Westpac (WBC) will sting its home loan customers by raising home mortgage rates to help build up its capital base, rather than forcing shareholders to accept no increase, or a reduction in their dividends to achieve the same end.
As well it will take its total capital raising to $6 billion this year with a discounted entitlement issue to raise $3.5 billion.
In a series of announcements yesterday, Westpac revealed record full year earnings and dividend and said it would raise home loan rates by 0.2% as part of moves to meet the new APRA requirements for banks to hold more capital against their mortgages.
The rate increase will start for all customers from November 20 and will apply to holders of mortgages issued by Westpac. Home loans from other banks in the group, Bank of Melbourne and St George are not affected – for now, but look like rising once a review is completed.
Headline interest rates at the country’s second biggest bank will rise to 5.68% for owner-occupiers and top 5.95% for investors.
The bank also announced it will raise $3.5 billion through a discounted share issue to shareholders to boost its capital reserves.
The new shares will be issued at $25.50, representing a 13.6% discount to the dividend-adjusted closing price on October 13 (Tuesday) of $29.50. Westpac shares were halted yesterday to allow the institutional part of the issue to be carried out.
And the bank rushed out its 2014-15 profit (it was due to report on November 2) and revealed a rise and a higher dividend. Statutory net profit rose 6% to $8.012 billion and the more preferred cash earnings edged up 3% to $7.82 billion.
Seeing first half cash earnings were up 8% at $3.77 billion, the bank saw slowdown in the second half (but not in its core Australian bank where cash earnings were up a solid 8% for the year).
And a final dividend of 94 cents a share has been announced, up 2 cents a share. The interim dividend was upped 4 cents a share to 90 cents, meaning that rather than cut payouts to shareholders to boost capital to meet the new regulatory requirements, Westpac will sting home loan customers (and no doubt credit cards and business loans as well).
Westpac’s return on equity (the measure of profitability all watch) fell 0.57% to 15.8%. That is still very strong, despite suggestions the fall represented a weakness.
Importantly the bank’s net interest margin was unchanged at 2.08% (which was a strong performance given the two reductions in interest rates this year). Impairment charges were higher, not because of higher bad debts, but higher write-offs and lower benefits from what the bank called ’stress reduction’.
It is clear the bank wanted to boost dividend to make the $3.5 billion share raising more attractive to shareholders (especially retail holders) – so it couldn’t ask shareholders to accept a lower dividend.
Westpac raised $2 billion at its half-year result in May and then in June reduced its stake in its wealth management arm (BT) and raised more than half a billion dollars.
The National Australia Bank raised $5.5 billion as well in May to help it improve its UK banks to make them fit for sale. In August, ANZ Banking Group raised $3 billion and the Commonwealth picked up just on $5 billion. All up the big banks have raised just on $20 billion this year.
But so far Westpac is the only one to force home loan customers to help pay for the higher capital costs insisted on by regulators.
Westpac CEO Brian Hartzer said the result was driven by “a solid operating performance, supported by strong gains in customer numbers”.
The capital raising will be a 100 basis points addition to Westpac’s common tier one equity capital ratio, and take its top level capital ratio to 14%.
Westpac said this raising places its capital ratio "within the top quartile of banks globally".
“Capital raised responds to changes in mortgage risk weights that will increase the amount of capital required to be held against mortgages by more than 50 per cent, with the increased regulatory required to be applied from July 1, 2016," the bank said in yesterday’s statement.
The increase in mortgage rates would also help meet the capital requirements, the bank said.
UBS and Merrill Lynch are handling the capital raising.
