The weekly wrap 2: cynicism over NAB and ANZ motives

When ANZ raised capital last week the bank's intentions were accepted as being of a "war chest" nature, to pursue further acquisition opportunities in Asia. A 9.5 per cent tier one capital ratio in the meantime was also welcome relief against bad debts.

But the more bearish brokers, such as RBS and Morgan Stanley, were more cynical, suggesting the additional capital was necessary in light of the brokers' shared view that ANZ would report a large leap in bad debts at its quarterly update.

The NAB capital raising this week was not specifically attributed by the bank to any one purpose either, leading to similar suspicions over asset quality. In the bank's accompanying update, management suggested three non-specific purposes - to assist in building market share in SME and institutional lending, to provide for any bolt-on acquisition opportunities, and lastly to provide more cover for contingent risk exposures. Broker responses were mixed.

Macquarie was cynical, noting "with no apparent earnings risk or corporate activity, the excess capital will initially be used to dilute return on equity and earnings per share." JP Morgan saw the sudden raise as merely opportunistic, cashing in on the recent rapid share price run.

Goldman Sachs JB Were (an underwriter to the share sale) downgraded its profit forecast but noted (or guessed) that this was above consensus. Interestingly, GSJBW is modelling an increase in NAB's net interest margin of five basis points compared with static margins in the models of most other sell-side brokers.

Leading bear RBS saw only a buffer against bad debts. But not all analysts were negative.

UBS called the raising "prudent" and Citi noted NAB now had "plenty of capital to pursue growth".

Plenty indeed. Once the adverse tax ruling from New Zealand is accounted for, NAB's tier one rises to 8.8 per cent - ahead of Westpac and CBA on 8.3 per cent, but below the 9.5 per cent ANZ war chest. Most brokers believe the greatest risk of bad debt growth now appears to have passed, as the Australian economy appears to have weathered the GFC storm rather well.

Bad debt growth will continue to lag nevertheless, leading to an expected peak some time in 2010, but NAB likely now has enough in provisions in most analysts' view.

JP Morgan warns, however, that other factors may yet impact on NAB's balance sheet, including the ultimate valuation of the bank's ever present suite of toxic assets of as yet indeterminate value. The broker believes the bank's ratio could yet fall below 8.0 per cent again.

And RBS is not convinced that NAB will not need to raise even more capital against continuing bad debt growth. NAB announced yesterday that non-performing loans as a percentage of the loan book reached 177 bps in the June quarter compared to 138 bps in March. The bulk of the blow-out came from the UK and nabCapital. While most analysts see these figures as being in line with expectation, RBS suggests they show a "significant deterioration".

On a net basis, brokers this week raised the average target price for NAB by 0.5 per cent. RBS joined in the upgrade.

Given ANZ and NAB have now raised "pre-emptive" capital within a week of each other, the market has become understandably concerned that Westpac and CBA must surely follow suit. However, analysts are largely in agreement that this is not the case.

Macquarie sums up the view, noting that the larger banks have no further acquisition targets, have no offshore problems or intentions, and have no toxic asset exposures of note to be worried about. The market should rest easy.

That does not mean, however, that bank analysts consider the bigger banks good value at this price level. CBA remains the net least preferred in the FNArena broker universe with a 0/5/5 buy/hold/sell rating, while Westpac slipped into third place on the table this week following a downgrade from Aspect Huntley from accumulate to hold, prompted by the recent share price run. Westpac now has a ratio of 1/7/2.

Citi was otherwise sufficiently reassured by the NAB capital raising to upgrade its rating from sell to hold. As the market becomes more confident in only a minor recessionary jolt in Australia, recent share price gains are making the "defensive" bigger banks look more overvalued to the "risky" smaller banks.

But has this recent run in the general market been just a bit too enthusiastic? GSJB Were suggests that while it pays to look through the earnings cycle to later recovery, the "hot" rally smacks of nervous fund managers, who were still hiding in cash, getting a case of the jitters to the upside. This is exactly the sort of psychological response that signals a market top.