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Why ASX bank stocks jumped as RBNZ demanded an extra $19bn from them

Shares in ASX big banks jumped higher in early trade after the Reserve Bank of New Zealand (RBNZ) offered concessions to its higher cash buffer requirements for the sector.

The Commonwealth Bank of Australia (ASX: CBA) share price increased 1.4% to $78.92, the Westpac Banking Corp (ASX: WBC) share price added 0.9% to $24.26 and the National Australia Bank Ltd. (ASX: NAB) share price climbed 1.3% to $25.23 in early trade.

Australia and New Zealand Banking Group (ASX: ANZ) is in a trading halt as it examines the latest RBNZ decision. The S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is up 1% at the time of writing.

The New Zealand banking regulator is asking the big four to cough up around NZ$20 billion ($19 billion) in capital to lift their Common Equity Tier-1 (CET1) ratio to 16% of risk-weighted loans issued in that country.

Multiple headwinds

The market was bracing itself for this news as it could lead to dividend cuts or fresh capital raisings from the big four. The extra capital demanded by RBNZ comes at a time when the balance sheets of the ASX banks are looking stretched.

Not only are bank earnings under pressure from falling interest rates and competition from smaller lenders, but fines, class actions and tighter regulations in Australia are also weighing on their bottom lines.

The extra cash that banks will have to hold in their New Zealand operations means less can be sent back to the mothership to fund dividends.

Risk of near-term dividend cut recedes

However, RBNZ is taking a gentler approach to the big banks. While it’s insisting that their NZ subsidiaries hold extra cash to buffer from a one-in-200-year banking system meltdown, the central bank is giving our big four seven years to get their house in order. That’s two years more than originally discussed.

This means the risk of a near-term or immediate cut to bank dividends is probably off the table. Dividends are the only thing supporting ASX bank stocks, in my opinion.

Extra concessions

There’s another significant concession from RBNZ. Our banks can use a wider range of assets to calculate their CET1 ratios, not just cash.

Not to get too technical here, but a small amount of preference shares can be counted towards this cash buffer. This cap is increased to 2.5% from the 1.5% that was originally discussed.

Further, RBNZ is now allow redeemable preference shares to be used under this cap when it initially said it wouldn’t.

Australian banks account for nearly 90% of the New Zealand market and RBNZ believes the change will conservatively lift interest charged to borrowers there by 20.5 basis points. While the cost of debt is falling around the world, New Zealand may be the exception.

The extra impost from across the Tasman will add to the numerous headwinds buffeting the ASX banking sector, but at least our banks and their shareholders will have extra time to adjust.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, Commonwealth Bank of Australia, and Westpac Banking. Connect with him on Twitter @brenlau.

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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