NAB seeks $2.75bn in capital

National Australia Bank yesterday negotiated the sale of $2 billion in new shares to institutional investors in the bank's second major capital raising since the credit shock hit with force two years ago. The bank agreed to sell the shares at a price of $21.50 a share, The Australian reported, and at a discount of nine per cent to the price of NAB's shares on the ASX on Tuesday.

The bank plans to sell a further $750 million to retail investors under a share purchase plan.
 
The rally in the Australian, and global, stock markets over recent weeks probably explains the timing of NAB's move to raise additional capital. The considerable support from retail investors for the corresponding share sales by Macquarie Group and ANZ over the last two months may also inform the timing.

NAB has immediate and medium-term reasons for needing new capital.

The bank most likely will have to take provisions in the face of adverse rulings on long running tax disputes in Australia and New Zealand, and the bank may yet need to top up provisions on the troubled portfolio of collateralised debt obligations first disclosed a year ago.

The quick increase in problem loans disclosed in the third quarter trading update provides a further, immediate need for capital.

Other reasons advanced by NAB's managing director, Cameron Clyne, in a briefing yesterday was to "maintain maximum flexibility to support our customers and take advantage of strategic opportunities that may arise."

Consistent with past rhetoric from the bank, this might include the opportunistic purchase of bank and non-bank businesses in Australia and offshore, but ones referred to by Clyne as "bolt-on". He mentioned the purchase of a cluster of branches in Colorado in the US as one example (through NAB subsidiary Great Western Bank) as well as the purchase of Aviva's wealth management platform last month.

A third rationale for the capital raising is to support lending growth in business banking in Australia, not that there is much growth in demand at present.

The additional capital raised will lift NAB's tier one capital ration to around nine per cent as of June 2009, from 8.2 per cent.