Analysts are asking if the big four Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) still need to raise even more capital.
That's despite them bringing in a combined $16 billion from capital raisings, hybrid issues, dividend reinvestment plans and placements so far this year – more than the $13 billion raised during the GFC.
The problem as we've noted previously, is that as capital grows, return on equity and profit growth will shrink.
According to the Australian Financial Review (AFR), analysts say the banks are still short $20 to $25 billion. If that's the case, the banks also face another issue – where are they going to get the capital from? There's only a limited amount of investor funds available, which could see fund managers offload shares in other large ASX companies to fund the purchase of bank stock. Either that or the fund managers are going to demand large discounted prices for shares.
CBA is already offering new shares under its capital raising at $71.50, but because the bank may have to raise even more capital, the share price could sink below that offer price. What investors also need to realise is that a huge amount of new shares will be issued, so your shares that were once close to $100 each, are now worth much less than that.
Another headwind is that as the majors are forced to keep more capital on their books, regional banks Bank of Queensland Limited (ASX: BOQ) and Bendigo and Adelaide Bank Ltd (ASX: BEN) and non-bank lenders will be able to compete on a more level playing field than they have since the GFC. That could see the big four lose some of their market share of the mortgage market.
Their recent steps to discourage investors from lending through higher investor mortgage rates and loan-to-valuation ratios (LVRs) could already be forcing investors to seek out alternative sources of lending.
Foolish takeaway
The good news is that once the big four banks have been recapitalised, they should be able to withstand larger shocks to our financial system and economy, without requiring taxpayers to bail them out. The glorious time of the big four may be over though.
