What is happening with the Banks at the moment?

You will have heard that ANZ Banking Group Limited (ANZ) recently announced that they were raising $3 billion by offering shares at a discounted rate to Institution investors and its existing shareholders. Since then the Commonwealth Bank of Australia (CBA) has announced it is raising $5 billion by offering shares in a similar way to ANZ. Westpac Banking Corporation (WBC) and National Australia Bank (NAB) have also raised capital over the last month or two.

The stock market’s reaction to this capital raising has been negative with the price of ANZ shares falling by 7% on the day of its announcement. This has had a flow on effect to the other banks, as their prices have also been impacted. Clearly the stock market doesn’t think this is a good thing, however it is worth trying to understand what the purpose of raising the money is in order to for us to make an informed decision on whether it is good or bad.

The regulator of banks in Australia is a Government body called the Australian Prudential Regulation Authority (APRA). APRA wants to make sure that the banks are well capitalised and therefore not at risk of failure in the future. This is actually a global theme as banks in other countries are also increasing their capital levels.

By raising money the banks are becoming much safer and that should be a positive thing, so why has the price of bank shares fallen? The short answer is that if the banks’ profits don’t increase, these profits will need to be distributed over a larger number of shares. The significance of this is that the dividend could fall or remain flat.

On the other hand, if the banks are safer they may be able to reduce their funding costs which will improve profits and dividends can continue at their current levels or grow over time.

So there are some uncertainties as to what might happen. The thing we do know is that the banks will be safer and that is very reassuring. Although dividends may be slightly less than they are now or may grow at a slower pace than what they have in the past, we believe this is a small price to pay for the additional safety.

We therefore remain very positive on the banks as an investment in your portfolios. If you would like to speak to your Advisor, please feel free to contact us here.

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