Earlier this week, APRA announced its assessment on the additional capital required for the Australian banking sector to have capital ratios that are considered ‘unquestionably strong’.
Under the new standards, Australian banks will be required to increase their common equity tier 1 (CET1) capital ratios to 10.5 per cent (or 150 basis points) for the major banks and around 50 basis points for the smaller rules-based banks, by 2020.
EY’s Oceania banking and capital markets leader, Tim Dring, told Accountants Daily that accountants need to ensure they are aware of the implications and flow-on effects these changes will have in order to effectively advise their clients.
“When advising clients on transactions, funding, acquisition and growth, accountants will need to keep in mind any constraints they may be confronted with based on these changes,” Mr Dring said.
“By staying across the likely implications, they will also be better positioned to assist clients in their dealings with financial institutions.”
Mr Dring explained that APRA’s additional capital requirements will place further downward pressure on the banks’ return on equity targets.
“While well-placed to accommodate the changes, banks will invariably consider a range of options to ensure the impact on shareholders is minimised. Such options are likely to include capital optimisation strategies and an increased focus on expense management,” Mr Dring said.
“Ultimately, however, banks will look to maximise return, utilising levers such as pricing, capital flows and the imposition of additional lending requirements.”
Mr Dring said that accountants should work with their clients to reassess their existing facilities to identify any potential opportunities or risks as a result of these changes.
“The consequent redirection of capital towards lower risk segments and strongly collateralised lending may also result in increased opportunities for customers to reassess their existing facilities, given the likelihood of increased competition for these funds,” he said.
“Conversely, facilities that are not subject to strong collateral support may observe increased pressure on interest rates or additional restrictions in obtaining future funding, once such facilities expire. The ability to identify additional collateral to support such arrangements will be integral to mitigating these risks.”
There is also the potential that the increased capital requirements may encourage high-risk lending according to Mr Dring.
“With changes to APRA’s risk weighting not anticipated to occur until 2021, there may be an opportunity for banks to identify lending opportunities where the return on equity sufficiently outweighs the current capital penalties,” he said.
“This may assist businesses where previous capital flows excluded such deals.”