Bendigo and Adelaide Bank (BEN) shares are expected to resume trading today after entering a trading halt to announce a capital raising to fund the $1.7 billion purchase of Rural Finance, from the Victorian Government.
The deal, and Westpac’s (WBC) record interim profit overshadowed news that the key banking regulator, APRA, is thinking of changing regulations that could put a crimp on the growth in bank dividend payouts.
It involves how banks structure themselves and raise money. It could see them having to find billions of dollars in new capital, something that could be done from retained earnings.
The proposal is just that at the moment, but it is something Bendigo has to keep in mind with its company defining deal.
Victorian Rural Finance is a government finance arm lending to agriculture industry.
The bank’s shares last sold at $11.39 and are expected to resume trading when the market opens on today.
Bendigo is undertaking a fully underwritten $230 million share placement to selected institutional investors.
The issue is priced in the range of $10.82 to $11.05 a share, a small discount to the last sale on friday.
As well as the placement, the bank’s shareholders can participate in a non-underwritten share purchase plan.
The bank will effectively pay around $400 million for the purchase, it will be acquiring around $1.7 billion in loans
The deal still has to be approved by the banking regulator, APRA.
The issue from Bendigo will have to be approved by the regulator as well to make sure that the bank has enough capital on hand to cover any worsening in any bad or doubtful debts it may be buying.
In a statement yesterday, Bendigo and Adelaide Bank said it expected to complete the purchase of the business and assets of Rural Finance by July and that it was “committed to maintaining Rural Finance’s distinct brand and its presence in 11 locations across Victoria”.
That was part of the agreement with the Victorian Government, which could limit cost savings for Bendigo.
“This transaction brings together two iconic Victorian businesses, both with long and proud histories of serving farmers and communities,” managing director Mike Hirst said in a statement.
Rural Finance’s loan book, which has an estimated value of about $1.695 billion, the statement said.
The deal will be a bit of a gamble for Bendigo – at $11.39 the company was valued at just $4.7 billion.
The deal will concentrate the bank’s involvement in the rural sector, leaving it exposed to any problems, such as drought.
The news was overshadowed by Westpac’s record profit and dividend payout.
Despite that Westpac was the biggest drag on the market yesterday, its shares fell 1.2%, to $34.45.
The financial services sector was the worst-performing sector, down 0.4% as other big four banks also fell.
The Commonwealth Bank lost 0.3% to $78.94, the ANZ Banking Group shed 1.1% to $33.97. The National Australia Bank shares fell 1% to $34.20 ahead of its results on Thursday. Macquarie shares jumped 3% to $60.46.
The banks fell not because the Westpac result was poor (far from it), but because APRA is looking at changing banking regulations which will force the big four banks to find up $8 billion in new capital.
It involves the treatment of intermediate holding companies (such as their wealth arms) and the issuing of capital through these wealth management subsidiaries (such as BT Financial Group in the case of Westpac or MLC in the case of the NAB).
At the moment there is a benefit for the banks’ Tier one capital, but the move will reduce that key capital ratio, if it happens.
All four banks have confirmed the possible move by APRA, but have played down the impact on their capital ratios.
Still banking analysts reckon the banks will have to raise more capital from retained earnings (by holding dividends down for the next couple of half year periods).
New equity issues have been ruled out for the moment.
All four banks have talked about funding any shortfall through "organic" means, which is code for using retained earnings and restricting dividend payouts until the capital hole is filled.
