Australia’s largest banks are bolstering their ample reserves to replace hybrid capital and prepare for a potential economic downturn with the way they are managing dividend payments and reinvestment plans (DRPs) and share repurchases.
These are among the findings of an analysis of the first half results of the Big Four banks by industry analysts and professional services firms, who also noted an increase in expenses due to technology investments in the six months to 31 March 2025.
Capital idea
Morgans Financial analyst Nathan Lead said he believed National Australia Bank (ASX: NAB) was unlikely to increase its dividends or announce new buy-backs because of an approaching capital constraint and DRPs may be needed to support tier 1 capital.
He said NAB increased its tier 1 capital operating target by 25 basis points (bps) ahead of the phasing out of additional tier 1 (AT1) hybrid capital, which is a mix of debt and equity.
The Australian Prudential Regulation Authority (APRA) announced in December it was phasing out hybrid capital between 2027 and 2032 after finding it was not effective in crises like the collapses of Credit Suisse and Silicon Valley Bank in 2023, although these securities are popular with investors.
Lead noted Commonwealth Bank of Australia (ASX: CBA), Australia’s largest bank and company, had about $3 billion (US$1.92 billion) more capital than needed to hit the base of its 11-11.5% operating range target.
“Australian banks are amongst the most well capitalised globally, and CBA is at the top end of its peer group,” he said in a research report.
Australia and New Zealand Banking Group (ASX: ANZ) was retaining capital by slowing and extending its buyback, holding dividends flat and issuing capital through the DRP and he assumed it would lift its tier one ratio by 25 bps.
“Our forecasts now have shares on issue increasing over time instead of declining as we remove additional buybacks and assume ongoing DRP activation (by ANZ),” Lead said.
Westpac Banking Corp’s (ASX: WBC) flat interim dividend may be a sign it had limited surplus capital and no more buybacks were forecast, he said.
KPMG said in its half year results analysis that the average tier 1 ratio of the four major banks was 12.1%, down 56 bps from the first half of the 2024 financial year and 27 basis points from the second half of the year.
Pwc said Australian banking capital ratios remained higher than global peers because they were first to implement the Basel 3.1 capital reforms, which are aimed at strengthening the regulation, supervision, and risk management of banks.
“Strong levels of capital are crucial at a time when many prominent figures are suggesting a global recession could be on the horizon,” Pwc said in its analysis.
Costly investments
Lead said that although the 4% growth in ANZ’s costs compared with the second half of FY24 was a little under expectations, guidance implied 8% growth in the second half, partly driven by the second half skew in investment spending.
He said Westpac’s operating expenditure rose 3% in the first half from the previous six months and was expected to accelerate in the second half but it would deliver revenue growth and cost and productivity efficiencies, particularly from technology simplification.
KPMG said the four banks’ operating expenses increased by 6.2% compared with the first half of FY24 and 2.9% compared with the second half, mainly driven by personnel and technology expenses.
“The Majors cited accelerating digital transformation initiatives in response to customer demand for innovative banking solutions and an increased focus on gen AI (artificial intelligence) as key drivers,” the firm said.
PwC said the banks' first half operating expenses rose 4.2% and 2% respectively when the impact of acquisitions was excluded, mostly due to rising costs associated with technology and personnel.
It said the cost-to-income (CTI) ratio (excluding notables) had risen steadily since the first half of FY23 to 48.6% as the benefit of rising interest rates had been replaced with fierce competition, inflationary pressures and investments in technology.
By contrast to the Big Four, full year employment expenses were broadly flat at Macquarie Group, which is known as the ‘millionaires factory’ for the high salaries earned by some of its executives, due to a lower headcount.
But it is different to the Big Four banks with asset management, capital markets, commodities and global trading a major part of its business activities.
