Australian banks getting started on raising capital

[SYDNEY] Australia's biggest banks this week announced the largest collective fundraising since the global financial crisis. They may just be getting started.

National Australia Bank Ltd, Westpac Banking Corp and Australian & New Zealand Banking Group Ltd revealed proposals to raise a combined A$8 billion (US$6.4 billion) in capital to bolster their reserves against potential mortgage losses at home and to meet tougher global standards.

While the value of mortgages at the nation's biggest banks has more than doubled since 2008, boosting profits, the banks have lowered their assessment of risks related to home loans.

Regulators indicated in March they want to reverse this trend. They have also said they may impose extra capital requirements on some lenders to contain risks from a housing boom that has boosted prices in Sydney by 40 per cent in the past three years.

"Banks are beginning to shore up their capital positions and it will be a continuous theme as earnings growth slows down," said Simon Burge, who oversees A$450 million including bank shares as chief investment officer at Above the Index Asset Management Pty.

The capital plans announced this week have put Australian bank shares on course for the biggest weekly slump in almost two years. NAB is seeking A$5.5 billion in the country's biggest rights issue, while Westpac is raising A$2 billion. ANZ may garner as much as A$480 million.

More capital raisings are likely if regulators follow up on proposals to require the banks to set aside more capital against potential mortgage losses, and force them to lift capital ratios to higher global standards. The largest banks would need to raise up to an additional A$30 billion if those measures are imposed in full, CIMB Group Holdings Bhd. estimated in December.

While Commonwealth Bank of Australia didn't announce any capital raising, Mr Burge said the nation's largest lender by market value may have to follow suit. A spokesman for Commonwealth Bank declined to comment.

At the same time, the largest banks may see a slowdown in their earnings, which have been hitting successive records over the past five years, due to shrinking interest margins and rising charges for bad debts.

For the lenders, "with slower earnings growth, their ability to generate organic capital diminishes," Mr Burge said.

National Australia, ANZ and Westpac reported this week combined first-half cash profit of A$10.8 billion as their bad debt expenses climbed a combined 17 per cent from six months earlier, filings show. Commonwealth Bank of Australia's business year ends in June rather than in September for its three competitors.

Profits had benefited from declining mortgage rates, which have encouraged Australians to borrow more for property purchases. The four largest lenders have more than doubled the value of their mortgages to A$1.12 trillion in the seven years through March, data from the Australian Prudential Regulation Authority show.

BLOOMBERG