Australian Banks - Basel II

Submitted by Craig Strzelecki on 16 March, 2007 - 20:55

Analyst Citigroup Investment Research (CIR) have rated all four major banks with a Buy broker call, including Commonwealth Bank (CBA) and Westpac (WBC). With increased dividends major bank shares are now virtually self-funding. Basel II will reduce capital requirements for the major Australian banks, resulting in increased returns to shareholders. The analyst has raised EPS estimates by up to 5%, dividends by up to 9% and return CBA and WBC to a BUY. Basel II preparations have been largely "off the radar" while the banks have been working feverishly behind the scenes to secure the gains, APRA is reluctant to release large amounts of capital from the system. Until this is resolved, the banks have been unwilling to talk-up the benefits. A likely scenario is that absolute capital levels may not fall significantly while pro-forma risk-weighted assets may be around 30% lower, we expect APRA will require banks to "grow into" their capital base over time. On conservative estimates, an extra $30 – 35 bn in free cash flow will be released even with transitional constraints, out to FY12 investors will stand to receive up to $6-7 bn per annum in incremental dividends / buybacks. Regional banks have relatively less upside; whereas the major banks are adopting the advanced approach to Basel II, the regionals will adopt the standardized approach. While the latter approach is less rigorous, the reduction in capital under this model is substantially less.