Bank capital costs could be higher than expected, UBS analyst

Banks may need more capital than previously thought under proposed Reserve Bank capital adequacy changes, according to analysts at UBS.

UBS's Jonathan Mott previously estimated the big four Australian-owned banks would need around $15 billion in capital by 2023 but has upped it to $21 billion after further analysis.

In a note this week Mott said he now believed there was limited capacity for the banks to utilise their perpetual non-redeemable preference shares to count towards the capital requirements and that banks were likely to maintain a one per cent buffer over the 16 per cent tier one capital requirement.

"This implies the New Zealand banks would need to run CET1 (common equity tier one) ratios of ~17 per cent, well above our prior estimates of 14.5 per cent and leaves a financial year 2023 capital shortfall of $21bn rather than the $15bn we previously estimated."

Mott said this could delay or prevent buy-backs by ANZ and Commonwealth Bank of Australia (owner of the ASB) While NAB may be forced to cut its dividend or raise fresh equity.

Westpac's capital position would also be weakened but is shortfall could be offset by repricing or credit rationing, Mott said, or a cut to its dividend if the economic environment continued to deteriorate.

That won't please shareholders of the banks.

Mott estimates ANZ will have the biggest capital shortfall by 2023 at $6.114 billion followed by BNZ parent National Australia Bank at $5.905b. CBA is estimated to be short by $4.717b and Westpac $4.209b.

He said the Reserve Bank's estimates of repricing and return on equity also look too low.

The Reserve Bank has predicted banks will add around 20 to 40 basis points to net interest margins as a result of the increase in capital but UBS said it expected mortgage rates to rise between 80 and 125 basis points for mortgages.

Mott said he doubted the banks would be prepared to accepted a 10 to 11 per cent return on equity for their New Zealand arms when they were getting 14 to 15 per cent return on equity for their Australian retail and business banking arms.