Paying the Price

The Australian Prudential Regulation Authority (APRA) has imposed $500m in additional capital requirements on each of ANZ Banking Group (ANZ, Hold), National Australia Bank (NAB, Accumulate) and Westpac Banking Corporation (WBC, Hold) to reflect higher operational risk identified in their risk and governance self-assessments.

 

The capital add-ons will apply until the banks have completed their planned remediation to strengthen risk management and closed gaps identified in the self-assessments. In May 2018, APRA imposed a $1bn capital penalty on Commonwealth Bank (CBA, Hold) in response to findings of its Prudential Inquiry into the bank.

 

The additional capital requirement of $500m equates to less than 20 basis points of common equity tier-1 capital, or about 0.5% of the three banks’ market capitalisation. However, it does lump further pressure on the banks at a time when they need to start building capital for proposed Reserve Bank of New Zealand capital increases, and in our view raises the likelihood of Westpac cutting its dividend given an already stretched payout ratio.

 

The capital penalties are not permanent, although the banks will need to satisfy APRA that they have completed their remediation programs before the penalties are removed. APRA noted the major banks were well-capitalised and financially sound, but the management of non-financial risks needed improvement. APRA is also continuing to provide feedback to other banks, insurers and superannuation licensees that provided self-assessments to APRA. Where material weaknesses exist, APRA is considering the need for the application of additional operational risk capital requirements to those institutions.

 

APRA and the Royal Commission Interim Report previously noted that many of the issues identified in APRA’s Prudential Inquiry into CBA were also apparent in the other major banks. We had expected any penalty for the other majors to be less severe, but given the time that has elapsed since the Royal Commission, we doubt many could have foreseen APRA taking this latest action.

 

This action from APRA is a reminder that the major banks, as well as a number of other Australian financial services institutions, face ongoing regulatory headwinds on a number of fronts. Despite what was regarded as a benign Royal Commission final report, the major banks will remain under pressure to improve their practices and remediate appropriately for past indiscretions. This has implications for both costs and investors’ perception of risk in the sector.

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