By Malcolm Maiden
WELCOME to a world where too much bank capital is never enough: NAB's $2.75 billion share sale continues a relentless drive by the big four to armour-plate their balance sheets in this downturn.
Since the beginning of 2008, they have raised over $32 billion through share placements, issues and dividend reinvestment schemes. Whether you think that's a good or bad thing depends on whether you are with them, or competing against them.
The bank regulator, APRA, only officially requires our banks to maintain Tier 1 capital — core equity capital, basically — of at least 4 per cent of assets. But the big banks were doing significantly better than that going into the financial crisis last year, with Tier 1 ratios of about 7 per cent.
Last year, as the crisis deepened and loan losses increased, they took out more insurance on their double A credit ratings by embarking on a round of direct and indirect capital raisings that pushed their Tier 1 capital ratios to 8-per-cent-plus.
And they are still apparently marching upwards. Earlier this month, ANZ announced that whopper retail shareholder acceptances had added another $2.2 billion to a $2.5 billion institutional raising, lifting Tier 1 from 8.2 per cent to 9.8 per cent.
And after raising $2.25 billion late last year, NAB yesterday went back to the well, with a $2 billion underwritten share placement, and a retail follow-on offer that could raise as much as $750 million — and probably will, given the pricing.
The institutional placement alone will carry NAB's Tier 1 ratio from 8.2 per cent to 8.8 per cent, putting it behind ANZ in capital strength, but ahead of CBA (8.33 per cent at March 31 this year) and Westpac (8.4 per cent at March 31).
NAB provided a trading update yesterday that showed loan losses were continuing to rise. It provided $1064 million for bad and doubtful debts in the quarter, compared with $1.8 billion (or $900 million a quarter) in the March half-year.
Specific provisions in the March half were $1.2 billion. In the June quarter, NAB provided 71 per cent of that again as bad loans were confirmed and collective provisions became particular ones.
Past-due and impaired assets are another measure. They rose from 1.38 per cent of gross loans and acceptances to 1.77 per cent in the three months to June at the NAB, and have doubled in a year.
But while NAB and the other big banks are moving more loans from the general ward to the intensive care ward, they are also using their capital strength to boost already dominant lending market share as competitors that relied on securitised debt markets wither, and as foreign banks retire hurt.
NAB said yesterday that cash earnings in the June quarter were about $900 million. They were $2 billion in the March half, so there has been some slippage. But it is not unexpected and not serious.
The capital raisings by the banks meanwhile are more than offsetting loan losses, leaving them increasingly well placed to finance both natural growth and growth through acquisitions.
NAB is recruiting business bankers as it chases market share in small and medium-sized businesses lending and institutional banking. On the acquisition front, chief executive Cameron Clyne says no "transforming" acquisition is planned. But NAB could selectively add assets to existing business lines, as it did last month when it agreed to buy Aviva's Australian insurance and wealth management businesses for $825 million.
Westpac and CBA already have trophy banking acquisitions — St George for Westpac, and BankWest for CBA — and both are pushing hard to boost their share of residential lending.
ANZ is considering expansion in Asia, including the possible $1-billion-plus purchase of distressed Royal Bank of Scotland's banking businesses in Asian markets outside of China and India, including Hong Kong, Taiwan, Singapore and Indonesia.
The banks are able to do this because of their capital strength, and that strength is, in turn, a product of two things mainly: the fact that they have been relatively lightly touched by the meltdown, and the fact that they are receiving unprecedented support from shareholders in successive equity raisings.
When it completes this raising, NAB will have raked in $9.2 billion since the beginning of 2008. ANZ has raised $7.65 billion, CBA has raised $6.1 billion, and Westpac has raised $5.2 billion.
Shareholders aren't saying no yet, and every dollar they raise makes it harder for their competitors to stay in the game.
YESTERDAY'S June quarter production report from BHP Billiton showed, like Rio Tinto's last week, that the big miners are dealing with a sharp decline in demand rather than a collapse.
There has been an element of re-stocking by customers in the June quarter, and one cautionary note is that BHP thinks that China's re-stocking phase is now over ( it thinks it is continuing in North America, Europe and Japan).
But the big miners aren't losing all the ground they made in the commodities boom that ran from 2003 to mid-2008.
BHP posted a record net profit of almost $US16 billion in the year to June 2008. The 2008-2009 result it posts next month will be significantly lower — the broker consensus estimate is for a profit of $US8.75 billion — but that would still be a better result than any year up until 2005-2006.
Rio Tinto showed BHP a clear set of heels in iron ore in the June quarter, lifting production to 45.2 million tonnes, up by 8 per cent versus a year earlier, and up 43 per cent on the March quarter. BHP's iron ore production was down 10 per cent to just over 27 million tonnes compared with a year earlier, and down 4 per cent versus the March quarter.
Production glitches for both companies might have been handled better if their iron operations were merged, as is now proposed. Rio's production in the March quarter was down because of torrential rains that largely bypassed BHP. Stoppages at BHP in the June quarter related to accidents and expansion did not affect Rio.