Macquarie Group said around one quarter of its surplus capital will be eaten up by APRA’s capital reforms which target interest-only lending to property investors, while ratings agency Moody’s said a lower overall requirement for high-quality capital could see banks’ buffers drift lower over the next year.
The Australian Prudential Regulation Authority has made it clear its finalisation of the Basel 3 reforms, which have been well-flagged to the market, don’t require any additional common equity tier 1 (CET1) to be added into the banking system. But banking analysts said several questions remain around regulatory expectations, as CBA and Macquarie made ASX releases responding to the complex package.
One of the key components of the reforms is to lift the capital requirements for mortgage lending to interest-only and investor borrowers.
Macquarie said the “pro forma impact on [its] capital surplus above regulatory minimums” was $2.2 billion. This represents around one quarter of Macquarie’s capital surplus above regulatory minimums of $8.4 billion, but it does not include $1.3 billion raised via a share purchase finalised this week and a $1.5 billion capital raising announced with its recent results.
Like Westpac, Macquarie has a mortgage book orientated towards higher income investor borrowers, whose loans that will become relatively less attractive for banks under the new regime. Macquarie has been marketing for owner-occupier customers with low loan-to-value ratios, which are treated more liberally under the new regime.
Macquarie said the increase to its regulatory capital buffers was the product of new settings for ‘loss given default’ in its mortgage models, a new ‘capital conservation buffer’, and a new ‘floor’ that connects standards for large and small banks.
“We welcome the finalisation of these important capital reforms which will provide clarity to the investment community,” Macquarie chief financial officer Alex Harvey said.
Commonwealth Bank did not quantify an impact, saying it could take nine months to work out where the reforms would land.
That comes as APRA re-audits the major banks’ ‘internal ratings based’ (IRB) models to provide new certifications that they are operating under the new rules, which will come into effect on January 1, 2023.
CBA said it will “provide an update on the final impact and on our long-term capital management approach under the new capital framework at our full year results presentation for the financial year ending 30 June 2022, following APRA approval of new internal capital models.” CBA reports its results in August.
Moody’s pointed to the new minimum CET1 requirement of 10.25 per cent being lower than the average CET1 of 12.5 per cent as of September 2021 for the major banks, and Daniel Yu, vice president of Moody’s Investors Services, said “changes to risk-weighted asset calculations under the new framework will likely lead to higher reported ratios.
“As a result, we expect the major banks’ capital ratios to moderate from their current elevated levels as we draw closer to the effective date of the new rules on January 1, 2023,” Mr Yu said.
Leading bank analysts say significant uncertainty remains.
“Australian banks can’t yet quantify what restated CET1s look like from January 2023, nor exactly what the [above] 11 per cent APRA expectation is,” said Jefferies analyst Brian Johnston.
Assuming the amended Basel 3 “unquestionably strong” target is now 11 per cent CET1 plus a management buffer for a total target of 11.5 per cent, he expects major bank ‘risk weighted assets’ (RWA) to fall by 5 per cent, “with rising housing RWA offset by declining weightings for institutional, particularly commercial real estate but less so SME.”
The new rules adopt “a more granular housing approach” which Mr Johnston said will discourage lending to investors and borrowers requiring higher loan-to-value loans. This could disadvantage Westpac, but it has already moved to reduce the impact by shifting its mortgage book towards owner-occupiers, hitting its margin. Mr Johnston said ANZ could be a beneficiary of lower risk weights in institutional banking, although the incentives to lend more into SMEs appear less than expected.
Other changes in the APRA package announced after the market closed on Monday are the introduction of a “capital floor” which will be set at 72.5 per cent of standardised risk weighted assets.
Big banks using internal ratings-based (IRB) models will have to calculate and disclose risk-weighted assets under the standardised approach and their own model, to ensure they are meeting the requirements of the floor.
Regulatory capital buffers are also increasing via a 1.25 per cent increase in the capital conservation buffer (CCB) for banks using the IRB approach, and through setting the ‘Australian countercyclical capital buffer’ (CCyB) at a default level of 1.0 per cent for all banks, up from zero.
Another change will be further aligning RWA of New Zealand banking subsidiaries at the consolidated group level, applying a similar framework to the Reserve Bank of New Zealand, CBA noted.
APRA is continuing to consult with the banks on their new IRB model settings including residential mortgage ‘loss given default’ (LGD) models, which model the risk of home lending turning sour.
The changes provide banks with a “greater allowance [to use their] own models to measure credit risk capital,” CBA said.