Big Four Banks Gain $14 Billion Following New Capital Requirements

Investors poured around $14 billion into just four stocks today — Australia’s Big Four banks.

Each rose more than 3% today, with ANZ Banking Group Ltd [ASX:ANZ] leading the pack, up 3.99%, to $29.44 per share.

Why did investors do this?

This morning, the Australia Prudential Regulation Authority (APRA) lifted equity capital ratios for major Australian banks. An equity capital ratio, or tier 1 capital ratio, is just the core capital (equity) of a bank divided by their risk-weighted assets.

For example, imagine a bank had equity (what shareholders put into the business) of $100 and $1,000 in assets (outstanding loans) with a risk-weighting of 85%.

The bank’s tier 1 capital ratio would be 11.8% ($100 divided by [$1,000 multiplied by 0.85]).

As reported by The Sydney Morning Herald:

APRA this morning said for the banks to be considered “unquestionably strong” they will need to lift their tier 1 capital ratios to “at least 10.5 per cent” from current levels of around 9.5 per cent.

This will either force banks to increase their equity (core capital) holdings or reduce their risk-weighted assets.

The SMH continues:

UBS banking analyst Jonathan Mott says APRA would expect the majors to operate comfortable above this minimum level and target capital ratios of 10.75 per cent to 11 per cent.

‘…To hit 10.75 per cent tier 1 capital, Mott has calculated the banks need to come up with an additional $7.9 billion. This rises to around $17.7 billion assuming mortgage risk weights rise from an average of 25 per cent to 30 per cent, he says.

What now for the big four banks?

Rather than raising additional capital from shareholders, investors are confident banks can raise capital by other means, such as retaining earnings. APRA might also potentially change the framework to risk weighting for mortgages.

While all this sounds good now, it might be best to wait and see what happens. Too many investors run into stocks on various assumptions that may or may not happen in the future.

Instead, look for stocks that are unchanging, and companies with defined financial models. This idea alone has made Warren Buffett billions in the past. And it could do wonders for your investment returns also.


Härje Ronngard,

Junior Analyst, Money Morning

PS: A big reason to invest in blue-chip stocks is for income. They offer big dividends, and usually pay out large portions of profits to shareholders.

However, it’s not always the blue chips that have the best dividend yields, as income specialist Matt Hibbard’s report, ‘Top 5 Dividend Stocks in Australia for 2017’, reveals.

Some of the stocks Matt mentions pay reliable yields of 6%, 7%, 8% and more. That’s more than 5% what you’d get on an Aussie 10-year bond for just slightly more risk.

To get your free copy of Matt’s report, click here.

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