Banking sector - The race to raise capital
27 Aug 2015
By Shadforth Financial Group
One of the main themes from the company reporting season so far is the race for the major banks to boost capital on their balance sheets, with ANZ and Commonwealth Bank announcing equity raisings. Australian banks have announced a combined $16 billion of capital raising this year to meet increased capital requirements from regulators, surpassing the $13 billion raised during the Global Financial Crisis.
The capital raising announcements come off the back of a $5.5 billion capital raising in May by National Australia Bank to boost its capital levels before the demerging of its UK business and Westpac's $2 billion raising via the underwriting of its dividend reinvestment plan.
ANZ surprised the market by announcing a $3 billion capital raising via a $2.5 billion share placement to institutions and a $500 million share purchase plan for retail investors. ANZ didn't want to be last to market, which is the reason it rushed to raise capital ahead of the Commonwealth Bank's full year result announcement.
Commonwealth Bank announced a $5 billion capital raising via an Entitlement Offer. Commonwealth Bank already had a strong balance sheet, with the raising predominantly to meet the $4 billion of additional capital the bank calculated it would need as a result of the Australian Prudential Regulation Authority (APRA) increasing mortgage risk weights from 16 per cent to 25 per cent.
APRA chair Wayne Byres recently backed banks taking early action to raise their capital levels. Mr Byres commented that the regulator 'fully' supported the first recommendation of the financial system inquiry, that banks be 'unquestionably strong.'
The short-term effect of maintaining higher capital levels will be modestly lower returns on equity and lower growth in earnings per share and dividends. However, we believe the major banks are in a strong position to cope with the higher capital impost. Importantly, higher capital requirements will strengthen balance sheets and underpin more sustainable long-term profit and dividend growth.
Despite the soft economy, operating conditions for the banks are supportive of further respectable earnings and dividend growth, with solid credit growth boosting top-line revenue, good deposit growth, broadly stable margins, tight control of operating expenses and benign bad debts. Loan impairments may potentially start increasing in late 2016 as the credit cycle inevitably turns. Risks are centred on low interest rates boosting property markets to unsustainable levels and a sharp deterioration in economic conditions.