Navigating Regulatory Shifts: The Impact of Capital Review on ANZ and Westpac's Valuation Potential

The global financial crisis of 2008 left an indelible mark on banking regulation, but the post-Basel III era has introduced a new tension: balancing financial stability with economic growth. In 2025, Australia and New Zealand are recalibrating their capital requirements, with profound implications for major banks like ANZ and Westpac. These regulatory shifts are not merely technical adjustments—they are strategic recalibrations that will shape risk-adjusted returns, competitive positioning, and long-term sector dynamics.

New Zealand's Capital Reassessment: A Test of Pragmatism

New Zealand's Reserve Bank (RBNZ) has embarked on a bold review of its 2019 capital requirements, which had imposed some of the world's strictest equity buffers. The proposed cuts—from 9% for top Australian-owned banks to 8%, and 7% to 5% for mid-sized institutions—aim to reduce compliance costs and lower barriers to entry for new competitors. This move reflects a growing recognition that excessive capital demands can stifle lending and drive up borrowing costs for households and businesses.

For ANZ Bank New Zealand (ANZ NZ), the potential easing of capital requirements is a double-edged sword. On one hand, reduced buffers could free up capital for lending or shareholder returns, aligning with the RBNZ's goal of fostering economic growth. On the other, the bank must navigate a competitive landscape where open banking and customer switching are accelerating. ANZ NZ's proactive engagement with parliamentary inquiries and its commitment to open banking infrastructure suggest it is positioning itself to thrive in a more dynamic market.

Australia's Flexible Approach: Risk-Based Resilience

In contrast, Australia's Australian Prudential Regulation Authority (APRA) has opted for a more nuanced, risk-based framework. By allowing banks to rely on internal ratings-based (IRB) models, APRA is enabling capital ratios that better reflect a bank's actual risk profile. This approach, while less rigid than New Zealand's standardized requirements, demands robust risk management capabilities.

Westpac's strong capital position—CET1 at 12.3% as of Q3 2025—positions it to leverage this flexibility. Its ability to maintain a core net interest margin (NIM) of 1.85% despite competitive pressures underscores its operational efficiency. Meanwhile, ANZ's struggles with a declining CET1 ratio and NIM of 1.43% highlight vulnerabilities. APRA's recent imposition of a $1 billion capital add-on on ANZ, following concerns over non-financial risk management, further complicates its outlook.

Valuation Implications: Risk-Adjusted Returns in Focus

The divergent regulatory paths of Australia and New Zealand are reshaping the valuation metrics of ANZ and Westpac. In New Zealand, ANZ NZ's exposure to rate cuts (250 basis points since August 2024) has boosted its lending margins, potentially offsetting the drag from lower capital buffers. However, in Australia, ANZ's regulatory headwinds—higher capital costs and reputational risks from APRA's scrutiny—could constrain its ability to compete with Westpac.

Westpac's disciplined margin management and robust capital buffer provide a buffer against economic volatility. Its 14% quarterly profit growth in Q3 2025, despite a 4.35% cash rate environment, demonstrates its resilience. For investors, Westpac's alignment with APRA's risk-based framework suggests a stronger capacity to navigate future stress scenarios.

Long-Term Sector Competitiveness: A Tale of Two Models

The regulatory experiments in both countries offer a microcosm of a global debate: Should banks be overcapitalized to ensure stability, or should regulators prioritize economic efficiency? New Zealand's approach risks undercapitalizing banks in a low-interest-rate environment, while Australia's flexibility could lead to uneven risk management practices.

For ANZ, the challenge lies in harmonizing its operations across two regulatory regimes. Its New Zealand arm benefits from easing capital rules, but its Australian division faces heightened scrutiny. This duality could create valuation asymmetries, with ANZ's New Zealand business acting as a growth engine while its Australian operations absorb compliance costs.

Westpac, meanwhile, is better positioned to capitalize on Australia's flexible framework. Its capital strength and margin discipline align with APRA's emphasis on risk-based prudence. However, the bank must guard against complacency in a sector where customer expectations and technological disruption are reshaping competitive dynamics.

Investment Outlook: Balancing Prudence and Opportunity

For investors, the key takeaway is that regulatory shifts are redefining the risk-return profiles of major banks. Westpac's robust capital position and alignment with APRA's evolving framework make it a more attractive long-term play in Australia. Its ability to maintain profitability in a high-rate environment, coupled with a CET1 buffer above its target range, suggests resilience.

ANZ's valuation potential is more nuanced. While its New Zealand operations could benefit from regulatory easing, its Australian challenges—higher capital costs and risk management overhauls—pose near-term headwinds. Investors should monitor ANZ's progress in addressing APRA's concerns and its ability to leverage New Zealand's more accommodating capital rules.

Conclusion: The New Normal in Banking Regulation

The 2025 regulatory reviews in Australia and New Zealand underscore a broader trend: regulators are increasingly prioritizing economic efficiency without sacrificing stability. For banks like ANZ and Westpac, the ability to adapt to these shifting sands will determine their long-term competitiveness. Investors must weigh not just current profitability but also the regulatory tailwinds and headwinds that will shape these institutions in the years ahead. In a world where capital rules are no longer static, agility and prudence will be the twin pillars of success.