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Big banks must hike rates again

Christopher Joye

Coolabah Capital

In The AFR I argue that even after CBA and NAB hiked rates by 0.15 to 0.17 percentage points in the last two days, they are going to need to raise them again---or not fully pass-on any future RBA cuts. The majors have accumulated $31bn of common equity tier one capital (CET1) since 30 June 2014, which is much more than most analysts and investors expected (I warned them!). But I show that with the majors' current tier one capital "leverage ratios" (see table below) only currently sitting at ~4.6% on average, and likely to go to a min. of 5.0% to 5.5% (given the FSI found the majors would be insolvent with a 4.5% leverage ratio in a GFC-style shock), they are going to have raise another $16bn to $35bn of CET1 and AT1 capital over the next few years. This means they need a min. of 0.38 percentage points worth of rate hikes for a total increase in CET1 capital of 200 basis points, which gets them to a circa 5% leverage ratio. Read for free here (VIEW LINK)

Christopher Joye
Portfolio Manager & Chief Investment Officer
Coolabah Capital

Chris co-founded Coolabah in 2011, which today runs $7 billion with a team of 33 executives focussed on generating credit alpha from mispricings across fixed-income markets. In 2019, Chris was selected as one of FE fundinfo’s Top 10 “Alpha...

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