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
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