TEXT-Fitch: No Impact on Australian Bank Hybrid Ratings from Removal of Annual Profits Test

SYDNEY, October 02 (Fitch) Fitch Ratings says there will beno rating impact on Australian bank hybrid capital instrumentsfrom the Australian Prudential Regulation Authority's (APRA)decision

to remove the requirement for it to approve couponpayments that exceed after-tax earnings (the annual profitstest).

The change comes as part of APRA's final Basel III capitalstandards which were published on 28 September 2012. APRA hasstated that it now considers the costs of maintaining the annualprofits

test on bank hybrid capital instruments to outweigh thesupervisory benefits, given the fundamental change to the natureand required levels of hybrid capital under Basel III.

The removal of the annual profits test eliminates one easilyactivated loss absorption trigger of Australian bank hybrids.However, this removal has no impact on coupon payments remainingfully

discretionary for Tier 1 hybrid instruments, which Fitchviews as the most easily activated loss absorption trigger. Thisis reflected in Fitch notching Tier 1 hybrids three levels belowa

bank's Viability Rating (VR). When combined with a two-notchreduction for loss severity, Fitch will continue to rateAustralian bank Tier 1 hybrid instruments five notches below abank's VR.

APRA approval will still be required by Australian banks topay ordinary share dividends that exceed after-tax earnings.

APRA's Basel III rules will be introduced from 1 January2013, ahead of the timeframe set out by the Basel committee. Thefinal rules are largely in line with APRA's previous indicationsand do

not alter Fitch's view that Australian banks are wellpositioned to meet the Basel III capital requirements.

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