Westpac’s move to raise $2.5 billion from a placement of shares to institutional investors ruined the small market rally yesterday, sending banking stocks sharply lower as it reminded investors of their year long worries about the bad debt and capital positions of the banks.
Westpac shares were suspended at $17.88 yesterday to allow the placement to take place: that was Monday’s close when the shares rose $1.03.
The shares will resume trading, probably today after the bank confirmed last night it had finished the raising.
Westpac’s issue takes the value of stock offerings by the nation’s four biggest lenders to more than $10 billion this year
The news kicked the market lower after solid gains in Europe and the US after the strong day in Asia on Monday. Asia had another solid day yesterday, except here where prices were lower because of the banks.
Resources did well.
The ASX 200 finished down 0.8%, or 27.3 points, at 3604.3, while the All Ords was down 0.6%, or 20.1 points, at 3533.7.
The Commonwealth lost more than 8% to $30, a loss of $2.80. The ANZ fell 5.5% to $14.10 and the NAB was off 5% at $19.09. It was an expensive day for shareholders in other banks because of the Westpac move to raise capital.
Now investors are wondering if the Commonwealth will go again for the second time in two months after it raised $2 billion to finance the purchase of BankWest.
Westpac says the capital raising will further increase its resources, enhance its balance sheet flexibility and will position the organisation to capture organic growth opportunities.
But in reality it has been a long time coming, as analysts conjectured about just how the bank would repair the hit to its tier one capital position from the $14 billion St George takeover.
That was a 1.1 Westpac share for every St George share, but because the bank was buying a lower rated bank (A versus Westpac’s AA).
This is in fact the capital raising Westpac has needed to make for months, and yet it has happened at a time when the shares are close to recent lows.
The bank’s share price was trading at over $23 a share earlier in the year when it was planning the St George purchase and it could have been done then, meaning less dilution for existing shareholders.
The bank mentions added bad debts in yesterday’s statement: earlier in the year they were unknowns, which would have made the issue a little easier to get away.
It will find it easy to raise the funds this time given that it is flavour of the month after the St George buy.
The bank said the extra funds will add about 0.92% to Westpac’s capital ratios and boost its Tier 1 capital to around 8.32%, on a pro-forma basis.
Westpac, which recently took over St George Bank, had said in October that its Tier 1 capital target range was 6.75% to 7.75%.
However, due to the current highly uncertain environment the bank also said it would operate above that range "from time to time".
Westpac said the decision to raise $2.5 billion from a share sale took into consideration more challenging hybrid debt markets. (No one wants to buy them because of the debt element which is bad news in these risk averse days.)
It also considered opportunities for growth, the impact of a slowing economy and further deterioration in credit conditions.
"Demand for Westpac’s balance sheet is expected to increase in the coming period including from the maturity of corporate bonds and a reduction in foreign bank capacity for Australasian corporates,” it said.
"Decisions to extend funding will need to meet Westpac’s normal lending criteria and be within acceptable company and industry limits.”
Westpac said on Tuesday its performance in the first two months of fiscal 2009 had been sound and that the overall earning trend was in line with its fiscal 2008 second half performance.
"The first two months have been impacted by higher impairment provisions, including the top-up to provisions for previously announced exposures, including Allco and ABC Learning, as well as for one corporate downgrade," it noted.
Westpac said the placement, which is fully underwritten, will not be increased.
After the placement, Westpac will also offer its retail shareholders the opportunity to participate in a non-underwritten share purchase plan.
The plan offers eligible ordinary shareholders registered by the close of business on Monday the chance to subscribe for up to $10,000 worth of shares.
And Bluescope Steel went into a trading halt yesterday as it joined the queue of fund raising companies.
The shares last traded at $4.03. The trading halt will remain until the start of trading on Thursday, or when the announcement is made.
