Global DCM market ripe for needy banks

Banking Day staff Finance regulation

Moody's estimates the aggregate additional capital needed by Australia’s four biggest banks will increase in a range from A$75 billion to $93.5 billion, to meet new prudential rules.

In an assessment of APRA’s new total loss absorbing capacity requirements for the four banks, “combined with a prior move to increase capital requirements, will result in a substantial increase in capital at these banks by 2024,” Moody's Investors Service said yesterday.

“The increased capital requirements will create bigger buffers for the four banks to absorb unexpected losses, reducing the need for any government support for depositors or senior bondholders in times of stress,” said Frank Mirenzi, a Moody's Vice President and Senior Credit Officer.
?In a crucial qualification Mirenzi  added: “however, we do not believe the higher capital requirement means that the government would be less willing to provide support, if required.”

APRA has opted to increase the banks' loss absorbing buffers by raising the required minimum ratio of total capital to risk-weighted assets by three percentage points.

With the additional 3 percentage point TLAC requirement, the minimum total capital ratio for the Big Four banks, including a capital conservation buffer and an additional charge for domestically systemically important banks, will effectively rise to 17 per cent by 2024 from the current 8 per cent.

Moody’s suggested banks will seek to diversify their investor bases, refuting the debating point that this segment of the market will be stretched.

“Given our large forecast capital requirement, and based on the current currency mix of the banks' Tier 2 capital securities, we believe the banks are most likely to issue securities in the three major currencies of AUD, USD and EURO.

“We believe the US dollar market will represent a greater proportion of future Tier 2 capital, given the greater depth relative to the domestic market and the higher issuing volumes that will be required.”

Since the new requirements were announced, three banks have completed Tier 2 transactions.

NAB and WBC issued US dollar-denominated securities of US$1.5 billion (A$2.2 billion) and US$2.25 billion (A$3.3 billion) respectively, Moody’s said.

“In the domestic market, ANZ raised A#1.75 billion. Furthermore, prior to APRA's announcement NAB also raised A$1 billion in Tier 2 securities in May 2019.

“If Brexit negotiations are concluded and a formal withdrawal agreement is ratified, reducing uncertainty about the UK economy and its currency, the banks may seek to raise capital in British pounds to diversify their investor bases. They currently do not have any outstanding securities issued in British pounds.”?