The weekly wrap 2: regionals looking a little desperate
The interesting news of the week in the banking sector was a capital raising from Bank of Queensland. The regional bank has been undertaking a strategic review, which is code for shopping around for a suitor, or at least major investor.
Management had nothing to say on the matter of suitors when it suddenly announced a $340m rights issue. BOQ tried to throw a party but no one showed up.
While not putting in quite the performance of the big banks during the stock market rally, BOQ hasn't missed out. General sentiment has lifted to re-rate PE multiples as noted, so if ever there was an opportune time to raise fresh capital, it was now.
The raising would take BOQ's tier one capital up to a comfortable 9.9 per cent, allowing it to pursue "emerging growth opportunities", in the words of management. Not all analysts were convinced.
As the Wrap noted two weeks ago, when rival regional Bendigo and Adelaide was forced to make yet another profit guidance downgrade, the regional banks are doing it tough. They do not have the capital of the big banks, nor the deposit bases, nor the credit ratings, nor the funding opportunities.
What they do have is rising bad debts from hard-hit regional areas (unemployed Queensland miners, for example) which will likely linger longer while the bigger banks begin to see bad debt levels decline. They have also seen competition for new business lost to the bigger, safer majors.
While one or two brokers saw the additional capital as providing comfort (Macquarie upgraded from Underperform to Neutral), others saw only desperate measures and further dilution of the shareholder base.
Deutsche Bank noted BOQ's return on equity would be diluted by about 10 per cent, which would drag overall return on equity below the bank's cost of funding in the near term.
Faced with potentially negative growth, that tier one capital ratio can only erode while BOQ still stares down some material exposures, including the matter of Storm Financial. Deutsche maintained a Sell rating.
Ironically the only Buy rating in the FNArena universe (the Buy/Hold/Sell ratio on BOQ is 1/5/4) comes from RBS, which up until recently had a Sell on all banks. RBS believes BOQ is now set to improve its banking margins, so the analysts were happy with additional funds tagged for growth opportunities.