BANKING CAPITAL - learning to swim against the tide by ProQuest


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With capital now scarce                              By oNE EstImAtE, if the prescribed Basel III tier 1
                                                     ratio had to be met immediately, rather than by 2012,
and future regulation likely                         Australian banks would potentially need an additional
                                                     capital injection to the tune of $15 billion today.
to worsen the situation,                             Luckily, banks still have two more years to meet
                                                     these requirements and Australian banks, which
banks are seeking to raise                           remain some of the better capitalised banks in the
it, investors are wary of                            Asia Pacific region, are likely to meet their 2012
                                                     Basel III tier 1 ratio requirements without further
parting with it, and lenders                         extraordinary capital injections.
                                                          However, accommodating the need for additional
seem keener than ever to                             capital comes at a price. By the same estimates,
hang on to it.                                       return on equity (ROE) of Australian banks could
                                                     be eroded by 150 to 300 basis points (bps) by 2012.
                                                     This is within the median range for Asian Pacific
                                                     banks, with some banks in the region expecting to
                                                     face an erosion of up to 700 bps while some might
                                                     actually escape with no impact at all on their ROE.

                              NIgEl ANdrAdE is a Partner at McKinsey & Company where he is the leader
                              of the Financial Institutions Practice for Australia and New Zealand.


The magazine for Finsia members                                                   j u n e 2010 I N F I N A N C E   51
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            Assuming that investors are unlikely to stand                Together, these two sets of levers can result in
       by while their returns diminish, banks are being            a reduction of risk-weighted assets (RWAs) of 15%
       compelled to react.                                         to 25% in OECD banks. Further, some banks also
            A series of market interviews across the region        see an 8% to 12% growth in revenues. These
       at the height of the financial crisis highlighted that      improvements result in additional economic value –
       although all banks were undertaking programs (in            for one global bank, about 25% in two years with
       addition to capital management) to optimise their           two-thirds of the impact being captured within the
       short-term value through pricing, cost reduction           
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