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Capital Markets Weekly: National Australia Bank sets precedent for wider bank equity-raising
National Australia Bank announced on 27 April that it is "taking decisive action" to address adverse impacts from COVID-19, arranging an AUD3 billion underwritten institutional share placement, along with a non-underwritten retail share sale plan seeking AUD500 million. In an accelerated statement of half-year results, it also reduced its interim dividend by 64%, saving AUD1.6 billion (or 37 basis points of Common Equity Tier 1). Overall, it seeks to boost its CET1 ratio from 10.39% at end-H1 2020 to 11.2%.
While claiming that its asset quality generally remains sound, NAB has taken an "additional forward- looking economic adjustment of AUD807 million" for future COVID-19 related asset quality damage. The bank forecasts a "sudden and materially negative impact on economic activity", projecting that Australian GDP will decline 8.4% by September 2020 versus end-2019, and only regain pre-pandemic levels in 2022.
The equity offering comprised 212 million shares, priced at AUD14.15 per share, an 8.5% discount to its closing price level on Friday 24 April. The offering reportedly increased the number of NAB shares outstanding by 7%: trading in the new shares starts on 1 May.
Commentary from a representative of AMP, a leading domestic institutional investor, suggested that the accelerated results release and associated share issuance was designed to enable the bank potentially to pre-empt parallel share-raising initiatives by other major Australian banks. Australian Financial Review suggests that Westpac is most likely to follow NAB's example. On 28 April, Sharecafe website noted that Westpac had warned it plans to take AUD2.24 billion in provisions for bad loans, including AUD1.6 billion for COVID-19 related impairments. On top of previously announced write-offs and an AUD900 million provision for settlements relating to prior anti-money laundering breaches, this implies total charges of AUD3.6 billion for the half-year, potentially pushing Westpac into operating loss. Its results are slated for release on 4 May: at end-2019, its CET1 ratio stood at 10.8%.
IHS Markit's Banking Risk Service assesses that in developed markets, most large banks entered the COVID-19 crisis with relatively strong capital and liquidity indicators. Conversely, profitability indicators were weak, particularly for several large European banks still undergoing business restructuring, but also reflecting squeezed margins from the low interest rate environment, heavy competition and additional pressures from new technology.
Bank capital buffers represent an important cushion for the sector in addressing the inevitable surge in impairment to reflect the impacts of deep economic recession and COVID-19 related lockdowns. Pressure on banks also is mitigated by government fiscal measures helping companies through the crisis and seeking to cushion impacts on households.
However, it is inevitable that governments will not be able to support all the firms that face financial stress in the months ahead, and it is thus unavoidable that impairment levels and future provisioning needs will grow substantially. Over time this will place greater pressure on banks' capital positions and drive further capital raising: NAB's issuance is likely to be the first of multiple bank share sales, while some weaker banks are likely to seek state support.
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