The Reserve Bank of New Zealand (RBNZ) has handed down its decision about how much capital New Zealand banks need to hold, is the National Australia Bank Ltd (ASX: NAB) share price a buy?
Investors seem to think so with the NAB share price up 1.5% in early trading. NAB is represented in New Zealand with its subsidiary Bank of New Zealand which NAB acquired in 1992.
Macquarie Group Ltd (ASX: MQG) had previously estimated that NAB may need to raise around $4 billion to reach the expected capital levels set by RBNZ.
Today we learned that RBNZ will require the New Zealand subsidiaries of the big ASX banks of NAB, Australia and New Zealand Banking Group (ASX: ANZ), Westpac Banking Group (ASX: WBC) and Commonwealth Bank of Australia (ASX: CBA) to lift their CET1 to 16% of risk-weighted assets.
However, banks will have an additional two years to reach the capital requirement and there will be additional financial tools that can count as high-quality capital.
With higher capital requirements there will be two main ways that banks can reach the requirement, either raise capital or keep more profit in New Zealand. If banks keep more profit in New Zealand it could mean less profit to fund the dividends that the banks pay to ASX shareholders.
However, banks are expected to increase their interest rates for borrowers in New Zealand to account for this increased capital requirement. The RBNZ said interest rates are expected to rise by around 0.20% (20 basis points).
Foolish takeaway
In a GFC it will make New Zealand banks very safe, but less profitable during regular times. NAB is trading at under 12x FY21's estimated earnings with a grossed-up dividend yield of 9.4%.
NAB is better value than it was earlier this year, but I don't see much return potential except for the dividend, which is at risk of being reduced again, particularly if NAB faces any AUSTRAC issues. I believe there are better shares out there for dividends and growth.
