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The Financial System Inquiry


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)
ANZ $33.71 2756.6 93.0 49.3 1.9X
CBA $80.76 1621.3 130.9 48.8 2.7X
NAB $35.04 2365.8 82.9 47.9 1.7X
WBC $34.55 3109.0 107.4 48.5 2.2X
TOTAL 414.2 194.5 2.1X

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.


Chief Executive Officer of Montgomery Investment Management, David has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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  1. Hi David

    Your article talks about a 1 for 10 rights issue at a 30% discount. Where did you get these numbers from? Is this based on past experience?

    • A hypothetical. Plucked from thin air. Some of it can be raised of course through a DRP and a slightly lower payout ratio over time. See WBC’s recent result and dividend announcement.

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