The ANZ Group Holdings Ltd (ASX: ANZ) share price is down over 1% after the ASX bank share was punished by APRA.
APRA is the Australian Prudential Regulation Authority, which is responsible for ensuring that the financial system is stable, competitive and efficient.
APRA punishes ANZ
The regulator has announced it will require ANZ to hold an additional operational risk capital overlay of $250 million. That means the impact of this additional risk overlay is $250 million, equating to 6 basis points (0.06%) of common equity tier 1 (CET) capital.
ANZ said it acknowledged APRA’s concerns and is “expediating work” already underway to address the issues raised. This includes working with APRA on the scope of an independent culture and control review within its markets business which has already been started and will report to the board.
This increase has led to the total risk overlay reaching $750 million. APRA said this was due to “heightened concerns about the bank’s non-financial risk management practices.”
APRA said it has held longstanding concerns with ANZ’s non-financial risk management and imposed a $500 million operational risk capital overlay on the bank in 2019 to reflect “deficiencies in its risk governance.”
The regulator said that despite the remediation program being in place for “several years”, APRA has “yet to observe significant improvements in ANZ’s non-financial risk management.” That’s not a great sign for ANZ shares.
APRA is also requiring the bank to appoint an independent party to review the root causes of recent issues and risk governance in the markets business and assess the potential impacts across the broader bank.
What caused this additional punishment?
APRA noted ANZ has admitted it misreported bond trading data to the Australian Office of Financial Management (AOFM) in 2022-23.
While ANZ has launched several investigations into those issues, it raises “prudential concerns that ANZ has yet to adequately address deficiencies in controls, risk culture, governance and accountability” according to APRA.
This capital requirement will remain in place until ANZ has delivered required remediation to APRA’s satisfaction.
APRA Chair John Lonsdale said:
ANZ is financially sound with strong capital and liquidity levels. However, weaknesses in managing non-financial risk can lead to detrimental financial impacts and APRA has no tolerance for such weaknesses persisting.
Of the major banks that had capital add-ons applied in 2019, ANZ is the only bank yet to have its add-on either removed or reduced. While the bank has implemented actions to improve its risk governance and culture over the past five years, these recent issues suggest there continues to be material gaps that need to be closed as a priority.
This is not good for ANZ and it raises question about the bank’s commitment to its governance. I wouldn’t want to buy ANZ shares, partly because of the elevated valuation and the underlying questions this has raised. I think there are plenty of other ASX dividend shares I’d rather buy.
