7 Dec 2014
Murray report recommends Australian banks hold more capital
FXStreet (Bali) - An Australian Government-commissioned Financial System Inquiry report (The Murray Report), released over the weekend, recommends Australian banks hold greater amounts of capital, concluding that optimal capital levels should be at least 12.2% of their assets as Tier 1 capital vs current range of 10-11.6%.
The inquiry also recommended that given the potential risks to a correction in the housing market, banks need to hold extra capital. While the Report didn't specify an exact capital level, up to regulators, any increase in capital levels would result in an increase in banks’ funding costs, likely leading to lower profits. Another likely consequence of lifting Tier 1 Capital would be upward pressure in lending rates, suggesting that the RBA may have greater room for maneuver on lower rates if needed, an outcome which would come in line with recent market chatter after a big Au Q3 GDP miss.
According to Goldman Sachs: "If the first two FSI recommendations are adopted, the additional capital requirements for the major banks amount to A$16-54bn versus our current FY18E forecasts. However, ultimately we believe the figure could be closer to A$25bn (additional 1% capital + 25% average mortgage risk weight), which is equivalent to two fully underwritten DRPs. Assuming no offset, the hit to returns would be 1.7% and c. 5% to valuations. However, we show the Australian banks have a good track record of offsetting the returns impact of additional capital, and we expect this to remain the case."
The inquiry also recommended that given the potential risks to a correction in the housing market, banks need to hold extra capital. While the Report didn't specify an exact capital level, up to regulators, any increase in capital levels would result in an increase in banks’ funding costs, likely leading to lower profits. Another likely consequence of lifting Tier 1 Capital would be upward pressure in lending rates, suggesting that the RBA may have greater room for maneuver on lower rates if needed, an outcome which would come in line with recent market chatter after a big Au Q3 GDP miss.
According to Goldman Sachs: "If the first two FSI recommendations are adopted, the additional capital requirements for the major banks amount to A$16-54bn versus our current FY18E forecasts. However, ultimately we believe the figure could be closer to A$25bn (additional 1% capital + 25% average mortgage risk weight), which is equivalent to two fully underwritten DRPs. Assuming no offset, the hit to returns would be 1.7% and c. 5% to valuations. However, we show the Australian banks have a good track record of offsetting the returns impact of additional capital, and we expect this to remain the case."