The share prices of Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB and Westpac Banking Corp (ASX: WBC) could face further share price declines because of New Zealand.
According to reporting by Bloomberg, New Zealand's central bank, the Reserve Bank of New Zealand (RBNZ), will announce this week how much capital it expects New Zealand banks to hold to be able to weather a severe economic shock to the local and global economy.
The big ASX banks are considering whether they should sell or shrink their New Zealand operations if the RBNZ decides to increase the amount of Tier 1 to 16%, which is a high percentage even compared to the level that APRA wants.
If NAB, ANZ and the others have to increase their capital levels then it would undoubtedly add pressure on the banks' profitability and dividends. Bloomberg quoted Tim Roche, Fitch Rating's head of Australia and New Zealand financial institutions:
"There is general pressure on profitability across the board right now, with slow credit growth, low interest rates and increased scrutiny impacting fee income."
Macquarie Group Ltd (ASX: MQG) analysts have estimated that each of Westpac, NAB and ANZ would need to add between $4 billion to $5 billion to meet the new requirements. However, CBA apparently has enough capital.
Foolish takeaway
It makes it even harder for the banks to maintain their dividends and profits if they have to hold more capital. In a once-in-a-generation event more capital would make the system safer, but in all of the years that there isn't a crash it would reduce the profitability.
