The Commonwealth Bank of Australia (ASX: CBA) share price fell 0.4% today as the big bank responded to APRA’s capital adequacy changes.
Commonwealth Bank of Australia or CBA is Australia’s largest bank, with commanding market share of the mortgages (24%), credit cards (27%) and personal lending markets. It has 16.1 million customers, 14.1 million are in Australia. It is entrenched in the Australian payments ecosystem and financial marketplace.
What Did CBA Say?
Today the Australian Prudential Regulatory Authority (APRA) has responded to the submissions for the November 2018 consultation paper on the loss-absorbing capacity of authorised deposit-taking institutions (ADIs), also known as banks.
APRA also confirmed that the Australian loss-absorbing capacity will be established under the existing capital framework. After considering the feedback, APRA said it will require domestically systemically important banks, including CBA, to lift total capital by three percentage points of risk-weighted assets (RWA) by 1 January 2024.
APRA said that this requirement will likely result in the big banks increasing the issue of existing forms of capital. APRA will also consider feasible alternative methods for raising the additional one to two percentage points for the long term target of an additional four to five percentage points.
Commonwealth Bank of Australia responded by saying, “Based on CBA’s risk-weighted assets of $447 billion as at 31 March 2019, the additional three percentage points represent an incremental increase of approximately $13 billion of Total Capital.
“CBA expects that this would result in a decrease in the senior funding requirement. The ultimate cost is not yet known, given the pricing of instruments will be impacted by the change in market supply of new issuance by the Australian banks.”
Is CBA A Buy?
The big banks will theoretically be safer through the economic cycle if they hold more capital, but in the good years returns may be a little lower. Despite the fully franked dividend yield of 5.3%, I don’t think the yield compensates enough for the potential risks and lower future returns.
I’d much rather buy shares of the reliable shares in the free report below instead of CBA.
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