Australia’s Biggest Banks May Face Tougher Capital Requirement

Australia’s Biggest Banks May Face Tougher Capital Requirement

Part of Global Efforts to Avert Another Banking Crisis

ROBB M. STEWART

Oct. 31, 2013 3:42 a.m. ET

MELBOURNE, Australia—Australia’s biggest banks may be required to deepen their capital reserves against future stresses, potentially raising costs for their customers and reducing the scope for dividend increases that have historically lured investors. The nation’s banking regulator said it was considering requiring the country’s largest lenders to create a bigger capital cushion as part of global efforts to avert another banking crisis. A bigger cushion would leave less room for Australia’s banks—which remained healthy throughout the global financial crisis—to return money to shareholders.Much of the appeal of the nation’s banking stocks, which have risen strongly over the past year, is that they have provided relatively high dividend yields.

In its annual report to parliament Thursday, the Australian Prudential Regulation Authority said it was committed to implementing new global capital and liquidity rules, known asBasel III, laid out by the Basel Committee on Banking Supervision. It plans to finalize its approach to banks deemed “systemically important” to the country next year. Any new capital requirement would take effect at the start of 2016, the report said.

According to Mark Nathan, a Sydney-based fund manager at Arnhem Investment Management, such a new capital requirement likely wouldn’t drastically affect the country’s four biggest banks, since they wouldn’t need to raise more capital and would probably pass along any losses to their customers.

Still, it may rule out any forthcoming special dividend payments, Mr. Nathan said. Investors may also worry that the news comes at a time when demand for credit across the country is sluggish, limiting the scope for revenue growth for lenders.

The regulator pushed through the new Basel III rules on banks’ capital quality at the start of the year, electing not to use the discretion allowed by the Basel Committee to implement them in phases. In its report Thursday, it said the banks were on course to meeting those requirements without difficulty.

The regulator said it was working within a framework endorsed by leaders of the Group of 20 industrial and developing nations that demanded no bank should be “too big to fail,” and that taxpayers not be forced to bail out distressed lenders, as many were in the aftermath of the global financial crisis.

The big lenders and the regulator declined to comment on the prospect of either a new capital cushion or any potential impact on dividend payments, saying discussions on such matters were confidential. Several lenders are also about to release earnings results, placing further limitations on public commentary.

National Australia Bank Ltd. NAB.AU -2.54% briefly addressed the topic in its annual earnings report Thursday, acknowledging a possible impact on its capital-management strategy depending on the size of the cushion imposed.

“The banks have exhibited a great deal of resilience during the crisis,” NAB Chief Executive Cameron Clyne said during a news briefing in Sydney. The bank was comfortable with its dividend payout and had no plan to change it, he added. “There is nothing in front of us now that changes the outlook.”

Shares in NAB, Australia & New Zealand Banking Group Ltd. ANZ.AU +0.42% ,Commonwealth Bank of Australia Ltd. CBA.AU -1.21% and Westpac Banking Corp.WBC.AU -1.75% have risen by about 35% over the past year as investors sought strong dividend yields amid volatility in global markets, and as the local economy has felt the strain of a cooling of the boom in mining investment and minerals prices.

NAB lifted its annual dividend payout by 5.6% after recording a 34% jump in net profit to 5.45 billion Australian dollars (US$5.17 billion) in the year through September, boosted in part by lower bad debts.

ANZ earlier in the week said it was lifting its annual dividend by 13% after its profit for the year climbed 11% to A$6.27 billion thanks also to a fall in bad debt alongside steep cost cutting. Westpac is due to release its full-year results Monday and Commonwealth Bank’s first-quarter numbers are due Wednesday.