So much for the 'Race to $100' for Commonwealth Bank of Australia (ASX: CBA).
Having gone as high as $96.69 in recent times, Australian's largest bank has announced that it is raising $5 billion in capital from shareholders at a price of just $71.50.
That's a 10% discount to yesterday's closing price of $82.12, and CBA's share price is likely to take a hit today.
As we've warned in previous posts, the big four banks Australia and New Zealand Banking Group (ASX: ANZ), CBA, National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) are highly leveraged businesses and could be forced to raise capital.
Well, that process is currently underway.
ANZ announced last week that it was raising $3 billion through a placement to institutions and a share purchase plan. Westpac has $1.25 billion of hybrid securities on offer and NAB announced a $5.5 billion capital raising back in May.
That is still the largest capital raising in Australian corporate history according to ABC News. NAB issued shares at a 19% discount to the prevailing price, at $28.50, increasing the amount of shares on issue by 8%, diluting earnings per share and putting more downward pressure on dividend payments.
Some reports suggest even that might not be enough capital, and the bank may need to raise even more according to UBS analysts. NAB needs to set aside some capital to prop up potential future compensation payouts to its British customers, leaving it with an estimated $2.2 billion capital left to shore up its balance sheet.
Foolish takeaway
We have been accused of bank bashing in the past, but perhaps our position is more misunderstood than anything. Australia hasn't seen a recession in more than 23 years – over which time our banks have partied like it's 1999 every year. Their profit results and performance goes hand-in-hand with our economy, and the headwinds are blowing. More capital on the balance sheet will also mean lower returns on equity and likely lower profits. That should theoretically mean lower dividends too.
Also have a think about this for a moment.
In which other sector would regulators force companies to increase the amount of cash they hold – 'just in case'? That tells you something about the risks inherent in the banking system and one of the dangers of investing in the banks. By all means keep your bank shares – just make sure your portfolios are well diversified.
