Readers may remember that the Reserve Bank of New Zealand (RBNZ) has proposed that banks have to hold more capital to be even safer than they already are.
This has led some market commentators to speculate that Commonwealth Bank of Australia (ASX: CBA), Australia and New Zealand Banking Group (ASX: ANZ), Westpac Banking Corp (ASX: WBC) and National Australia Bank (ASX: NAB) will leave New Zealand. I suppose ANZ Bank would become Australia Banking Group if that were to happen?
According to Bell Potter, the RBNZ’s proposal would increase the minimal capital required by the big four ASX banks from 10.5% to 18%, with the Tier 1 component rising from 8.5% to 16%. Bell Potter has estimated this would mean around $18 billion more of Tier 1 capital.
As a result, this would mean ANZ New Zealand needing to raise around $6.7 billion, NAB New Zealand needing to raise $4.4 billion, CBA needing to raise $3.9 billion and Westpac needing to raise $3 billion according to Bell Potter.
You can easily see this would not be a popular move for the big banks as it would significantly decrease the potential returns.
It’s because of this that there is talk of the big four ASX banks divesting their Kiwi operations to absolve themselves of the funding requirements.
However, New Zealand is a profitable segment for the big ASX banks, so divesting their Kiwi subsidiaries could lead to lower a return on assets and return on equity.
The banks are suffering potentially less attractive operating conditions on all sides. If banks leave New Zealand then most of their eggs will be in the Australian mortgages basket. This could be a dangerous move with Australian dwelling prices continuing to fall.
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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.