Australia's second largest domestic bank isn't letting good news go to waste as it posted a better-than-expected full year result and unveiled a $3.5 billion capital raising to meet tighter banking regulations.
But the success of Westpac Banking Corp's (ASX: WBC) strategy to bolster its cash buffer over mortgages to protect against a financial shock could ultimately depend on how its rivals respond to today's news, which includes a lifting in the interest rate Westpac is charging some owner-occupiers and property investors.
The bank will increase some of its mortgage rates by 20 basis points (or 0.2 of a percentage point) even as the Reserve Bank of Australia's cash rate sits at a record low of 2% and is likely to drop by another 25 basis points in the coming month or two.
Westpac needs to increase its cash margin (the difference between how much it charges mortgagees and how much the bank has to pay for funds) to help it meet the higher capital adequacy ratios being imposed on the industry by global regulators.
The big question is how its rivals will react. Conventional wisdom would imply that the other Big Banks will follow Westpac's lead as the sector tends to track as one.
Westpac must be banking on this given that it is aiming to bring 2 million new customers through its doors over the next two years.
But this isn't a given in the current climate with rivals like Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd. (ASX: NAB) turning their focus on the domestic instead of international market to grow earnings.
The fight for market share comes at a time when the residential housing market looks poised to contract, meaning that any gains will have to come at the expense of rivals.
What's more, Westpac's rivals may not need to raise rates to meet stricter capital ratios as they have moved early to tap shareholders for cash and sold assets.
This could tempt one or two to break ranks and hold rates steady to win over customers and to ensure they do not lose business to smaller lenders like Bank of Queensland Limited (ASX: BOQ) and credit unions.
Westpac has taken a calculated risk and the jury is still out on how this might pan out. Here are other key points investors need to know about its result and capital raising:
- The fully underwritten renounceable entitlement offer is priced at $25.50 a new share compared with Westpac's closing price of $30.44 on Tuesday;
- The new shares will not be entitled to the final 2014-15 dividend;
- The cash injection will raise the bank's common equity tier-1 (CET1) ratio by 100 basis points to 14% on an internationally comparable basis;
- Westpac's cash earnings for the year ended September 2015 increased 3% to $7.82 billion;
- This is above consensus estimates of $7.76 billion but the 2 cents increase to its final dividend of 94 cents a share falls short of market expectations of 96 cents a share, according to Bloomberg data;
- The bank's cash return on equity dropped 57 basis points to 15.8% due in part to higher operating expenses.
While the result is a bit of a mixed bag, I think shareholders should participate in the capital raising. The recent raisings done by the likes of Commonwealth Bank of Australia (ASX: CBA) have shown that those who participated in the discounted new share offer will come out on top.
I think Westpac's experience will be similar.
