Big four returns set to suffer under APRA's new terms

Christopher Joye

Coolabah Capital

APRA's announcement of an increase in the average residential mortgage "risk-weight" applied by Australia's "internal-ratings based" (IRB) banks from 16% currently to "at least" 25% has important consequences for expected returns from bank securities...The substantial increase in equity will inevitably lower the major banks' shareholder returns and close the gap with regional banks that are still stuck using 40 per cent risk-weights (this disadvantage disappears if regionals can secure IRB status). The reduction in major bank leverage is a material credit positive for higher ranking securities that do not possess the 5.125% Common Equity Tier 1 (CET1) capital equity conversion trigger embedded within AT1 hybrids. The surge in CET1 reduces the probabilities of default/loss on subordinated bonds, senior bonds and deposits, making them more valuable, ceteris paribus. While AT1 hybrids benefit insofar as their 5.125% equity conversion trigger may be further away from the new-normal 10 per cent benchmark, these securities may get caught up in efforts by banks to boost "going concern" capital. Read the full AFR article for free clicking (twice) 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...

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.


Please sign in to comment on this wire.