August 20, 2019 / 1:09 AM / 2 months ago

UPDATE 3-ANZ may need to ring-fence New Zealand profits after overseas exposure curb

* Australia moves to lower offshore banking exposure

* ANZ’s New Zealand unit may need to retain more profit in country

* Extent of earnings ring-fencing to depend on RBNZ decision

* New Zealand banking subsidiaries likely to increase prices-Citi (Adds response from CBA and NAB)

By Paulina Duran

SYDNEY, Aug 20 (Reuters) - Australia and New Zealand Banking Group said it may need to hold on to a higher proportion of earnings at its unit across the Tasman Sea after Australia moved to restrict the level of banks’ overseas exposure.

The announcement follows the confirmation of plans by the Australian Prudential Regulation Authority (APRA) to lower the level of exposure that the country’s banks can have to offshore units to 25% of core capital from 50%, ANZ said on Tuesday.

ANZ, Australia’s No.4 lender by market value, sources over a fifth of its profits from New Zealand, where it is the largest lender, benefiting from dividend distributions to the parent worth almost all of the unit’s profits.

Its capital exposure to the unit is currently “approaching” APRA’s revised limit, analysts said.

Australia’s new rules would introduce restrictions on ANZ’s ability to inject capital into ANZ New Zealand and a need for the unit to build capital organically, ANZ said.

The extent of the impact would depend on the Reserve Bank of New Zealand’s (RBNZ) decision on capital requirements, ANZ said.

“ANZ NZ may be required to retain a higher proportion of its earnings to meet any potential increased capital requirements and any future capital required in New Zealand may also need to be held at a Group level,” it said in the statement.

The changes, which APRA said impacts a small number of unnamed banks, will come into effect from January 2021.

Australia’s Big Four lenders have large operations in New Zealand, where they dominate almost 90% of the banking system.

They had lobbied to dilute APRA’s new rules for related entities, and argued against New Zealand’s plans to hike capital levels, warning it would likely hurt that country’s economy.

“Today’s announcement increases the likelihood of NZ subsidiaries repricing (loans) in order to raise organic capital, particularly for ANZ,” Citigroup analyst Brendan Sproules said in a note to clients.

“As the largest player in NZ, it is likely that if ANZ reprices, the other banks will follow.”

A spokeswoman for National Australia Bank, the second largest in New Zealand, said the new requirement did not trigger any further disclosures from the bank or its New Zealand subsidiary, declining to comment further.

Commonwealth Bank of Australia said there was “sufficient capacity” under the regulator’s lower limits to accommodate its foreign exposures, including taking into account the additional capital requirement for New Zealand banks.

Westpac Banking Corp declined to comment.

APRA said it expects the new rules to help reduce the risk of future offshore problems hurting Australian banks and its deposit-holders.

“Complex group structures could potentially make it difficult for APRA to resolve (a bank) quickly and protect depositors’ savings in the unlikely event of a bank failure,” APRA Deputy Chair John Lonsdale said.

“By updating and strengthening the requirements ... APRA will ensure (banks) are better able to monitor, manage and control contagion risk within their organisations.”

ANZ said it was looking at potential exemptions from APRA.

ANZ shares were down 0.15%, while the broader market was 1.2% higher. (Reporting by Paulina Duran in Sydney; Additional reporting by Nikhil Kurian Nainan in Bengaluru; Editing by Himani Sarkar)

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