The big Australian banks may have lagged the local market and, more so, their international peers, but they are also expensive — which makes capital raisings likely, with the Australian Prudential Regulation Authority expected to set higher capital ratios.
APRA is due to unveil its new standards to make the banks “unquestionably strong” in the next couple of days.
The rule of thumb says APRA sets the standards but the market sets the timing, and this explains why analysts are looking for the banks to move quickly to meet any higher capital ratios set by the regulator.
Federal Treasurer Scott Morrison yesterday released new draft rules for banks and APRA, which will be given wider powers to regulate the industry to cover non-bank lenders. Dressed up as new rules to make the industry more competitive, Morrison unveiled plans announced in the May budget to drop the $50 million cut-off for capital to be classed as banks.
At $50m capital, even if the institutions wanted to be called banks, and given banks are on the nose politically, the entities are not exactly going to shake up the $1.7 trillion mortgage market.
By way of example, the biggest peer-to-peer lender, Society One, has been operating since August 2012 and has loans outstanding at last count of $312m, which a big four bank would lend before breakfast.
The big four banks are expensive on a price-to-book ratio at between 1.38 times for ANZ and 2.16 times for CBA. This compares to the big US banks at two times.
Returns on tangible equity at 19 per cent for CBA are also on the expensive side. This is despite the fact that over the last three months the big four have underperformed both their regional peers and the local market.
The banks are down 7 per cent in the last quarter against the market at down 2 per cent. The banks account for one third of the S&P/ASX 200 index, so a negative bank performance drags down the whole bourse.
The comparison with regional peers is even worse, according to UBS data: HSBC has increased by 20 per cent over the same period, Standard Chartered by 18 per cent, Indonesian banks by 15 per cent and Korean banks by 30 per cent.
The global banks are up on a combination of stronger global economic growth and expectations of rising interest rates, which are better for the banks.
By contrast, the Australian banks are down for a combination of factors, starting with a subdued earnings outlook and the political backlash evident in the tax grab from Canberra and South Australia.
Then there is the expectation of higher capital ratios that will mean raising more capital.
When Wayne Byres’ APRA releases its new standards to meet with the suggestion of the Murray Committee inquiry, it is expected to increase the risk weighting for housing above the present 25 per cent among other measures.
Given the delays in international capital decisions, it is likely APRA will give the banks plenty of time to respond to any increased capital ratios.
ANZ, with a capital ratio of 9.9 per cent, is the highest of the big four, followed by BT at 9.48 per cent, NAB at 9.31 and CBA at 9.2 per cent.
While the banks have plenty of time, the analysts are arguing for an early push to take advantage of their overvalued market ranking.
The investment bank analysts would obviously like the banks to go early because this would generate more fee income, but given the flexibility allowed, the banks have time on their side. Either way, the game of chicken starts from the moment APRA sets the standards and the argument will be that the first bank to go will get the cheapest equity.
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