ANZ capital uplift questioned

Investors and other users of financial reports by Australia's major banks lack a "high degree of confidence in the accuracy" of any internationally harmonised capital ratios self-reported by banks, two independent researchers warn.

John Watson of Margate Financial Research Solutions and Graham Andersen of Morgij Analytics, in their study of bank capital, challenge the assumption - made, they say, by ANZ and Commonwealth Bank - that "capital harmonisation [is] a straightforward calculation process and simply assumes that other jurisdictions only require minimum standards and makes no allowances for IRB model variations, differences in definition of capital, allowable deductions and Pillar 2 supervision."

ANZ attributes one percentage point of the uplift to its capital ratio for harmonisation with international jurisdictions to the deductions that Basel III permits for equity investments and deferred tax assets arising from temporary differences.

Watson and Andersen said that "while this adjustment would be appropriate ceteris paribus, the fact is that other things are far from equal."


"The BCBS has decided to revise the prudential treatment of banks' equity investments in funds so that in the future meaningful inter-jurisdictional comparisons can be made," they noted.

The research duo also queried ANZ's 0.2 percentage point uplift to its internationally harmonised capital ratio due "unspecified 'other capital items'."
 
"ANZ's lack of disclosure of any detail with regard to these non-specific items makes it impossible for financial analysts to give credence to their assertion," they said.

"The authors' research opinion is that a valid harmonisation methodology for the treatment of banks' equity investments is currently unachievable," they concluded.

They said this was due to:

-- the Basel Committee on Banking Supervision's concerns expressed about inconsistent treatment of banks' equity investments for capital allocation purposes.

-- the BCBS March 2014 RCAP review of APRA finding that differences due to the treatment of equity investments and to deferred tax assets were either non-significant or non-material.

-- the lack of disclosure of treatment of equity investments in internal models of banks in all other jurisdictions operating on the Internal Ratings Based Approach.

-- the lack of explicit treatment of banks' equity investments in funds for banks operating under the Standardised Approach.

"Given that treatment of equity investments is typically the largest single contributor to capital ratio harmonisation adjustments, we caution investors and other users of financial reports issued by Australian [major banks] in placing a high degree of confidence in the accuracy of any internationally harmonised capital ratios that have not been formally reviewed and approved by both APRA and the BCBS."