NAB sorts out its capital and rating
In most other parts of the world banks have, over the last year, raised capital largely in order to fund long delayed write-downs. In many cases, a large capital raising was merely the prelude to another one soon after. So is National Australia Bank, which soaked up $3 billion in ordinary shares, at $20 a share, and at a 10 per cent discount to its previous share price, that much different?
The sequence of administration and receivership of ABC Learning and Allco Finance last week, and with plenty of rumours that Centro Property Group will be next, highlights that the formal provisions of Australia's banks are probably inadequate in comparison to the level of their loans to these companies.
On the other hand the equity and credit markets worked out the likely losses long ago, even if bank provisioning practices and international accounting standards wear some blame for restricting the level of provisioning to date.
At NAB, which has ditched its prior plan to underwrite its current and next dividend reinvestment plans, the capital raising is largely about restoring its credibility with key stakeholders, including credit ratings agencies and credit investors, and giving the bank the strategic flexibility it lacked a month ago.
NAB had to bow out of making a bid for Suncorp on the weekend of 11 and 12 October in part because of the adverse view of Standard & Poor's on the bank's AA-credit rating.
Yesterday's capital raising, which lifts that tier one capital ratio to in excess of eight per cent, led S&P to revise the outlook to stable.
The bank had scratched around over the last few weeks trying to work out a model for a hybrid capital instrument but, as with Bendigo and Adelaide Bank last week, and AMP as well, NAB concluded that this was not viable. This is largely due to the declining prices, and high yields, on hybrid paper in the secondary market, a trend largely created by the guarantee on bank deposits.
The question remains, however, how much business growth NAB (and other banks such as ANZ that follow them into the market to raise more capital than previously planned) can tolerably pursue.
Offshore credit investors remain wary of Australian banks largely because they remain wary of most banks.
Domestic credit investors are taking very short-term decisions about where to place their money as the November 28 date for the implementation of the paid version of the government guarantee on deposits of more than $1 million approaches.
The takeover on NAB's short-term horizon is Wizard Home Loans, which The Australian's columnist John Durie reported yesterday NAB was expecting to buy for as little as $20 million.
The medium-term prospect remains Suncorp, and the board of the Queensland bank will be hoping that ANZ and other banks manage to follow NAB into the equity market and produce some additional value for its banking business.