The Commonwealth Bank of Australia (ASX: CBA) share price is surging higher following APRA's announcement on bank capital requirements.
CBA Share Price
The chart above compares the Commbank share price to that of its rivals, Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd. (ASX: NAB).
At the time of writing, the Commbank share price is up 2.6%. Well ahead of the market, or S&P/ASX 200 (Index: ^AXJO) (ASX: XJO), which is up 0.7%.
The catalyst behind the share price increase is an announcement from Australia's banking watchdog, APRA, which released its new capital framework today.
Basically, APRA was due to release new reforms that set tough capital standards for Australian banks.
Banks — and shareholders — were worried that the rules would force them to raise capital by selling shares or cutting dividends. Pleasingly, the new rules do not seem too bad.
From 2020, the big four banks will need to maintain a 10.5% CET1 capital ratio.
Commbank had a CET1 capital ratio of 9.6% at March 31, 2017, which is less than that of NAB's 10.1% and Westpac's 10%.
However, Commbank has three years to accumulate more capital.
"CBA is well positioned to meet this new capital benchmark," Commbank Chief Financial Officer, Robert Jesudason, said.
"We will provide a more detailed update on these matters when we present our annual results on 9 August 2017."
What was equally pleasing for bank shareholders was APRA's comment regarding the current international banking reforms which could influence its requirements. It said that any changes made at the international level will be factored into the new requirements.
APRA stated that, "it expects that any changes to the capital framework that may eventuate from the finalisation of international reforms will be able to be accommodated within the calibration set out in this paper, and will not necessitate further increases to requirements at a later date."
Foolish Takeaway
Commbank is behind some of its peers with regards to its CET1 capital ratio, but it's not too far behind. Therefore, rather than cuts to dividends or new capital raisings, it may only mean that growth in the bank's dividends will be slowed or that its dividend reinvestment plan (DRP) will be funded by issuing new shares opposed to internal cash.
