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CBA share price lower after APRA capital target decision

This morning the Australian Prudential Regulation Authority (APRA) announced that it would give the big four banks longer than originally planned to raise extra capital.

According to APRA’s announcement, the regulator will require the major banks to lift their total capital by three percentage points of risk weighted assets by January 1 2024.

APRA still has an overall long-term target of four to five percentage points of loss absorbing capacity and over the next four years will consider the most feasible alternative method of sourcing the remaining one to two percentage points.

What impact will this have on CBA?

This afternoon Commonwealth Bank of Australia (ASX: CBA) responded to the news by advising of the probable impacts on its business.

The release explains that based on CBA’s risk weighted assets of $447 billion as at March 31 2019, the additional three percentage points represent an incremental increase of approximately $13 billion of total capital.

CBA advised that the ultimate cost is not yet known because the pricing of instruments will be impacted by the change in market supply of new issuance by Australian banks.

CBA’s capital increase is broadly in line with what the rest of the big four bank have reported today.

Australia and New Zealand Banking Group (ASX: ANZ) advised that it will need to increase its total capital by $12 billion, National Australia Bank Ltd (ASX: NAB) will require an increase of $12.1 billion, and Westpac Banking Corp (ASX: WBC) will need to lift its total capital by $13 billion.

Whilst this is less than APRA’s original proposal, judging by the big four’s share price weakness, it appears that some investors were hoping the regulator would be even more lenient.

Why is APRA doing this?

APRA explained that it is doing this in order to support the financial sector in the event of a failure.

It said: “The changes would increase the financial resources available for APRA to safely resolve an ADI, and minimise the need for taxpayer support, in the unlikely event of failure. They also fulfil a recommendation from the 2014 Financial System Inquiry that APRA implement a framework for minimum loss-absorbing and recapitalisation capacity.”

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Motley Fool contributor James Mickleboro 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.

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