A$16bn capital top up suits Australian major banks: S&P

Australian major banks might need to raise an additional A$16 billion in capital to meet targets contemplated by the recent Financial System Inquiry, according to analysis by Standard and Poor's.

This is less than one-third the level of additional capital than the most extreme scenarios postulated for a top of industry capital.

A higher core equity tier one capital ratio of around nine per cent, rather than the current eight per cent, "would likely have a solidifying effect on our view of the Australian major banks' capitalisation at current rating levels" and "could even have an improving effect" on the banks' credit ratings, S&P wrote in a report circulated yesterday.

The ratings agency analysis echoed the Financial System Inquiry's findings, saying that:  "Australian banks' capital ratios are not in the top quartile of internationally active banks when it comes to capital strength, and that a baseline target in the top quartile of internationally active banks is recommended, making the capital ratios 'unquestionably strong'."

The Australian major banks' recent tier one ratios were "lower than those of their international peers, and falling in the bottom 20 per cent of the banks included in the report," the S&P report said.

It said the differences "mainly result from the harmonisation issues in the treatment of risk weighted assets and definition of capital and APRA's conservative stance toward regulatory capital ratios."


The low ranking is no detriment to S&P's views on credit ratings, with the four major banks, which account for about 80 per cent of financial system assets in Australia, "each currently assessed as 'adequate' in terms of our capital and earnings assessment."

"However, the picture changes if viewed through an S&P risk-adjusted capital ratio lens," it said.

A recent S&P review comparing data from the top 100 banks with data from the Australian majors "puts the Australian major banks in a more favourable position, with three of the four major banks ranking 60th to 62nd," S&P said.

The major banks, in their public disclosures and in their follow-up submissions post the FSI Interim Report argued that, on an internationally harmonised basis, they were well capitalised relative to global standards and to international peers; a view put in a report by PricewaterhouseCoopers commissioned by the Australian Bankers Association.