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A Broker's PreView - Flood of Capital Raisings to Stop-Banks Record Run?

Overview: The ‘Big Four’ as they are colloquially known consists of Commonwealth Bank, Westpac, ANZ and NAB. All four have their respective strengths and weaknesses, and all four have a heavy presence in New Zealand. Today we are going to bypass the conversation over which bank will offer investors the best bang for their buck and look at the Australian banking sector as a whole.

Pros: The Big Four boast some of the highest net interest margins in the world, all managing to skim approximately 2 percent on average between lending and deposit rates (put very simply). These margins are on the wane though as banks compete hard for customers struggle to maintain higher margins in a low interest rate environment.

The Big Four have also shown good resilience in tough times. The companies came through the worst of the Global Financial Crisis relatively unscathed, and have since thrived producing very good return on equity on the back of a thriving housing market in Australasia and a dominant share of the home loan market.

Cons: It is the exposure to the red hot housing market that has some worried. The Abbott government commissioned a Financial System Inquiry, the results of which were released late last year. This report recommended “setting Australian bank capital ratios such that they are unquestionably strong”, and that banks “maintain loss absorbing and recapitalisation capacity.” The report also recommended regulation to narrow mortgage risk weights. Put simply, these changes would increase the amount of capital held for each dollar of lending.

This raises the spectre of capital raisings across the entire banking sector. National Australia Bank kicked this off with Australia’s largest ever rights issues, raising AU$5.5 billion with the intent of putting “NAB in a strong capital position following anticipated regulatory change.” As of yet, these regulatory changes are still just “anticipated”, but most see them as inevitable.

Price performance: Three of the Big Four hit all time highs in March and April, however all have fallen off their perch with the looming capital raisings (off between 13 & 20 percent)

Investment outlook: Capital raisings are seldom beneficial for share prices in the short term. New Zealand investors also get limited tax credits on their Australian dividends making the yield relatively unattractive for local investors.

*A Broker's View is written by Grant Davies, Investment Advisor at Hamilton Hindin Greene Limited. This article represents general information provided by Hamilton Hindin Greene, who may hold an interest in the security. It does not constitute investment advice. Disclosure documents are available by request and free of charge through www.hhg.co.nz.

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