TEXT-Fitch: No Impact on Australian Bank Hybrid Ratings from Removal of Annual Profits Test

(The following was released by the rating agency)

SYDNEY, October 02 (Fitch) Fitch Ratings says there will be no rating impact on Australian bank hybrid capital instruments from the Australian Prudential Regulation Authority's (APRA) decision to remove the requirement for it to approve coupon payments that exceed after-tax earnings (the annual profits test).

The change comes as part of APRA's final Basel III capital standards which were published on 28 September 2012. APRA has stated that it now considers the costs of maintaining the annual profits test on bank hybrid capital instruments to outweigh the supervisory benefits, given the fundamental change to the nature and required levels of hybrid capital under Basel III.

The removal of the annual profits test eliminates one easily activated loss absorption trigger of Australian bank hybrids. However, this removal has no impact on coupon payments remaining fully discretionary for Tier 1 hybrid instruments, which Fitch views as the most easily activated loss absorption trigger. This is reflected in Fitch notching Tier 1 hybrids three levels below a bank's Viability Rating (VR). When combined with a two-notch reduction for loss severity, Fitch will continue to rate Australian bank Tier 1 hybrid instruments five notches below a bank's VR.

APRA approval will still be required by Australian banks to pay ordinary share dividends that exceed after-tax earnings.

APRA's Basel III rules will be introduced from 1 January 2013, ahead of the timeframe set out by the Basel committee. The final rules are largely in line with APRA's previous indications and do not alter Fitch's view that Australian banks are well positioned to meet the Basel III capital requirements.