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(07/19) [SNAPSHOT: AUSSIE CREDIT & APRA'S NEW CAPITAL RULES]

Amidst much anticipation, the Australian Prudential Financial Regulatory Authority (APRA) outlined today the "quantum and timing" of new capital requirements for Australian Banks, in order to make the sector "unquestionably strong". To meet this new benchmark:

  • For the Big 4 Banks, APRA has raised the required CET1 capital ratio by 150bps to at least 10.5%
  • For Regional Banks and other ADIs, the effective increase in capital requirements will be around 50bp
  • All banks are expected to meet the requirement by1 January 2020

Implications

  • APRA expects that for the Big Four Banks; the increased capital requirements will translate into the need for an increase in CET1 capital ratios, on average, of around 100bps above their Dec 2016 levels.
  • NAB analysts equate this to an around Aud 16bn in additional equity for the big Four banks over current levels
  • Given the two and half year time frame, the required capital is being deemed as highly achievable by organic means ie mostly via retained earnings.
  • For regional banks, the considerably smaller 50bps requirement is also expected to be comfortably achieved given the longer than expected time frame and already strong capital position.

Australian Bank Credit - Extending the "Unquestionably strong" theme

Limited to no impact is expected on Australian bank credit, which have remained resilient in anticipation of today's new capital rules (despite being heavily sold pre-emptively on the equity front) and in the face of recent headwinds, which saw a hawkish set of RBA minutes for July bring forward rate expectations and A$ appreciation. Initial interpretation of the rules has also suggested that APRA's "unquestionably strong" capital ratios have proved less punitive (both in terms of quantum and timing) than feared.

Favorable funding conditions, as such, are likely to ensue for Australia's Big 4 Banks, which continue to be core issuers in both the offshore and domestic primary space.

According to IGM's database, big 4 Australian banks (incl their intl branches) raised a USD equiv of Usd 47.776 bn from the primary market YTD via 104 deals. Key funding source remains the international USD market. However of this. a quarter or 26 of the deals on an equiv Usd 14.539bn were raised from the domestic AUD market.

Domestic supply was in fact bolstered yesterday by CBA's Aud 1.85 bn three part deal, comprising a 5yr FRN and FX, which priced at a tight 3-mth BBSW+88bp, but top end of earlier +86-89bps guidance and a 10.5yr fixed, which priced in line with guidance at +105bps for issue price of 98.582.

(michelle.kwek@informagm.com)

Please refer to our quarterly reviews on the AUD bond market for an update and breakdown of the market, including quotes from key domestic DCM players. For a copy of the latest Q2 Update and Beyond, please click here and or notify us if you wish to receive this report moving forward.

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