News: NAB UPDATE 1-ANZ flags need for more cash on new capital rules

• Analysts expect major banks to raise up to A$31.2 bln
• ANZ slowing institutional lending, dividends
• ANZ may look to sell "problem assets" - analyst

(Updates with analyst comment)

Australia and New Zealand Banking Group (ANZ) on Monday signalled it may have to raise extra capital while lowering investor expectations on dividends following a regulatory change to the treatment of residential mortgages.

The Australian Prudential Regulatory Authority (APRA) is seeking to strengthen the finances of the country's highly profitable major banks including ANZ, asking them to keep aside more funds against every dollar that they lend.

Analysts expect Australia's "Big Four" banks to collectively raise up to A$31.2 billion ($23.73 billion) in additional equity over the next 2-3 years to create a large enough buffer to shield them from a repeat of the 2008/09 financial crisis.

ANZ is also battening down the hatches by giving capital-intensive institutional lending a wide berth, slowing dividends and selling non-core assets.

"Over time, ANZ expects that these and other initiatives will allow the group to target a stronger balance sheet and capital structure," it said in a statement.

"However, alternatives such as providing a discount to the dividend reinvestment plan (DRP) and/or DRP underwriting could provide additional flexibility, if required."

Discounted DRPs - where investors swap all or part of their dividends for new shares - are a relatively easy way for banks to meet capital deficits. Analysts expect all of Australia's banks, including ANZ, to use DRPs to help resolve any capital shortfalls.

Analysts said they expect ANZ to elaborate on its intentions in a third-quarter trading update due on Tuesday.

"ANZ has been running down parts of their institutional business in Asia, which was draining a fair bit of capital. So the 'other initiatives' probably refer to more of these capital releases from problem assets," said investment analyst Omkar Joshi, who helps oversee about A$1 billion at Watermark Funds Management.

APRA increased mortgage risk weights in July for the country's five biggest banks - ANZ, Commonwealth Bank (CBA), Westpac Banking Corp (WBC), National Australia Bank (NAB) and Macquarie (MQG) - to make them safer amid sky-rocketing house prices in Sydney and Melbourne.

On Monday, ANZ said that while the exact increase was yet to be confirmed, the A$3 billion it raised late last year should help it offset the impact of higher mortgage risk weights.

ANZ also expects its Common Equity Tier I ratio - a measure of balance sheet strength - to fall to 9 percent as of June 30 from 9.80 percent in March.

It added that it had "the ability to meet stated capital objectives." ($1 = 1.3146 Australian dollars)