Westpac Banking Corp (ASX: WBC) today announced it'll raise $3.5 billion in capital from shareholders.
To counter increased banking regulation, Westpac says it will give all shareholders the opportunity to acquire 1 share for every 23 normal shares they currently hold, at $25.50. That's 16.2% lower than yesterday's closing price and an enormous 36% discount to its yearly high achieved in April.
Westpac says the money raised will add 1% to the bank's required regulatory capital ratio (known as CET1). It says once the capital raising is complete, its balance sheet will be within the top quartile of banks globally.
Unfortunately, following recent changes by APRA (the banking regulator) to raise the risk applied to certain mortgages, Westpac plans to increase its "variable home loan (owner occupied) and residential investment property loan rates by 20 basis points [0.2%]."
That's bad news for anyone who has a variable interest rate mortgage or investment property loan with Westpac. In fact, it's almost equivalent to an official interest rate increase by the Reserve Bank! The new rates take effect from 20 November 2015.
To try and allay investors' concerns Westpac has released some unaudited profit results ahead of schedule. For Westpac's 2015 financial year, cash profits were up 3%, with a return on equity (ROE) down 0.57% and profits per share up 2%.
Unsurprisingly, Westpac says any new shares issued as part of its $3.5 billion capital raising will not receive the final dividend, expected to be 94 cents per share – up 2% from last year.
Are you buying in?
Earlier this week, Fairfax Press noted a research report from analysts at Macquarie Group Ltd (ASX: MQG) who forecast Australian house prices to fall by 7.5% in the next two years.
It cited oversupply issues, weak population growth and a slowing economy as reasons to believe a downturn in property could last longer than what we've become accustomed to in recent decades.
Therefore, investors who chose to buy into Westpac's heavily discounted capital raising could be taking bigger risks than it appears on first glance.
In my opinion, increasing regulation, falling profitability, a low point in the bad debt cycle, slower growth in credit markets and a heightened chance that the major banks will cut their dividends, mean none of the big bank stocks are a buy today.
