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RBNZ’s $19bn torpedo can’t sink CBA’s capital return boat

The Commonwealth Bank of Australia (ASX: CBA) share price is the only one trading in the green today as shares in the other big banks returned some of Thursday’s gains.

The CBA share price inched up 0.4% to $78.91 when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index advanced 0.3% during lunch time trade.

In contrast, the Australia and New Zealand Banking Group (ASX: ANZ) share price fell 0.5% to $24.59, the Westpac Banking Corp (ASX: WBC) share price dropped 0.4% to $24.23 and the National Australia Bank Ltd. (ASX: NAB) share price slipped 0.2% to $25.36 at the time of writing.

Impact of RBNZ on the big four

The share price performances reflect the impact of the rule change that the Reserve Bank of New Zealand (RBNZ) are imposing on the big four on their Kiwi operations.

The RBNZ is doubling the Common Equity Tier-1 (CET1) ratio for banks to 16%. This translates to an extra NZ$20 billion ($19 billion) in cash and other qualified assets that the big four will have to hold in their New Zealand businesses.

Our ASX banks won’t all be impacted in the same way due to the differences in size and scale of their NZ loan book – and there are no prizes for guessing which two are the most impacted by the latest RBNZ ruling (hint: just look at the share price performance).

$6 billion capital shortfall

The analysts at Macquarie Group Ltd (ASX: MQG) estimates that ANZ will need to pump in an extra $3 billion or so from the change, while NAB and Westpac will need cough up around $2 billion and $1 billion, respectively.

CBA is not only in the clear, but it looks well placed to return circa $3.2 billion back to shareholders once the sale of its life insurance business is completed.

This possibly explains why CBA is outperforming its peers as capital returns will be harder to come by in 2020 compared to the current year, when several companies showered shareholders with special dividends, franking credits and share buybacks.

CBA the least dirty shirt

However, Macquarie warns that the premium commanded by CBA’s share price is getting harder to justify – and it isn’t the only one warning that shares in our largest mortgage lender is looking stretched.

On the other hand, investors are going through the “least dirty shirt” cycle – and that’s a strong current to swim against. In my view, CBA is the only big bank stock with a clear runway for 2020 (or at least a clearer runway) and its dividend looks the safest of the lot.

In this climate, it’s worth paying more for certainty.

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

The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. 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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