ANZ shares dip as APRA increases ANZ’s capital overlay
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More news: ANZ shares lowered on the ASX after the Australian Prudential Regulation Authority (APRA) increased the capital add-on applied to ANZ by $250 million in response to heightened concerns about the bank’s non-financial risk management practices.
Shares were down 1.6% to $29.48 by 1:20pm AEST while the wider financial sector was up 0.07%.
E&P Capital analyst Azib Khan noted that the key risk for ANZ is that the lender will be required to provide an enforceable undertaking (EU) to APRA to remediate controls risk, risk culture, governance and accountability issues akin to the EU provided to APRA by Westpac in 2020.
What they said: "We believe [Westpac]’s APRA EU has been one of the key driver’s of [its] operational underperformance over the last four years," Khan said.
"We see risk of similar multi-year operational underperformance for ANZ."
APRA increases ANZ’s capital overlay on bad bond behaviour
The news: The Australian Prudential Regulation Authority (APRA) has increased the capital add-on applied to ANZ by $250 million to $750 million in response to heightened concerns about the bank’s non-financial risk management practices.
The numbers: APRA has held longstanding concerns with ANZ’s non-financial risk management, and imposed a $500 million operational risk capital add-on to the bank in 2019 to reflect deficiencies in its risk governance.
The context: This capital add-on has remained in place as the bank implemented a remediation program. Despite this program being in place for several years, APRA said it is yet to observe significant improvements in ANZ’s non-financial risk management.
More recently, several issues emerging in the bank’s markets business have increased APRA’s concerns, after it admitted to misreporting bond trading data in FY23.
While ANZ has launched several investigations into these issues, the big four lender has yet to adequately address deficiencies in controls, risk culture, governance and accountability, according to the APRA.
In response, APRA will require ANZ to:
- Hold an operational risk capital add-on of $750 million, representing an increase of $250 million to the existing add-on;
- Appoint an independent party to review the root causes of recent issues and risk governance in the markets business, and assess the potential impacts across the broader bank; and
- Develop a remediation plan to address findings from the independent review.
The capital add-on will remain in place until such time as ANZ has delivered required remediation to APRA’s satisfaction.
What they said: APRA chair John Lonsdale said he was concerned at the persistence of risk governance and culture issues within one of Australia’s largest banks.
“ANZ is financially sound with strong capital and liquidity levels,” Lonsdale said.
“However, weaknesses in managing non-financial risk can lead to detrimental financial impacts and APRA has no tolerance for such weaknesses persisting.
“Of the major banks that had capital add-ons applied in 2019, ANZ is the only bank yet to have its add-on either removed or reduced.
"While the bank has implemented actions to improve its risk governance and culture over the past five years, these recent issues suggest there continues to be material gaps that need to be closed as a priority.
“We have communicated our clear expectations to the ANZ board and executive team that these issues must be urgently reviewed to ensure underlying drivers are identified and addressed. Depending on the outcomes from ANZ’s independent review, APRA will consider whether further action is required.”
The source: APRA media release
