Westpac Banking Group’s Chief Executive Officer, Brian Hartzer, provided markets with an unaudited third quarter 2016 financial year (3Q16) capital and asset quality update. The key take-outs were:   Capital – As at 30 June 2016 WBC’s Core Tier 1 (CET1) ratio was 10.1% (~0.40% lower than March 2016 due to payment of the interim dividend), the Tier 1 ratio 11.9% and Total Capital Ratio 14.0% (were 12.1% and 14.0% respectively). While the CET1 ratio was well above APRA’s regulatory minimum requirement of 8% it will fall to ~9.0% (WBC’s target range is 8.75 to 9.25%) when APRA’s new mortgage Risk Weighted Assets (RWA) changes come into effect on 1 July 2016. These numbers highlight the interplay between the dividend payout ratio and retaining capital within the business. While the CET1 ratio is solid compared to APRA’s regulatory minimum the high dividend pay-out ratio means the group struggles to maintain organic capital generation. This is also highlighted internationally comparable CET1 ratio falling from 14.7% to 14.1%. This in turn suggests it is difficult to remain in the top quartile (globally) from a Basel III international peer basis (APRA’s Insight Issue Two paper published on 4 July 2016 placed the top quartile mark at ~13%). A sudden deterioration of asset quality (i.e. provisions increasing at a higher than expected rate), would also place pressure upon the sector if this were to occur.   Provisions – WBC’s impaired assets were $52 million lower, 90+ day arrears (but not impaired) increased by $348 million over the quarter (2nd quarter increase was $232 million). The usual causes were cited, these being an increase in residential mortgage delinquencies within mining related towns situated in WA, Qld and SA. WBC also reported, unsurprisingly, increasing stresses in business loans to the mining sector representing $11.6 billion or 1.2% of group Total Committed Facility (TCE) and NZ dairy sectors (0.59% of TCE). The major risk remains in the commercial property portfolio (representing $67.0 billion or 6.91% of TCE).   Funding & Liquidity – The reported stable funding ratio was 84.0% (83.0% 2H16) with customer deposits representing 60% of total funding (60% March 2016). The liquidity coverage ratio was reported as 126% (127% March 2016). WBC’s cost of core funding rose by 10-20 basis points over the last 12 months due to higher term deposit rates relative to market rates and higher short term funding costs from both offshore costs and a widening of the Bank Bills/Overnight Index Swap Rate spread.   Overall these numbers are credit neutral.