Chris Joye at AFR reports on a recent study by UBS banking analysts Jonathon Mott and Adam Lee. The two believe that David Murray’s financial system inquiry is likely to recommend an increase of 2 to 3% in major banks tier 1 capital ratios.
Based on an extra 3 per cent capital buffer for too-big-to-fail banks, UBS finds that the major banks would have to “increase common equity tier one capital by circa $23 billion above current forecasts by the 2016 financial year end”.
…This automatically lowers the major banks’ average return on equity at the end of the 2016 financial year from 15.4 per cent to 14.3 per cent, or by about 116 basis points across the sector. Commonwealth Bank and Westpac come off best according to the analysis, with ANZ and National Australia Bank hit much harder.
Readers should bear in mind that capital ratios are calculated on risk-weighted assets and not all banks employ the same risk-weightings, with CBA more highly leveraged than ANZ. As I pointed out earlier this week, regulators need to monitor both risk-weighted capital ratios and un-weighted leverage ratios to prevent abuse of the system.
Bear in mind, also, that a fall in return on equity does not necessarily mean shareholders will be worse off. Strengthening bank balance sheets will lower their relative risk, improve their cost of funding, and enhance valuations.
Read more at UBS eyes $23b capital hit to big banks.