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Connexus : Issue 39
CoverStory 32 Connexus Magin says options to get additional capital are limited, especially given doubts over some hybrid capital-type instruments under the new rules. Mark Genovese, CEO of Mar itime, Mining & Power Credit Union, says he and his colleagues are getting mixed signals, with government and others encouraging mutuals to grab a larger slice of the nation’s banking market. “ That’s all well and good, but how do you actually, in a practical sense, achieve that? Well, you have to grow balance sheets significantly and quickly. But how can you do that in an environment with squeezed margins and a challenging operating environment without actually going out and accessing capital?” The conundr um with tighter capital requirements, says Genovese, is that MMPCU and some other industrial credit unions are operating in thriving towns on the back of mining and waterfront growth. “ Those places are doing very well, and parts of regional areas are doing very well, and we are basically having to slow the business down because we just can’t meet the demand out there. We just don’t have the capital.” Genovese says prohibition on conversion of Tier 1 and Tier 2 capital to unlisted equity is “one of the biggest problems we face”. At its headquarters in Albury, NSW, Hume Building Society is more positive about the broader impact of Basel III, with CEO Andrew Saxby suggesting some aspects of the refor ms will be “mildly positive” for Hume. He says Hume is in the somewhat unusual position of not facing significant capital constraints and that it has been able to grow at an acceptable rate while maintaining CARs of about 14.1 to 14.5 per cent. Saxby welcomes news that asset revaluation reser ves may be treated as Tier 1 capital. “ [That’s] a mild positive, and we’re just waiting to see confirmation that our understanding of that is true.” Never theless, Saxby concedes he has concerns about APRA applying a strict inter pretation of the proposed capital conser vation buffer of 2.5 per cent from 2016. “At this stage we have to trust that APRA will give us some leeway on our [prudential capital ratio] and that they’ll take 1 per cent or 1.5 per cent, or hopefully 2.5, off our PCR to allow this extra buffer on top of it.” The watchdog’s view APR A is accelerating implementation of the Basel III capital reforms to send a signal to the world about Australia as a stronghold of safe banking. Dr Laker advised mutuals at last year’s Abacus-A MI Convention to put “your thinking caps on” about capital instruments that mutual ADIs can issue in the era of Basel III and there are now encouraging signs that APRA is w illing to accommodate mutual solutions. APR A has responded to submissions from Abacus and Abacus member ADIs with an undertaking to work closely with mutual ADIs on the “particular challenges that the Basel III measures on the quality of capital pose for that sector.” On 30 March APRA released a response paper and a set of draft prudential standards. APR A’s response paper specifically addresses the concerns of mutuals and flags a potential way for ward for mutuals to issue a Common Equity Tier 1 instr ument. APRA says it will continue to engage with mutual ADIs about mutual Additional Tier 1 and Tier 2 instruments and the practical Proud heritage Heritage Bank has a reputation for being creative when seeking capital. However, the Toowoomba-based mutual admits it may have to adapt its strategy. “ We’ve been an innovator,” says Paul Williams, Heritage’s chief treasury and business strategy officer. “ We’ve done more to diversify our capital base than most. We’ve successfully issued an ASX-listed retail Tier 2 deal and completed many Tier 2 private placements, as well as broad-based wholesale issues.” Yet the “windows are closing” as APRA responds to Basel III, says Williams. “APRA doesn’t want ADIs to have innovative or hybrid-style capital propping up capital adequacy ratios. It wants core capital, which means sustainable profitability for mutuals, so we’re having to examine the composition of our capital base to position the business for the long term.” For example, Heritage repaid a significant line of subordinated debt in December. Williams says the redemption means the current proportion of Tier 2 capital in Heritage’s capital base is “closer to where we think the new requirements will be”. “ Even though our capital adequacy ratio has been reduced, we are comfortable for now with the overall mix.” The non-viability clause is a real sticking point...