December 17, 2018 / 7:13 AM / 3 months ago

UPDATE 3-National Australia Bank flags $2.7-3.4 bln capital increase at NZ unit

* NAB responds to RBNZ proposal to almost double needed T1 capital

* Four Australian banks to add about NZ$12.8 bln capital to units

* 5-year transition time frame appears manageable - Goldman Sachs (Adds NAB shares, inquiry background in last three paragraphs)

By Paulina Duran

SYDNEY, Dec 17 (Reuters) - National Australia Bank Ltd (NAB) on Monday flagged a potential Tier 1 capital increase of about NZ$4 billion to NZ$5 billion ($2.7-$3.4 billion) for subsidiary Bank of New Zealand, after New Zealand’s central bank proposed to almost double capital requirements for banks.

The Reserve Bank of New Zealand (RBNZ) said on Friday it was considering almost doubling the required capital banks would need to hold to bolster the financial system’s capacity to handle any shocks.

The RBNZ posited that the New Zealand units of Australia’s four major banks would have to add a total of about NZ$12.8 billion in Tier 1 capital to meet its requirements. The central bank proposed a five-year transition period.

Australia and New Zealand Banking Group Ltd flagged a capital increase of NZ$6 billion to NZ$8 billion following the RBNZ’s proposal. Commonwealth Bank of Australia and Westpac Banking Corp have acknowledged the proposal.

“The five-year transitional time frame given to the banks to meet the revised capital framework does appear manageable,” Goldman Sachs banking analysts said in a note on Monday.

The Australian Prudential Regulation Authority (APRA) earlier this year also flagged higher capital requirements for the country’s major banks to bring them more in line with international standards.

If APRA recognises the extra capital at the New Zealand units of Australian banks, the banks would just need to repatriate the funds and not have to increase their overall capital level, the Goldman Sachs analysts said.

“We note that this final point remains highly uncertain.”

An APRA spokesman for was not available for comment.

NAB, Australia’s fourth-largest lender, said it and its unit would collectively engage with the RBNZ and the APRA regarding the changes.

Separately, NAB said its chief executive would take about two months leave around the scheduled release of a major report into Australia’s finance sector, prompting a rebuke from a shareholder group.

Shares of the lender closed down around half a percent, in a wider market that ended up 1 percent. NAB shares have fallen about 20 percent so far in 2018.

Billions of dollars have been wiped off the value of NAB and its three larger Australian rivals this year as an inquiry into financial sector misconduct exposed a culture in which staff were incentivised to mislead customers.

The inquiry is due to release its final report by Feb. 1. Analysts expect it to recommend substantial structural and regulatory changes in the banking, financial advice and fund management sectors. ($1 = 1.4721 New Zealand dollars)

Reporting by Ambar Warrick in BENGALURU; Editing by Himani Sarkar and Christopher Cushing

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