DBRS Releases Commentary on Major Australian Banks: Higher Capital Requirements Manageable

DBRS published a new commentary highlighting recent developments in the Australian banking system, with regards to higher capital requirements and increased regulatory ratios. This comes at a time when profitability will be pressured by the lowering of the base interest rate and elevated remediation costs.

Key Highlights include:
• The major Australian banks face additional capital requirements to address risk management weaknesses.
• The finalisation of the loss-absorption framework results in additional need for Tier 2 Issuance.
• The outcome of the evolving capital framework in New Zealand, where their local subsidiaries have a dominant position in the banking system, remains uncertain.
• Simultaneously, lower interest rates and higher remediation costs will likely impact profitability.

“DBRS views that the recently imposed capital add-ons have a modest impact on the banks CET1 ratios as the banks have strong internal capital generation and high payout ratios that could be adjusted, if necessary”, said Lito Chousiada, Assistant Vice President from DBRS FIG team. “The banks have historically had good access to the capital markets, however, it is too early at this stage to estimate how easily the elevated supply of Tier 2 Instruments will be absorbed or what the pricing impact would be, following the finalisation of the loss-absorption framework”, added Lito Chousiada.

“These increased capital requirements and the higher regulatory ratios come at a time when the four major banks are facing headwinds both on the revenue and cost side, following the recent cuts in the cash rate and the increased costs, partially remediation-related, however DBRS considers that the banks have the ability to absorb these elevated costs as they have a strong post-provisioning earnings capacity”, said Elisabeth Rudman, Managing Director from DBRS FIG team.

The commentary “Higher Capital Requirements Manageable for Australian Banks” is available at www.dbrs.com.