Corporate Finance - Bank Case Study
Bendigo Bank Case Study 2011
Question (1): Capital Structure and Financing in the Banking Industry
Introduction
Australian banks are an interesting case of capital structure and financing considerations as far as companies go, in that they are regulated in a number of ways by the Australian Prudential Regulatory Authority (APRA) and the Reserve Bank of Australia (RBA).
Considerations of capital structure have the effect of reducing the cost of capital and so in turn increase the value of the firm (Ross, S. 2011).
APRA and the RBA together impose certain requirements on all Authorised Deposit-taking Institutions (ADIs) in relation to their capital make-up and their financing operations.
Differences in Capital Structure
ADIs are the only institutions permitted to engage in deposit taking activities. Customer deposits being a liability along with unsecured notes and which are therefore a form of ‘debt’ means that a large proportion of a bank’s capital is made up of this form of debt.
In addition to financial leverage considerations (i.e. debt to equity) banks must maintain a Capital Adequacy Requirement (CAR) which under the Basel II Accord stipulates that a bank must hold capital above an amount which is set by the Capital to Assets Ratio (CAR) of 8% Tier I and Tier II capital combined (with a minimum of 4% being of the Tier I type). This means that banks must have at least as much capital in the prescribed forms as represents 8% of its total assets (which are principally comprised of loans in a similar way as deposits comprise the majority of liabilities).
Capital in the form of ‘equity’ shares may be freely issued in the same way as any other form of company, just as a bank may use retained earnings to reduce the need to raise financing via any type of either debt or equity channel.
Financing Requirements
Since deregulation in the 1980s, Australian banks have adopted the strategy of making profits through liability management
Question (1): Capital Structure and Financing in the Banking Industry
Introduction
Australian banks are an interesting case of capital structure and financing considerations as far as companies go, in that they are regulated in a number of ways by the Australian Prudential Regulatory Authority (APRA) and the Reserve Bank of Australia (RBA).
Considerations of capital structure have the effect of reducing the cost of capital and so in turn increase the value of the firm (Ross, S. 2011).
APRA and the RBA together impose certain requirements on all Authorised Deposit-taking Institutions (ADIs) in relation to their capital make-up and their financing operations.
Differences in Capital Structure
ADIs are the only institutions permitted to engage in deposit taking activities. Customer deposits being a liability along with unsecured notes and which are therefore a form of ‘debt’ means that a large proportion of a bank’s capital is made up of this form of debt.
In addition to financial leverage considerations (i.e. debt to equity) banks must maintain a Capital Adequacy Requirement (CAR) which under the Basel II Accord stipulates that a bank must hold capital above an amount which is set by the Capital to Assets Ratio (CAR) of 8% Tier I and Tier II capital combined (with a minimum of 4% being of the Tier I type). This means that banks must have at least as much capital in the prescribed forms as represents 8% of its total assets (which are principally comprised of loans in a similar way as deposits comprise the majority of liabilities).
Capital in the form of ‘equity’ shares may be freely issued in the same way as any other form of company, just as a bank may use retained earnings to reduce the need to raise financing via any type of either debt or equity channel.
Financing Requirements
Since deregulation in the 1980s, Australian banks have adopted the strategy of making profits through liability management