Australia mulls higher capital requirements in new blow to bank earnings

NAB would need to increase its capital by $13.8b.

Reuters reports that Australian banks can expect more earnings pressure in the medium term as the country’s financial regulator aims to hike capital requirements by four to five percentage points by 2023 from the current 14.5%.

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The move, which represents the third request from the Australian Prudential Regulation Authority (ARPA) in three years, would bring Australian banks in line with new international standards developed by Basel Committee on Banking Supervision and strengthen the footing of banks from market shocks.

“The aim of these proposals and resolution planning more broadly is to ensure that the failure of a financial institution can be resolved in an orderly fashion,” APRA Chairman Wayne Byers said in a statement.

Despite its industry merits, the larger capital requirements comes as an earnings blow to the country’s top lenders who have already seen billions of dollars wiped out from their market cap following the results of a damning public inquiry that exposed widespread corporate misconduct in the financial services industry.

Also read: Bank satisfaction deep dives in Australia after damning probe

National Australia Bank (NAB), for instance, said that it would need to increase its capital by up to $13.8b (AU$19b) over the next four years and issue less senior debt whilst Westpac would need to increase its capital by $15.3b (AU$21b).

The ongoing housing downturn also represents a downside risk to the profitable mortgage business of the country's top banks. Credit growth has already tapered off to 5.1% in March from a peak 6.6% in April 2016, data from BMI Research show, as mortgages account for 60% of the banking sector's total loan portfolio. 

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