Commonwealth Bank of Australia (ASX: CBA) has completed its entitlement offer to retail investors, raising just $1.5 billion in new capital.
The shares have entered a trading halt and will be available for normal trade on Monday, or when the bank releases an announcement in relation to the completion of the retail bookbuild.
Last month, Australia's biggest bank launched a $5 billion capital raising – the second biggest in the country's history – offering new shares for a significant discount of just $71.50 per share. This was required as a result of the new capital restrictions put in place by the banks' regulator, the Australian Prudential Regulation Authority (APRA), in July this year.
Commonwealth Bank successfully raised $2.1 billion from institutional investors but raised just $1.5 billion from the retail component of its offer, leaving it well short of its intended target. The bank has now launched a retail shortfall bookbuild to raise the remainder of the cash needed, which is fully underwritten.
Indeed, this is not a good sign for Commonwealth Bank, nor any of its major rivals. Just six months ago, the market's appetite for bank stocks was so hot that all four banks were trading at all-time or multi-year highs.
In the time since, all four banks have fallen into an official "bear market" – defined as a fall of 20% or more – with investors clearly concerned about the headwinds facing the sector, and the Australian economy as a whole. Indeed, bad debt charges are expected to begin rising in the near future, which will limit earnings growth, while the new capital restrictions set by APRA will likely impact the banks' return on equity as well.
The fact is, Australians have a limited amount of capital to spend and many remain overexposed to the banking sector as it is. I don't expect the market's response to today's news will be too pleasant when the shares do reopen for normal trade.
What happens now?
To make matters worse, it is expected that Commonwealth Bank, National Australia Bank Ltd. (ASX: NAB), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ) could be forced to raise up to $25 billion of capital in addition to the amount already raised.
The lukewarm response to Commonwealth Bank's retail entitlement offer is by no means encouraging, and could suggest further downside for the banks' share prices. Notably, Goldman Sachs has also cut its price target on the stock by 5.8% to $75.32, compared to yesterday's $75.13 closing price.
