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09-08-2015, 11:13 PM
Investors brace for $5bn CBA equity raising
THE AUSTRALIAN AUGUST 10, 2015 12:00AM
Michael Bennet
Reporter
Sydney
For the year to June 30, CBA is expected to report a 5 per cent rise in cash profit to a record $9.1bn Source: Supplied
Commonwealth Bank will this week hand down its most hotly anticipated annual results in years, with the lender’s profit of more than $9 billion to be overshadowed by efforts to increase capital levels and the health of its loan book.
After ANZ got the jump on its rival and raised $2.5bn from institutional shareholders last week, investors are bracing for CBA to press the button on an equity raising of up to $5bn at its results on Wednesday.
Bendigo and Adelaide Bank will today report an expected $435 million full-year cash profit and provide insight into the industry’s margins amid hot competition to write mortgages. Also today, National Australia Bank will also release its third-quarter earnings statement.
But the main event remains CBA’s result and potential capital raising, with investment banks UBS, Goldman Sachs, Credit Suisse and Morgan Stanley jostling to manage the potential deal, sources said.
“All eyes turn to CBA (on) Wednesday with an estimated ‘known’ capital shortfall of about $4.5bn,” Credit Suisse analysts said after ANZ’s deal. “While we could feasibly see a period of rolling dividend reinvestment plans, we consider a larger raising to be defensible and ultimately more prudent.”
Richard Wiles, an analyst at Morgan Stanley, said the last time the major banks undertook large equity raisings was during the global financial crisis, when it proved that the “first mover” could achieve a better issue price. He said that, with NAB and ANZ having completed equity raisings, investors had “turned their attention” to CBA and Westpac’s capital management initiatives.
The big banks are raising capital after the Australian Prudential Regulation Authority last month revealed their mortgage “risk weights” would have to increase to at least 25 per cent by July next year, equating to a combined $12bn in additional capital. APRA also told the banks that their overall “common-equity tier-one” capital ratios would need to rise, reducing their leverage and returns. Mr Wiles said: “Our forecasts assume partial second-half 2015 DRP underwriting to raise $2.5bn at CBA and $2bn at Westpac. However, for CBA, we see merit in a capital raising of $4bn-$5bn at its result.”
On Morgan Stanley’s numbers, the raising would boost CBA’s lagging CET1 to 9.4 -9.7 per cent, albeit not including the looming refinancing of debt in its wealth subsidiary with equity that will drag on its capital levels.
Analysts believe the major banks will ultimately need CET1 ratios of at least 10 per cent.
For the year to June 30, CBA is expected to report a 5 per cent rise in cash profit to a record $9.1bn and a final dividend of $2.21. But CBA’s surprisingly soft third-quarter trading update in May and ANZ’s slide in earnings last week have intensified the finer details of the result. ANZ’s third-quarter earnings fell 8.5 per cent to $1.73bn as bad debts blew out to 25 basis points of gross loans, which the bank attributed to balance sheet growth and problems in the mining and agriculture sectors.
UBS analyst Jonathan Mott said that, given the market expected loan growth to slow in the face of APRA’s cap on investment property lending, the focus would be on CBA’s margins and bad and doubtful debts. “The focus of the results will likely be on signs of deterioration in asset quality, how quickly BDD normalises and CBA’s mechanism for raising capital,” he said, estimating CBA at $10bn short of the “10 per cent CET1 line-in-the-sand” level.
But Mr Mott noted that CBA was in a “privileged position”, given its lofty share price reduced the dilution from capital raisings and much of the cost could be “passed on to consumers”. All the banks have recently begun passing on the headwinds, raising interest rates for property investors despite the Reserve Bank not touching the cash rate.
THE AUSTRALIAN AUGUST 10, 2015 12:00AM
Michael Bennet
Reporter
Sydney
For the year to June 30, CBA is expected to report a 5 per cent rise in cash profit to a record $9.1bn Source: Supplied
Commonwealth Bank will this week hand down its most hotly anticipated annual results in years, with the lender’s profit of more than $9 billion to be overshadowed by efforts to increase capital levels and the health of its loan book.
After ANZ got the jump on its rival and raised $2.5bn from institutional shareholders last week, investors are bracing for CBA to press the button on an equity raising of up to $5bn at its results on Wednesday.
Bendigo and Adelaide Bank will today report an expected $435 million full-year cash profit and provide insight into the industry’s margins amid hot competition to write mortgages. Also today, National Australia Bank will also release its third-quarter earnings statement.
But the main event remains CBA’s result and potential capital raising, with investment banks UBS, Goldman Sachs, Credit Suisse and Morgan Stanley jostling to manage the potential deal, sources said.
“All eyes turn to CBA (on) Wednesday with an estimated ‘known’ capital shortfall of about $4.5bn,” Credit Suisse analysts said after ANZ’s deal. “While we could feasibly see a period of rolling dividend reinvestment plans, we consider a larger raising to be defensible and ultimately more prudent.”
Richard Wiles, an analyst at Morgan Stanley, said the last time the major banks undertook large equity raisings was during the global financial crisis, when it proved that the “first mover” could achieve a better issue price. He said that, with NAB and ANZ having completed equity raisings, investors had “turned their attention” to CBA and Westpac’s capital management initiatives.
The big banks are raising capital after the Australian Prudential Regulation Authority last month revealed their mortgage “risk weights” would have to increase to at least 25 per cent by July next year, equating to a combined $12bn in additional capital. APRA also told the banks that their overall “common-equity tier-one” capital ratios would need to rise, reducing their leverage and returns. Mr Wiles said: “Our forecasts assume partial second-half 2015 DRP underwriting to raise $2.5bn at CBA and $2bn at Westpac. However, for CBA, we see merit in a capital raising of $4bn-$5bn at its result.”
On Morgan Stanley’s numbers, the raising would boost CBA’s lagging CET1 to 9.4 -9.7 per cent, albeit not including the looming refinancing of debt in its wealth subsidiary with equity that will drag on its capital levels.
Analysts believe the major banks will ultimately need CET1 ratios of at least 10 per cent.
For the year to June 30, CBA is expected to report a 5 per cent rise in cash profit to a record $9.1bn and a final dividend of $2.21. But CBA’s surprisingly soft third-quarter trading update in May and ANZ’s slide in earnings last week have intensified the finer details of the result. ANZ’s third-quarter earnings fell 8.5 per cent to $1.73bn as bad debts blew out to 25 basis points of gross loans, which the bank attributed to balance sheet growth and problems in the mining and agriculture sectors.
UBS analyst Jonathan Mott said that, given the market expected loan growth to slow in the face of APRA’s cap on investment property lending, the focus would be on CBA’s margins and bad and doubtful debts. “The focus of the results will likely be on signs of deterioration in asset quality, how quickly BDD normalises and CBA’s mechanism for raising capital,” he said, estimating CBA at $10bn short of the “10 per cent CET1 line-in-the-sand” level.
But Mr Mott noted that CBA was in a “privileged position”, given its lofty share price reduced the dilution from capital raisings and much of the cost could be “passed on to consumers”. All the banks have recently begun passing on the headwinds, raising interest rates for property investors despite the Reserve Bank not touching the cash rate.