit to its tier one capital ratio under the current regime, while NAB, with $1.97bn of wealth debt, enjoys a 53 basis-point benefit.

The effect on ANZ, which has $800 million of outstanding wealth debt, is 22 basis points.

All three banks said they would meet any additional requirements through organic capital generation.

CBA chief financial officer David Craig said the Australian Prudential Regulation Authority’s ruling would have no immediate impact on the bank’s capital ratios.

“The impact on future periods should be minimal given the group’s strong capital generation capabilities, which should enable the orderly transition of existing non-recourse debt to equity funding,” Mr Craig said.

In a note, Goldman Sachs analyst Andrew Lyons agreed the banks could make up the difference organically. But the impact on returns from the wealth businesses was more important.

Again, Westpac would be unaffected, but Mr Lyons estimated that by 2018 CBA would suffer a 90 basis-point decline in return on tangible equity, with a 60 basis-point fall for NAB and a 20 basis-point erosion for ANZ.

Bank of America Merrill Lynch said in a note that the APRA move underscored the sector’s regulatory risk, which together with full valuations meant that it had a cautious, underweight view on the stocks.

“While the financial services inquiry is the key focal point for potential regulatory change in 2014, it is accompanied by a new federal government looking to address the fiscal shortfall and post-global financial crisis issues that remain unresolved,” analyst Andrew Hill said.

“This leaves potential near-term risks surrounding the first-half 2014 results, the May 13 federal budget and the interim financial system inquiry report due midyear.”

NAB said APRA had approved a transition period that would allow the capital benefit of most of the outstanding debt to be progressively reduced through to December 2017.

ANZ said it expected to meet any additional capital requirements through organic capital generation.

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