The Financial System Inquiry
I sat next to David Murray AO, Chairman of the Financial Services Inquiry (FSI), at a breakfast meeting yesterday and I understand his final report is scheduled for presentation to Treasurer Hockey before the end of the month.
David is a quiet and very thoughtful guy and with a chuckle he said, “I have been trying to leak the recommendations of the FSI but no one seems to be listening”.
In a speech to the National Press Club back in July, David said, “Smaller banks face some regulatory disadvantages that reduce their competitiveness, especially higher risk weights for mortgages. The report identifies a range of options to promote competitive neutrality.”
He went on to say “The [FSI Interim] report suggests that there may be a case for Government and regulators to do more to reduce resultant disruption and the size of the potential call on taxpayers. Options for change include higher regulatory capital requirements to further reduce the risk of failure… For this reason the committee has asked for views on the pros and cons of higher capital ratios – to reduce taxpayer exposure to failure.”
While any increased capital requirement via equity raisings is dilutive for the major banks; it is least dilutive when valuations are relatively high. And from this perspective, it appears now is an opportune time for regulators to affect such an increase.
Montgomery Investment Management considers both an increase in IRB risk-weights for mortgages and an increase in D-SIB capital for the (“too big to fail”) majors as probable.
The following analysis details the four major Australian Banks, and compares their current market capitalization with their most recently published shareholders’ funds.
|BANK||Share Price (4/11/14)||Shares on Issue (m)||Market Cap ($b)||Share-Holders’ Funds ($b)||Market Cap/ SHs’ Funds ratio (X)|
In summary, the four major Australian Banks’ aggregate market capitalization of $414.2 billion is 2.1X their aggregate Shareholders’ Funds of $194.5 billion.
If we assume each bank needed to increase their Shareholders Funds by $7 billion, then a one for ten rights issue at an average 30 per cent discount to the prevailing share price (25%: ANZ, 47%: CBA, 16%: NAB and 35% WBC) should be easily achievable in today’s conditions.
This assumes an aggregate $28 billion equity raising, which would increase the total Shareholders’ Funds by 14 per cent to $225.5 billion.