Westpac Executive Queries Need For Capital Top-ups

Sydney Morning Herald

Monday December 22, 2008

Danny John

THE second highest-ranking executive in Westpac Bank has questioned the need for banks to top up their strongest form of capital to record levels - a move that has resulted in more than $8 billion of fund-raising exercises by the big four in recent weeks.

Westpac's chief financial officer, Phil Coffey, has called for greater discussion about the push by the big banks, in particular, to raise their levels of Tier One capital to more than 8 per cent, double the minimum they are required to hold by the banking regulator.

The shift towards the new level has coincided with the sharp slowdown in the economy and a rising tide of bad debts that has prompted the banks to build in a much greater buffer of capital to the hundreds of billions of dollars of loan assets they hold on their balance sheets.

While the increase in capital has been seen as a sensible move by banks to ensure they are not weakened by the slowdown, some market watchers have seen the build-up of funds to a higher percentage of what are called risk-weighted assets as a macho exercise.

The Australian Prudential Regulatory Authority, which oversees the banks, has set the amount of Tier One capital to be held by deposit-taking institutions against their total risk-weighted assets at 4 per cent. This is the level that is also required by global banking supervisors.

The authority was forced to go public three weeks ago in a declaration that the new 8 per cent level was not to meet its requirements. But the sector, it said, was both financially sound and well capitalised given the worsening economic climate.

Westpac, the country's largest bank by stock market capitalisation following its merger with St George Bank, had only recently set itself a target of between 6.75 per cent and 7.75 per cent for its Tier One levels, comfortably in excess of APRA's minimum amount.

Westpac was sitting at the top of that range just before the St George tie-up went through, but even with the lower level of capital held by St George, the combined entity's Tier One only dropped to 7.58 per cent.

That had been considered more than comfortable by the bank until two of Westpac's big rivals, ANZ and National Australia Bank, recently undertook different capital raising exercises that took both of theirTier One capital levels to 8.3 per cent.

Those moves set the pattern for Westpac and the Commonwealth to follow suit given the belief among investors and analysts that they were lagging behind the other two and that they were holding "skinnier" levels of capital against those assets which might eventually end up as bad debts.

Westpac subsequently waded into the market to raise as much as $3 billion of Tier One capital, which took its new holding to 8.32 per cent.

The Commonwealth ended up being the last to move with its first, and highly controversial botched $2 billion raising by Merrill Lynch a week ago and its subsequent $1.65 billion replacement carried through by UBS. It now has the highest level of Tier One capital of the big four at 8.5 per cent.

But Mr Coffey has since raised questions over whether the banks have needed to go so far and believes there is a need for "considerable discussions" about the new target.

Speaking to investors and analysts at a briefing on the St George merger last week,he said he had yet to see anyone give a definitive reason whythe target of 8 per cent was necessary.

However, Mr Coffey appreciated there was support for banks to be "fully capitalised in this uncertain environment". As a result, Westpac was "very comfortable to be at the top end" of its existing range, he said. "Right now, to be more fully capitalised is the right place to be."

© 2008 Sydney Morning Herald

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