Australian Banks

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Low-doc loans make an unwanted return
THE AUSTRALIAN OCTOBER 28, 2014 12:00AM

Anthony Klan

Journalist
Sydney
Low-doc return.
Low-doc loans do not ­require borrowers to provide tax returns. Source: TheAustralian
LOW-DOC loans — or “liar’s loans” as they are known in the US — have become even easier to obtain as lending standards ­loosen, with non-bank lenders ­aggressively spruiking the controversial products by slashing interest rates and offering cashback giveaways and cruises.

The loans, which do not ­require borrowers to provide tax returns and are used by tax-avoiding small business owners, have traditionally carried interest rates substantially above standard loans.

However, as lending standards across the financial sector weaken — and the demand for residential mortgage-backed ­securities grows — some lenders have slashed low-doc lending rates to equal that of standard mortgages.

Non-bank lender Liberty, which describes itself as an “early pioneer” of low-doc lending, ­recently announced a 40-basis-point cut to its Prima Nova Low Doc loan to 5.24 per cent, and ­further reduced the income supporting documentation required to be provided by borrowers.

Another lender, Pepper Australia, is spruiking a $1000 “cash back” for “non-conforming” borrowers who take out low-doc loans and is offering mortgage brokers the chance to win a four-night P&O cruise for conducting a course on how to sell low-doc and other “specialist” loans.

“We will (show how) you can use Pepper’s five-step process to successfully present a specialist home-loan opportunity to a client who may not have considered a specialist solution,” the group told brokers.

Liberty spokesman Rick Zylinski said the lender would now accept a “completed accountant’s letter” in lieu of a Business Activity Statement, provided bank statements were also provided.

Pepper failed to respond to questions from The Australian.

The proportion of low-doc loans written slumped after the GFC and, in particular, the ­National Credit Act in 2010, which required lenders to make “reasonable inquiries” into a ­borrower’s financial position.

Overall levels of low-doc loans being written remain well lower than the GFC’s highs; however, lending standards are again slipping. A recent report by corporate regulator Australian Securities & Investments Commission into low-doc lending by banks and building societies — those ­“deposit-taking institutions” governed by the Australian Prudential Regulation Authority — found the proportion of low-docs issued by banks and building societies had failed from 6.4 per cent of new residential loans before the GFC to the current 0.7 per cent.

But a similar study has not been conducted examining non-deposit-taking institution lenders, who are currently the most active in spruiking the loans.

Pepper and Liberty are non-deposit-taking institutions.

Before the GFC low-doc and no-doc (which required no proof of income at all) represented 20 per cent of all loans issued. It is unclear what proportion low-doc loans consitute the current market when including non-deposit-taking institutions.

Many lenders are also targeting business owners, with laws surrounding loans for business purposes less stringent than those covering residential home loans.

Last week, APRA chairman Wayne Byres warned that lending standards for the deposit-taking institutions it monitored were being “stretched”.

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ANZ to focus on organic growth, not Standard Chartered
THE AUSTRALIAN OCTOBER 30, 2014 12:00AM

Richard Gluyas

Business Correspondent
Melbourne
ANZ Bank boss Mike Smith will press on with his ahead-of-plan, Asian organic growth strategy, despite the financial logic of a merger with Standard Chartered becoming even more compelling this week.

Overnight on Tuesday, StanChart’s dramatic slide from grace accelerated, when a 16 per cent slide in pre-tax profit for the September quarter to $US1.5 billion ($1.7bn) triggered a share-price rout.

In its third profit downgrade in a year, the emerging markets lender, which earns three-quarters of its profit in Asia, blamed rising impairments and anaemic revenue growth for withdrawing its June guidance that the second half would produce higher earnings than the first half.

Investors fled and the stock swooned, falling 9 per cent to a five-year low of £9.83 ($17.87), down from £18 less than two years ago.

Smith has often said the stars would need to align before ANZ considered a transformational acquisition. Right now, in pure financial terms, the stars are displaying unusual symmetry.

ANZ’s price-to-book ratio of 1.8 dwarfs StanChart’s ratio of 0.8, with its $90bn market capitalisation double that of its rival.

The fact StanChart is valued at a miserly 80 per cent of its book value compared to ANZ’s frothy premium shows a couple of things. First, from an ANZ perspective, there’s a massive opportunity for value creation if a merger deal could be struck. Second, StanChart’s yawning discount makes it clear the market has lost confidence in chief executive Peter Sands.

So, if the numbers stack up and an ANZ/StanChart merger tops the list of analyst fantasy deals, why won’t it happen?

For a start, it’s understood a merger is not on ANZ’s strategic agenda, mainly because it would be a merger of equals and StanChart is happily independent.

Valuations might have moved decisively in ANZ’s favour, but its rival’s loan book would give it a two-fifths share of MergeCo’s lending assets, with deposits and revenue about equal.

In July, admittedly when his scrip was worth a lot more than it is now, Sands effectively scorned the idea of an agreed merger.

Frankly, given StanChart’s born-to-rule culture, the prospect of the board meekly surrendering to a testosterone-fuelled ANZ is close to zero. Almost two years ago, Smith addressed the StanChart issue. “It’s theoretical and both organisations would have to want it badly,” Smith said.

Credit Suisse analyst Jarrod Martin reckons ANZ’s appearance as a white knight in a contested takeover would be the only scenario in which a tie-up between the two banks could occur. He says the first-mover on StanChart would most likely be a Chinese or Japanese bank. But even then, there are clouds over StanChart that could see ANZ baulk. Impairments almost doubled in the September quarter to $US539 million from a year ago.

ANZ would face the risk of a serious re-rating unless Smith was able to convince the market that he could de-risk StanChart as he has de-risked ANZ. At a time of intense focus on capital levels, StanChart also did nothing on Tuesday to allay fears that the bank is capital-lite.

ANZ, for its part, has the lowest tier-one capital ratio of the big four domestic banks going into Friday’s annual result, so the combined balance sheet would be stretched with StanChart a bank of global systemic importance requiring deeper capital buffers.

Finally, there are pockets of market resistance to Smith’s strategy in Asia. Despite the region’s relatively high growth, the returns are lower. The group’s return on equity, which is lower than Fortress Australia lenders like CBA and Westpac, would be diluted, as would ANZ’s ability to pay the kind of fully-franked dividends so loved by domestic institutions.

Smith will therefore press ahead with organic growth.

Waiting for the cheque

AT the major banks, November is bonus time — or resignation season, depending on your view.

Until they’re told the size of their year-end bonus, no self-­respecting executive will give an alternative employer a commencement date.

But once the cheque’s in the mail, as they say, it’s open season and the resignations start to pile up, according to a Sydney banker. This is particularly so at senior levels and for frontline staff, where the bonus can be up to 100 per cent of base salary.

At lower levels, where the bonus might be only 5-10 per cent of base, it’s far less of a problem.

Fair go for regionals

SUNCORP boss Patrick Snowball did his best yesterday to level the playing field in the debate around the financial system inquiry.

Since the inquiry’s interim report claimed Australian bank capital levels were only “middle of the road”, the majors have warned the sky will fall in if they’re held to higher levels of regulatory capital.

The voice of the regionals, which see a similar threat if there’s no change to risk-weights that enable the majors to hold up to one-third less capital on low-risk mortgages, has been lost in all the white noise.

Snowball said yesterday that any failure to address this imbalance in the inquiry would be a “huge lost opportunity”, entrenching the disadvantage suffered by the regionals.

He said growth in the majors’ share of the mortgage market from 60 per cent to 80 per cent had been at the expense of SME and agri lending.

It’s hard to disagree with him.

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Reform for low-growth future, says Suncorp chief
THE AUSTRALIAN OCTOBER 30, 2014 12:00AM

Suncorp Boss
Suncorp chief executive Patrick Snowball says the public must accept the need for structural reforms. Photographer: Liam Kidston Source: News Corp Australia

SUNCORP chief Patrick Snowball has urged regulators not to dwell on recommendations from the Murray financial system inquiry and questioned the government’s policy to tackle insurance affordability for North Queensland.

Speaking at an American Chamber of Commerce event yesterday, Mr Snowball also backed recent comments by business that political leaders and the public must accept the need for long-term structural reforms to ensure the nation’s future prosperity.

Mr Snowball, who is British, said when he arrived in Australia five years ago the “brutal” political discourse “robbed” the nation of the same opportunity as other Western economies after the global financial crisis to embark on “long-term structural reforms that would serve it well when inevitable challenges would emerge”.

It follows comments by Rupert Murdoch, the executive chairman of News Corp, publisher of The Australian, this month that leaders had mistakenly responded too much to domestic “political outcry” after the crisis rather than reform.

“Now, for the first time in at least a couple of generations, Australia does find itself confronting many of those challenges,” said Mr Snowball.

“The China tailwinds are moderating, the fiscal position needs to be adjusted, businesses need to transform and globalisation is unavoidable. Collectively, we need to acknowledge that we are now entering a period of lower economic growth and front up to the challenges of a mature first world economy.

“Business will need to adapt to this low growth environment by driving efficiencies across their cost bases; just as the electorate will need to adapt to lower government outlays as a means of addressing the budget.”

Ahead of the Murray inquiry’s final report next month, Mr Snowball reiterated it should back changing the banking rules that force smaller banks to hold more capital against mortgages, and end the big four’s advantage from the implied government guarantee.

Analysts, however, believe the inquiry will not yield to the regional banks’ lobbying for lower “risk weights”, and instead focus on higher tier one capital levels for the major banks.

“I am also a little anxious about the impetus that will be placed on achieving competitively neutral capital, funding and regulatory settings and the timing in which that will happen,” said Mr Snowball.

After the government last week released a range of initiatives to tackle insurance affordability in North Queensland, including a comparison website, Mr Snowball said efforts to increase natural disaster mitigation would be more effective.

“While the intent is right, I’m not convinced that these initiatives will drive the right outcomes,” he said.

“In my experience, aggregator sites are too sharply focused on price and do not place enough emphasis on product features and inclusions, a major issue after the Brisbane floods.”

According to KPMG, a proposed $250 million annual disaster mitigation program could produce a $6.2 billion increase in GDP over 10 years.

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ANZ lifts full-year profit by 10%
OCTOBER 31, 2014 9:30AM

Mitchell Neems

Business Spectator Reporter
Melbourne
Australia and New Zealand Banking Group says the consistent execution of its super regional strategy is positioning it well in a more constrained operating environment.

In the year to September 30, ANZ delivered a cash profit of $7.12 billion, a 10 per cent increase on last year's result.

The result is in line with expectations and also matches the accidental figures released by the bank earlier in the week, which resulted in a trading halt in its shares.

Full-year net profit increased 15 per cent to $7.27bn, while operating income rose 8 per cent to $20.054bn.

ANZ will pay a fully-franked final dividend of 95c on December 16 to shareholders on the register at November 11, bringing the lender's total distribution for the year to $1.78, which is a nine per cent increase on the previous year's distribution.

ANZ chief executive Mike Smith said the outcome of the government's Financial System Inquiry was a consideration for the bank's outlook, warning particularly on the impact of excessive regulation.

"It is perhaps not widely understood that Australia’s financial system has been strengthened significantly since the GFC and our major banks are now stronger and safer than ever," he said.

"While everyone benefits from a well-capitalised, well managed banking system -- consumers, shareholders and taxpayers -- there is a real cost to the economy of ever more restrictive regulation and policy settings."

Mr Smith said it is not in Australia’s interest for its financial system to be globally uncompetitive.

He added the lender expects 2015 to present similar opportunities for ANZ, with a continuation of a stable and benign credit environment.

"In Australia and New Zealand the consumer sector remains relatively buoyant however we expect a gradual transition to business led growth as business confidence improves," he said.

"Asia’s economies are set to maintain their position as the world’s best performing region."

Cash profit from Asia increased 25 per cent and revenue by 10 per cent in the full-year.

The bank's international business in Asia Pacific, Europe and America now accounted for 24 per cent of group revenues. Cash profits in those areas increased 20 per cent to $1.2bn.

The Australian region's cash profit was up one per cent at $4.4bn.

The net interest margin narrowed to 2.13 per cent, from 2.22 per cent, as strong competition for borrowers hits the big banks.

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Macquarie Group H1 profit lifts
OCTOBER 31, 2014 9:30AM

Mitchell Neems

Business Spectator Reporter
Melbourne
Macquarie Group expects its full-year result will be a slight improvement on the last year, despite warning on a number of challenges to its short-term outlook.

In the six months to September 30, Macquarie delivered a net profit of $678 million, a 35 per cent lift on the $501m recorded in the first half of the previous year.

The result was slightly above the consensus estimate of analysts surveyed by Bloomberg, who had been expecting $645m.

In the same period, revenue grew 17 per cent to $4.298 billion, up from $3.679bn in the previous corresponding period.

Macquarie will pay an interim dividend of $1.30 -- of which 52c will be franked -- on December 16 to shareholders on the register at November 14.

Macquarie's performance was boosted by its annuities-style business, which delivered a 38 per cent increase in its combined net profit contribution compared to the previous corresponding period.

Meanwhile, the combined net profit contribution of its capital markets facing business rose 11 per cent.

Macquarie’s assets under management at September 30 were $425bn, in line with March 31.

Macquarie chief executive Nicholas Moore said the group remains well positioned, with a strong and diverse global platform and specialist skills across a range of products and asset classes.

"All of this is built on the foundation of a strong balance sheet, surplus capital, a robust liquidity and funding position and a conservative approach to risk management."

"Our short term outlook remains subject to a range of challenges including: market conditions; the impact of foreign exchange; the cost of our continued conservative approach to funding and capital; and
potential regulatory changes and tax uncertainties," the lender said.

Macquarie also revealed that veteran company director Gordon Cairns -- currently chairman of Origin Energy and former chairman of David Jones -- will join the group's board on November 1 as an independent director.

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Banks fuel October rebound

Equities Sally Rose
737 words
1 Nov 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.

October began with shares spiralling towards a technical correction, having wiped out all of 2014's gains in September's slump. In a dramatic turnaround, the Australian sharemarket has posted a gain this month, led by the banks, ­closing on Friday 3.4 per cent ahead for the year.

The benchmark S&P/ASX 200 Index lifted 4.4 per cent in October to 5526.6 points, while the broader All Ordinaries Index added 4 per cent to 5505 points, despite weak commodity prices weighing on the resources sector, as the big four lenders rallied heading into bank reporting season. On Friday, the market added 0.9 per cent.

Local shares have shadowed the performance of equity markets in the United States, with a focus on rising global interest rate expectations. On Wednesday, the US Federal Reserve announced a long-awaited move to conclude quantitative easing.

"It was good to see the US Federal Re­serve end QE and sounding more positive about the economy," Quay Equities head of trading Tristan K'Nell said.

"But while the US economy is improving, China, Japan, Europe and even Australia are struggling a bit and that is driving investors back into safe yield plays.

"Eight weeks ago, the big four banks all looked expensive, but after a hefty sell-off brought them back to fairer value, investors started jumping back in a few weeks ago."Strong start to bank reporting season

Australia and New Zealand Banking Group added 0.7 per cent to $33.50 on Friday after reporting a 10 per cent lift in full-year cash earnings to $7.12 billion, buoyed by continuing strength in its domestic mortgage lending business.

The result was in line with an ­accidental disclosure that prompted a brief trading halt earlier in the week. ANZ recorded an 8.3 per cent gain for the month.

National Australia Bank kicked off bank reporting season on Thursday, when it showed a 10 per cent fall in cash earnings to $5.18 billion and confirmed it is looking to sell its poorly performing British division. NAB shares added 7.5 per cent over the month to $34.99.

"We expect another clean, predictable, high-quality result from Westpac Banking Corporation when it reports its full-year result on Monday," UBS banking analyst Jonathan Mott said. In October, Westpac rose 8.2 per cent to $34.78.

"With NAB, ANZ and Westpac all due to trade ex-dividend in November, they should continue to get a good run over the coming weeks," Mr K'Nell said.

Commonwealth Bank of Australia, which will report quarterly earnings on Wednesday, rose 6.9 per cent over the month to $80.48.

Macquarie Group added 2.2 per cent to $61.17 on Friday as its interim profit jumped 35 per cent to $678 million, beating forecasts. The investment bank has climbed 6.2 per cent over the past month.

Telstra Corporation closed October 6.2 per cent ahead at $5.63.Oil stocks suffer as crude prices slump

Crude oil prices slumped more than 11 per cent in October, and oil stocks felt it. Origin Energy lost 4.7 per cent to $14.27, while rivals Woodside Petroleum, Santos, Oil Search and Liquified Natural Gas also sold off.

The spot price for iron ore landed in China edged up 1.2 per cent to $US79.82 a tonne over the month, but is still down more than 40 per cent since the start of the year. Most analysts predict that a supply glut will continue to weigh on the value of the steel-making ingredient.

"It is well-understood that demand growth from China for iron ore is slowing," said Pengana Australian Equities Fund portfolio manager Anton Du Preez. "But as the biggest low-cost producers continue to ramp up volume, eventually most of the smaller players will get taken out of the market, leaving Rio Tinto, BHP Billiton, Vale and Fort­escue Metals Group left standing and in a stronger position than ever."

Resources giant BHP Billiton edged up 0.3 per cent to $33.96, having told investors it has put some key US shale gas assets up for sale. Main rival Rio Tinto added 1.4 per cent to $60.41, while iron ore miner Fortescue Metals Group rose 0.6 per cent to $3.50.


Fairfax Media Management Pty Limited

Document AFNR000020141031eab10002z

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Market rally fuels investor demand for debt
MAGGIE LU YUEYANG THE AUSTRALIAN NOVEMBER 03, 2014 12:00AM

A FLURRY of debt issuance over the past few days indicates the new issue window has reopened on the back of strong investor demand and positive liquidity conditions, after recent market volatility is easing.

Commonwealth Bank closed its $1 billion subordinated notes deal on Friday, with the funds qualifying as tier-two capital under Basel III requirements.

There was solid support after the bank doubled the issue from the original $500 million. Pricing came in at 195 basis points over bank bills, a slight premium to spreads on similar issues by ANZ and Westpac.

National Australia Bank has mandated Deutsche Bank, Bank of America Merrill Lynch and Goldman Sachs for a prospective euro debt deal in tier-two capital. It will hold a global investor call today to examine market demand.

The issuers are taking the opportunity right now as investors step back into the market after the recent volatility and spend cash they have in their portfolios, said James Hayes, BNP Paribas Sydney-based head of fixed income.

“It’s just a broad response in terms of investor demand for credit across global markets,” he said.

“Now that volatility has come off, investors have become more comfortable that credit spreads are not going to widen aggressively. They have started to show their hands again by buying in the secondary market and reopening the new issue window.”

Australia’s big banks have been sounding out underwriters and investors for tier-two bond issuance structures to comply with Basel III capital requirements.

Although they are not necessarily under pressure to do so, they may find market conditions ideal to issue debt, which have been largely driven by liquidity conditions in Europe.

“You’ve got the ECB (Euro­pean Central Bank) embarking on new liquidity measures, QE ­measures, in order to stabilise the economic conditions in Europe,” Mr Hayes said. “We expect to see investors continue to put their hands up to buy credit assets.”

The euro market looks to be the most attractive for the moment — that is probably why NAB headed to Europe, as well as Stockland, which issued €300m ($427m) of bonds last week under its medium- term note program.

Westfield spin-off Scentre Group has tapped the US dollar market, raising $US750m ($840m) in its senior guaranteed US notes transaction last week, while nickel miner Sirius Resources also mandated four banks — BNP Paribas, ANZ, HSBC and Westpac — to raise about $430m in debt in the December quarter to fund its Nova Nickel project in Western Australia.

MAGGIE LU YUEYANG

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Westpac posts full year cash profit of $7.63bn
THE AUSTRALIAN NOVEMBER 03, 2014 8:54AM

Michael Bennet

Reporter
Sydney
WESTPAC chief Gail Kelly has tipped the healthy appetite for housing loans to power on, as she unveiled a spike in cash profit to a record $7.6 billion built on better growth in mortgages.

But, like its rivals, Westpac (WBC) has taken a more conservative stance towards capital, issuing shares for its dividend reinvestment plan to save cash and increasing its top tier capital ratio target.

Rounding out the banks’ result season, Westpac today posted an 8 per cent rise in cash earnings to $7.62bn for the year to September 30, slightly higher than analysts’ forecasts.

The result boosted the big four banks’ combined cash profits to a record $28.6bn, after ANZ and National Australia Bank last week revealed profits of $7.1bn and $5.2bn, respectively.

Westpac’s net profit rose 12 per cent to $7.56bn, powered by its largest division, Australian Financial Services, which houses various businesses including its retail and business bank, plus St George.

“We believe we will continue to deliver strong outcomes for our customers and our shareholders in full year 2015,” said Mrs Kelly.

Echoing ANZ chief Mike Smith, Mrs Kelly said demand for loans from businesses was finally starting to show signs of life after years of muted growth. But she said the housing market, powered by Sydney’s property boom, would be the biggest driver.

“Housing credit growth has increased over 2014 and we expect growth at similar levels to continue through 2015, driven by strong demand and continued low interest rates.

“An upswing in home building is also underway,” she said.

Westpac is the second biggest home loan lender after fellow Sydney-based rival Commonwealth Bank.

In the last six months, Westpac managed to stop bleeding market share, growing mortgages in line with the overall market’s growth. Westpac has the biggest loan book to investors, an area of the market growing strongly. But regulators have expressed concern about concentration risks in Sydney and Melbourne, threatening to introduce measures to curb demand.

Ahead of the Murray financial system inquiry’s final report next month, Westpac revealed some caution on its capital amid bets the probe may force the big banks to increase their holdings. The bank upped its final dividend 2 cents to 92 cents per share, taking the total payout for the year to 182c, up 5 per cent.

But unlike recent results where it bought shares on-market and gave them to shareholders, Westpac said it would issue new shares for the DRP, saving capital. It also upped its common equity tier one (CET1) capital ratio target to 8.75- 9.25 per cent, higher than the previous 8.5-9 per cent, citing the new requirements for the big banks to hold an additional 1 percentage point by 2016.

But analysts believe the inquiry may increase the required ratio further, forcing the banks to raise prices for customers or suffer lower returns.

Westpac’s CET1 ratio fell 13 basis points to 9 per cent, but stressed it was partly due to the acquisition of assets from Lloyds and payment of a special dividend in December.

Westpac’s return on equity rose 48 basis points to 16.4 per cent.

Omkar Joshi, an analyst at Watermark Funds Management, said while the cash earnings were as expected, the underlying trends were soft and the result was flattered by lower losses from soured loans. He added Westpac’s revenue was outpaced by a 6 per cent rise in expenses, a dynamic not desired by analysts.

“Overall it was an in-line bottom line result, albeit a low quality result driven by lower bad debt charges and tax,” he said.

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Top four banks earn a record $29bn
NOVEMBER 03, 2014 3:30PM

Strong competition for new lending lowered profit margins at Australia’s top four banks by 2 basis points to 2.06 per cent in the second half, the lowest since an all-time low of 2.05 per cent in the first half of 2008, according to PwC.

An increase in lending volumes, most noticeably to business and for housing investment, overcame the margin squeeze to drive record profits, said PwC Australia’s Financial Services leader Hugh Harley.

The four major banks delivered a 5.6 per cent rise in combined underlying cash earnings of $29 billion after tax for the full year. A further fall in bad debts combined with growth in core earnings and a rebound in credit demand drove the record result.

Bad debt expenses fell to $3.5bn from $5bn a year earlier, representing 65 per cent of the overall improvement in pre-tax earnings.

“Overall, these are quite solid results, albeit still with a significant benefit from a lower bad debt expense,” Mr Harley said. “They reinforce the range of levers the banks have to manage profitability."

Still, he warned that digitisation meant “the banks will need to peddle faster to preserve their favourable economics”.

A highlight was a combined 3.8 per cent rise in business credit to $76 billion, up from just 1 per cent the year before.

Total growth in credit of 5.4 per cent over the year to September was the strongest since February 2009.

Overall core earnings before bad debts and tax for the nation’s four major banks increased 5.2 per cent to $45.7bn, compared to the previous year, excluding the effect of National Australia Bank’s $1.7bn provisions for the UK and software writedowns.

The banks’ bad-debt-expense-to-loans ratio, at 15 basis points, was the lowest since the mid-1990s.

Earnings at the banks’ wealth management operations grew 9.6 per cent, helped by buoyant equity markets, although trading income for the banks was down 10.4 per cent.

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Dividends in the firing line
THE AUSTRALIAN NOVEMBER 04, 2014 12:00AM

Michael Bennet

Reporter
Sydney

WESTPAC chief Gail Kelly has warned that banks falling foul of incoming capital rules may be forced to take the knife to dividends, revealing the urgency in the united front among the big four lenders against stricter rules from the Murray inquiry and G20.

Handing down a record $7.6 billion cash profit, Mrs Kelly yesterday joined her banking CEO counterparts in urging the Murray financial system inquiry to consider the cost of forcing the big banks to increase capital levels.

She also threw support behind comments by ANZ chief Mike Smith that it could lead to higher interest rates for customers.

Revealing its caution, Westpac upped its targeted “common equity tier-one” (CET1) ratio to a “prudent” 8.75-9.25 per cent, after getting clarity from the the Australian Prudential Regulation Authority on the new charge for “domestic systemically important banks” (D-SIBs).

Under the ruling by the bank regulator, the big four must have ratios of 8 per cent by 2016, up from 7 per cent, to provide a bigger “conservation buffer” for big banks. This additional capital is designed to reinforce balance sheets in the face of economic downturns.

Mrs Kelly said APRA had confirmed that banks would be required to consult with the authority about dividends if their capital slipped below 8 per cent, a more “conservative” approach that required a higher capital target to ensure it remained in charge of its own “destiny”.

The comments are notable because the Murray inquiry is widely believed to be mulling recommending doubling the D-SIB charge to an additional 2 percentage points of capital, boosting the floor further to 9 per cent.

The banks’ yield is also key to their share prices, which are near record highs.

“They (APRA) are taking a more conservative approach and saying if you fall into that top quartile (of the conservation buffer) — in other words below 8 per cent — you’d need to have a conversation with us,” Mrs Kelly said.

In line with the first half, Westpac — the best capitalised of the big four — yesterday increased its final dividend by 2c a share to 92c, pushing the total payout to $1.82, up 5 per cent.

Westpac shares fell 0.66 per cent, giving back some of the recent strong gains.

Capital generation was a highlight of Westpac’s result, its CET1 ratio falling just 13 basis points to 9 per cent despite buying an $8.4bn loan book from Lloyds, paying a special dividend and increasing mortgages.

But stricter rules out of the inquiry or G20 would force Westpac and the other big four to again revise higher targeted capital ratios, given APRA’s strict ruling on dividends when banks fall below the minimum.

While Mrs Kelly said its dividends were safe, the bank revealed prudence ahead of the Murray inquiry’s final report due this month by issuing shares into its dividend reinvestment plan to save cash.

“At the moment we are very comfortable with being able to maintain that dividend trajectory on what we know,” she said.

“It’s really going to depend on what happens and how we deal with it. That’s the discussion about the connection between stability and growth. If we have to hold more capital, that’s a cost to the bank.

“In many businesses you’d actually think about whether you’d pass that cost on or whether you price for that cost. Either you do that or it results in a lower return.

“So one way or another we need to think about that cost and how we’d actually deal with it.”

ANZ’s Mr Smith on Friday said lifting levels of common equity, the most expensive form of capital, could lead it to raise all loans 50 basis points to maintain the same returns. He urged regulators to mull cheaper “tier-two” capital. Mrs Kelly agreed that a wider debate was needed about the “trade-off” between capital, stability and growth.

Rounding out the banks’ result season, Westpac met analyst forecasts with an 8 per cent rise in cash earnings to $7.62bn for the year to September 30, after stemming the bleeding of market share in its mortgage book.

The result was powered by its largest division, Australian Financial Services, which houses various businesses including its retail and business bank and St George. But a slump in the group’s markets income disappointed analysts.

The result boosted the big four banks’ combined cash profits to a record $28.6bn, after ANZ and National Australia Bank last week revealed profits of $7.1bn and $5.2bn, respectively.

Catherine Allfrey, a principal at Wavestone Capital, described the result as “pretty solid”, but warned that the banks were in “goldilocks territory” as losses from bad debts fell near record lows and dividend payout ratios were near record highs.

“The increase in capital requirements are going to make it harder to grow the dividends going forward unless they come out with some large right issues after the inquiry to fund it,” she said. “But it depends on the timeframe and many other things we don’t know yet.”

Mrs Kelly said she was “quietly positive” about the Australian economy, with credit demand from businesses slowly improving and housing to continue to grow strongly.