Given that these disclosures have started to settle down into a slightly more regular pattern, I will be expanding my analysis to look at more areas. In particular, I intend to look at what the actual content of the numbers is saying about the risks embedded in each of the banks. As the vast majority of the numbers relate to credit risk, this is where I am forced to concentrate.

Firstly, though, a big warning to all. All of these numbers below are based on the disclosed numbers *as I have read and, in some cases, aggregated*
them. They are not in any way official numbers from the banks and you
should go back to the source documents (as linked previously) if you
want to look at them seriously. As all of the tables I have used have
some variations across each of the documents I may have mis-interpreted
the numbers in some way. If you spot one, or merely have a question,
please put it in comments or contact me on the email address given on
the “Authors” page.

There are also a few oddities in the data that make me question my own numbers. So, please, do not rely on these and I will not be interested in any claims that you made any financial decisions based on the below. It’s a blog post, for heaven’s sake.

Disclaimer over – on to the numbers.

Maybe not quite yet – a few whinges in preparation. The inconsistencies in the deployment of the tables in APS 330 are interesting. For example, all of the banks break out the RWA numbers for securitizations, yet only Westpac takes the obvious step of then doing the same to the EAD numbers, making a straight comparison more difficult. Westpac, however, does not break out the Standardised portfolio into the categories – again comparison is then more difficult.

Could you guys just have a quick chat with each other and sort it
out? Preferably agree to follow Westpac on the securitizations and the
ANZ or CBA on the Standardised numbers. NAB – can you please sort out
where you put your “Other Assets” category? And can all of you *please* work out that using supervisory slotting for specialised lending *does not*
mean that SL assets are “Advanced”! Slotting is not an Advanced method
of managing credit risk – it is much more like a Standardised methods.
(end whinge).

The next post will cover the market, operational and other risks areas. Unfortunately, these cannot be covered in equivalent depth due to the lack of data noted earlier.

## Credit Risk Comparison

The main method I have used to compare the relative credit risk of the three banks is the ratio of RWA to EAD. This has the problems noted in that previous post – and one more. Unfortunately it is one that I do not have the numbers to properly overcome. The problem is a technical one – the way the EAD and LGD (a component of the RWA calculation) are normally calculated is in a model that combines the two into a combined LGD and EAD score – with the break up of these two factors being of no real importance to the capital calculation, but of major importance to my analysis. As it is, I can do no more than note that this is a problem, but I hope not a major one. If there are any suggestions on how to overcome it, I am all ears.

The reason I am using this ratio, though, is that it should do a good job of picking out the effects of the PD (the probability of default) and the LGD (the loss given default) on the overall portfolio – i.e. how good the past lending decisions are currently estimated to have been, given an APRA approved modelling of those factors. The more RWA for a given EAD number, the higher the PD and LGD are – and so the riskier the lending is calculated to have been.

If the RWA is close to zero as a percentage of EAD then the lending has been calculated to have been of low risk. The higher it goes, the riskier the lending has been modeled to have been. At 100%, the bank then carries the assets at full weight on its books. Much more than this and you are heading into equity levels of risk. At 300 or 400% you would expect equity-like returns from the assets.

The higher the RWA, the higher the capital load required to support that lending, so it also costs good money to have a high RWA. The minimum capital load is 8% of the RWA, but all of the banks have loads over over 11%.

I will look through these portfolio by portfolio.

### Corporate Lending

In this area the NAB has a much bigger portfolio than any of the others – combined Advanced and Standardised EAD is over AUD200Bn, with the ANZ next biggest at AUD152Bn. The NAB also comes out worst in my risk comparison, with an (Advanced) capital weight of 68%, compared to the leader (WBC) on 56%. Not much of a difference, but a substantial difference in capital needed. By my calculations, if the NAB had WBC’s risk weight here they could lose over $19Bn in capital without affecting their tier two numbers. Ouch.This is, of course, assuming you could do it without reducing lending margins – a questionable assumption.

This is the biggest capital sink for all the banks, with the RWA from this area typically being nearly half of the credit risk RWA for the banks. These sorts of numbers mean you need to keep rates fairly high to support it – and that is what you see out in the market. This is why the NAB have been making a bit of cash over the last few years – and it is also hurting them a bit now.

### Sovereign Lending

In lending to governments, CBA is clearly the leader in EAD terms (with the NAB not far behind), but also has the highest risk weight here. My guess is that most of this is from lending to overseas governments as the Australian governments’ risk weights should approximate nil. Even so, the risk weights are so low this has little effect on the overall capital numbers – with one exception.

Sovereign lending typically has a risk weight of less than 10% – as is the case here. The CBA, though, has one interesting little anomaly – they have a Sovereign Standardised EAD of AUD479m with a RWA of AUD430 – a risk weight of 90%. Odd. I was not aware they had been lending to some of the dodgier governments.

The numbers here are so small, however, we can safely move on.

### Bank Lending

As with sovereign lending, the risk weights here are quite small, almost all less than 20%. The CBA and the ANZ, though, both hit the upper bounds of that amount on their Advanced portfolios, so I would be interested where they had been lending. The NAB, by contrast, has been doing the safest bank lending (10%), with WBC close to that at 13%.

Again, the NAB has a fair amount in the Standardised numbers, but in this case they probably want to leave it in Standardised as the RWA percentage there is lower, meaning less capital needed – a rare advantage.

### Residential Mortgages

The residential mortgage numbers are interesting. As APRA have imposed a 20% capital flaw floor in this area the numbers here lack transparency, with all being around that number.

I am presuming the difference from 20% in the numbers is due to the EAD / LGD interplay discussed earlier. If so, WBC is doing the most to reduce the EAD numbers and increasing the LGD as they have come out at 16% to the NAB’s 22%. Just a guess on my part, but worth keeping in mind.

The portfolios here are large, though, so the RWA numbers are the second highest (after Corporate). Work here can get your capital numbers down some way, particularly if you can get parts of your portfolio from Standardised into Advanced – the Standardised weights are around 50%.

### QRR Lending

Qualifying Revolving Retail lending (credit cards and overdrafts) are always a good bellwether of the retail lending profile. In this, WBC is doing comfortably the best, with a ratio of 33% – CBA doing worst on 53%. CBA does have the smallest portfolio here, though (ANZ is the largest and also has the second best ratio). The portfolios are quite small overall, so of no real importance.

### Other Retail Lending

This is where things get a little messy – the “Other” categories are sort of tricky as what is in them is less certain, so the risk of comparing apples with oranges is higher. That said, there appears to be two definite categories here. CBA and NAB are both carrying these at 100% and WBC and the ANZ at around 55%. I would love to know the reason(s) for the difference.

## Summary

Surprisingly for a bank that is very profitable WBC comes up trumps here, with an overall ratio of 35%, the CBA with 37% trails slightly and the NAB are in a tie for last place at 46%. This means that WBC has actually reduced its ratio from the last set of reports (where it was 38%, second to CBA on 35% and the ANZ and NAB bringing up the rear again).

The difference here is due to the WBC having the smallest and safest Corporate book and also doing well in Mortgages – the two biggest areas. Commiserations to the NAB and ANZ – but then, they will normally get better profits during the good times and for the same reasons.

I have uploaded a pdf version of the spreadsheet, as linked below. Please feel free to check it and feed back any comments. If it affects the post I will update as appropriate.

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