Shareholders in Macquarie Group Ltd (ASX: MQG) are sitting pretty over the latest declaration by the Australian Prudential Regulatory Authority (APRA) that big banks need to hold more capital.
The big four banks, Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd. (ASX: NAB) are all considering a variety of options including capital raisings and the issue of hybrid securities to fund their capital shortfalls.
A word of warning for investors: Many ordinary bank shares are actually offering a yield higher than that typically paid out for hybrid securities – and that's before the risks of owning hybrids are taken into account.
Macquarie investors are likely to avoid that situation entirely however, with the bank announcing yesterday that increased capital requirements would be met internally without any need for fundraising.
As a caveat, the bank mentioned that any 'significant, one-off acquisitions' – like the recent purchase of a fleet of aircraft – would have to be met through a capital raising at the time they occur.
This means Macquarie Group investors may expect to avoid earnings dilution from capital increases, a dilution that big four shareholders are yet to face. With investor lending slowing and a weak outlook for consumer credit thanks to weaker wage growth and persistent low sentiment, the big four banks could be looking at an earnings peak sooner rather than later.
Meanwhile, in the same announcement yesterday, Macquarie delivered an earnings upgrade. Instead of expecting profit to be 'slightly up' (thanks to a lower tax rate), it looks as though profit will now simply be 'up' on 2015 – no doubt thanks to actual earnings growth.
These two benefits combined make Macquarie Group my favourite pick in Australia's banking sector right now, but it's far from the top of my 'Buy' list.
