Westpac Banking Corp (ASX: WBC) has responded to APRA’s announcement about the capital adequacy framework.
Westpac Banking Corporation, more commonly known as Westpac, is one of Australia’s ‘Big Four’ banks and a financial-services provider headquartered in Sydney. It is one of Australia’s largest lenders to homeowners, investors, individuals (via credit cards and personal loans) and business. Its name is a portmanteau of “Western” and “Pacific”.
What Did Westpac Say About APRA’s Changes?
Westpac acknowledged APRA’s announcement on the loss-absorbing capacity changes it’s going to make for authorised deposit-taking institutions (ADIs) to support orderly resolution in the unlikely event of failure.
As a reminder, APRA is requiring the major Australian banks of Westpac, National Australia Bank Ltd (ASX: NAB), Australia and New Zealand Banking Group (ASX: ANZ) and Commonwealth Bank of Australia (ASX: CBA) to lift their total capital requirement by 3 percentage points of risk weighted assets (RWA), as measured under the current capital adequacy framework.
Based on Westpac’s risk weighted assets of $420 billion at 31 March 2019, this represents approximately $13 billion of additional capital, the bulk of which is expected to be raised through Tier 2 Capital. However, Westpac said the increase in capital will see a corresponding decrease in other forms of funding.
The increase in total capital will take effect from 1 January 2024. APRA said that it’s still targeting an additional four to five percentage points of loss-absorbing capacity above today’s framework. Therefore, over the next four years APRA is going to consider what feasible alternative methods for raising the additional one to two percentage points in consultation with banks and other stakeholders.
What Did Westpac Say?
The bank said that it’s too early to determine the actual total cost to Westpac given the pricing of any new Tier 2 Capital is expected to be impacted by the increase in supply of Tier 2 on issue by the Australian banks.
Whilst this change should make Westpac safer through the entire economic cycle (including a downturn), I’m not sure it makes Westpac a better buy because its returns will probably a little lower over time and the risks of rising mortgage arrears still remain. I much prefer the idea of the reliable and proven businesses in the FREE report below.
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