August 25, 2019 / 11:08 PM / a month ago

Australia's big banks gear up for capital raising rush

(Reuters) - Australia’s biggest banks are expected to cut dividend payments and tap bond markets for more funding to cope with tougher capital requirements as regulators look to safeguard the sector from future market volatility, according to analysts and bankers.

FILE PHOTO: Office workers walk in front of the Commonwealth Bank of Australia building in central Sydney, Australia, February 7, 2018. REUTERS/Daniel Munoz/File Photo

This week, Commonwealth Bank of Australia (CBA.AX) Chief Executive Matt Comyn and Chief Financial Officer Alan Docherty will finalise a roadshow with Australian equity investors before holding similar meetings in New York next month as well as London and Hong Kong.

The bank traditionally meets with investors following its full-year results and the presentations have often preceded CBA tapping the bond markets.

However, the meetings this year come as Australia’s banks are under increasing pressure to boost their capital.

Last week, the Australian Prudential Regulation Authority (APRA) said local banks would only be allowed to have 25% of their tier one capital – core funds held to help absorb losses - exposed to international operations or related parties from January 2021, down from the current 50%.

That means banks such as Australia and New Zealand Banking Group (ANZ.AX) face higher costs because they will have to fund each unit separately.

The news came on top of another decision by APRA last month ruling that Australian banks would need to raise an extra A$50 billion ($33.8 billion) of so-called “tier two” bonds – riskier instruments that suffer losses before tier one capital is touched - by 2024 as part of its new total loss absorbing capital rules.

Separately, the Reserve Bank of New Zealand has proposed almost doubling its capital requirements of its largest banks within the next five years.

Estimates of the total amount of additional capital raising from the above measures were not available.

The big four banks are the dominant market players in Australia as well as New Zealand, with the largest mortgage books in both countries.

“The regulators do not appear to be backing down from proposals across capital, remediation and responsible lending,” said UBS analyst Jonathan Mott, who added he remained cautious on the outlook for the banks.

“We expect the CBA and Westpac to join ANZ and NAB in cutting dividends should rates continue to fall.”

CBA and Westpac (WBC.AX) are Australia’s two largest home lenders by market capitalisation and mortgage books.

National Australia Bank (NAB.AX) cut its 2019 interim dividend by 16% in May – its first such reduction in a decade - as it set aside funds to cover compensation for wrongdoing exposed by the 2017 Royal Commission inquiry into the banking sector.

ANZ became the first of the four to reduce its payout ratio when it cut its dividend three years ago.

UBS forecast Westpac’s first half dividend could be cut from 94 cents to 84 cents per share in 2020.

RATE DEPENDANT

The Reserve Bank of Australia has cut its benchmark rates twice this year to a record low of 1% and has signalled that rates could fall further.

While this has lowered banks’ borrowing costs, the pressure it has put on their lending rates has hurt profit margins.

So far this year, Australian banks have raised $27.5 billion from the bond markets, according to Refinitiv data — below their borrowing pace over the previous two years, after early-year expectations of rate rises and volatile securities prices hampered banks’ ability to tap the markets.

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More than $21 billion of bank bonds are due to mature before year-end, according to Refinitiv.

“Markets are a day-by-day proposition right now following the increase in trade noise, (the) rally in rates and overall volatility, but the right day will see great conditions,” said Goldman Sachs (GS.N) Australia head of debt capital markets Andrew Edwards-Parton.

Westpac sold A$1 billion in tier two bonds last week while ANZ recently raised A$1.75 billion ($1.18 billion) and NAB tapped the markets for $1.5 billion.

Reporting by Scott Murdoch in Sydney; Editing by Jennifer Hughes & Kim Coghill

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