Jenny Ruth: Why ANZ has most to lose from proposed regulation

ANZ NZ currently accounts for 21.2 per cent of its parent's equity but that will increase to 32.3 per cent under the RBNZ proposals.

COMMENT:

ANZ Bank, New Zealand's largest bank, is looking like the meat in a sandwich of colliding regulatory proposals on either side of the Tasman.

If the Reserve Bank and Australia's banking regulator, the Australian Prudential Regulation Authority, proceed with their current proposals, they will have the potential to severely impact ANZ.

Here in NZ, the RBNZ is proposing to near double the minimum amount of tier 1 capital the big four banks have to hold from 8.5 per cent of risk-weighted assets to 16 per cent.

The central bank will also require that all tier 1 capital must be common equity only – at September 30 last year, $2.78 billion of ANZ's $11.86b in tier 1 capital were hybrid securities – securities that normally behave like bonds but which can be converted into equity if required. They will no longer qualify as tier 1 capital.

It is also proposing to severely curtail the benefits ANZ gets from being able to use its own internal models, as opposed to the standardised models NZ's smaller banks are compelled to use.

In February, RBNZ demonstrated how much advantage this gives ANZ: currently it has to hold just over half the amount of capital that Kiwibank is forced to hold to back every $100 of mortgage lending.

APRA regards a tier 1 ratio of 10.5 per cent of risk-weighted assets as "unquestionably strong".

In December, after the proposed new RBNZ requirements were published, ANZ said its group tier 1 capital at September 30 was 11.4 per cent, about A$3.7b above APRA's "unquestionably strong" level and that the RBNZ proposals would require it to add another $6-8 billion to its existing capital.

APRA's view of what is "unquestionably strong" suggests RBNZ's proposed requirements may be excessive, but APRA is also looking at whether it should require the Australian banks to hold more equity too.

Its NZ subsidiary's stand-alone tier 1 ratio was 13 per cent, according to its September quarter disclosure statement.

But the RBNZ proposals take no account of the position of the big four banks' Australian parents – ANZ and Westpac are owned by Australian parents of the same name while Bank of New Zealand is owned by National Australia Bank and ASB Bank is owned by Commonwealth Bank of Australia.

That's surprising because financial markets and the international ratings agencies are acutely aware of the NZ banks' parentage. Effectively the New Zealand banks bask in their parents' credit ratings, among the world's strongest at "AA-" – their stand-alone ratings are several notches lower at "BBB+".

It appears APRA is keenly interested in the amount of support the parents provide their NZ subsidiaries.

Reserve Bank Governor Adrian Orr. Photo / Mark Mitchell

In July last year, APRA proposed halving the equity the Australian parents could have in any individual subsidiary from 50 per cent of group equity to 25 per cent.

The Australian regulatory regime applies to all authorised deposit-taking institutions.

"An ADI's associations with related entities can expose the ADI to substantial risks, including through financial and reputational contagion," APRA says in the executive summary of its discussion document.

The experiences of the global financial crisis "have emphasised that deficiencies in prudent controls can expose an ADI to substantial risks in relation to its related entities", the Australian regulator says.

Clearly, all the Australian parents will be impacted by this proposal, but ANZ's ownership of its New Zealand subsidiary will exceed 25 per cent of the parent's equity if the RBNZ proceeds with its capital proposals in their current form.

Broking firm CLSA estimates that ANZ NZ currently accounts for 21.2 per cent of its parent's equity but, all else being equal, that will increase to 32.3 per cent under the RBNZ proposals.

NAB and BNZ would be the next most affected bank but would still fall below that 25 per cent threshold with BNZ going from 14.1 per cent of NAB's equity to 21.9 per cent.

ASB and Westpac's capital would rise to 15.5 per cent and 18.8 per cent respectively of their parents' equity.

Proposed capital ratio requirements (as per cent of risk-weighted assets)

There has been much talk that the Australian banks might take a number of different courses in reaction to the RBNZ proposals, including raising the interest rates they charge on loans and lowering the interest rates they pay for deposits.

More drastic measures that ANZ may be forced into could range from selling their NZ subsidiaries outright to selling down some of their equity or selling off parts of their lending portfolios.

For example, ANZ is the largest lender to the agricultural sector with a loan book of $17.42b – the next largest rural lender is BNZ with $13.76b.

There have been conflicting stories about APRA's view of this situation but it's understands that it intends publishing its reaction to submissions on its new equity restrictions in the September quarter.

That's when the RBNZ has said it will announce its final decisions on bank capital requirements.