Accounting change dents Aussie bank earnings

The four largest Australian lenders lost around A$2.7 billion ($2 billion) in earnings on the switch to new accounting standard AASB 9, Risk Quantum analysis shows.

Two of the firms – Westpac and ANZ Bank – implemented the new framework, the Australian equivalent of IFRS 9, on October 1. Westpac estimated a A$709 million earnings deduction net of tax, equivalent to a 16 basis point cut to its Common Equity Tier 1 (CET1) capital ratio. Its actual end-September ratio was 10.63%.  

Westpac said the earnings cut would result largely from the increase to loan-loss provisions impelled by the new standard. 

ANZ Bank anticipated a smaller, 6bp CET1 ratio shrinkage on transition to AASB 9. It quantified the fall in CET1 capital at A$246 million. Its end-September CET1 ratio was 11.4%.

The other two big Aussie banks adopted the accounting standard earlier: Commonwealth Bank on July 1 this year and National Australia Bank on October 1, 2014.

Commonwealth Bank said the transition crimped earnings by A$1 billion and zapped 18bp from its CET1 ratio, which was 10.1% at end-June. The latter reported a $725 million hit to earnings and a 13bp bite from a CET1 ratio of 8.63%.

What is it?

AASB 9, issued by the Australian Accounting Standards Board, replaces AASB 139 and provides a new method for classifying financial assets and liabilities, calculating the amount of reserves that need to be put aside against loans and determining which instruments qualify for hedge accounting.

Under the standard, loan-loss provisions are sized according to the credit quality of assets. Those that have experienced a slump in creditworthiness, but are not in arrears, are assigned provisions in line with their expected future losses. This is different from AASB 139, which only required provisions to be put aside when obligors actually fell behind in their repayments. 

AASB 9 is applicable for annual reporting periods as of 2018, although firms have been able to adopt early for periods from July 24, 2014.

Why it matters

Loan-loss provisions are drawn from retained earnings, which are also the primary component of CET1 capital. Higher provisions, like those mandated under AASB 9, therefore mean lower capital. 

The drain to CET1 appears muted across the Australian big four, but the effects do tell us something about each bank’s loan book and forward-looking scenario planning. In general, the more severe the ratio reduction, the more assets a bank projects it will need to strengthen provisions for in an economic slowdown.

On this basis, it appears that ANZ Bank is less vulnerable to loans souring in future and drawing more in provisions than its peers.

Get in touch

What else can we learn from Aussie banks' transition to AASB 9? Let us know by emailing [email protected] or sending a tweet to @LouieWoodall or @RiskQuantum.

Tell me more

Commonwealth Bank hikes loan reserves on accounting switch

Stronger loans buttress ANZ profits, suppress RWAs

View all bank stories

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