Westpac Banking Corp (ASX: WBC) shares have shrugged off the effects of a capital raising – which typically depresses prices – to rise almost 5% higher after the completion of the issue was announced.
Investors were apparently reassured by the news that Westpac would also be raising interest rates on its loans – passing the cost of higher capital requirements onto consumers. However, the price rise makes it look as though buyers are piling back in far too soon, with the effects of more shares on issue and higher interest rates yet to be felt by the bank's balance sheet and customers.
(As a side note, the fact that the bank can raise rates in today's super-competitive, low rate environment shows clearly that consumers need to shop around more).
Many shareholders are now wondering if Commonwealth Bank of Australia (ASX: CBA), Australia and New Zealand Banking Group (ASX: ANZ), and National Australia Bank Ltd. (ASX: NAB) will follow suit in raising rates, despite comments from Prime Minister Malcolm Turnbull that Westpac's increase was not necessary.
As Mr Turnbull noted, the banks will do whatever is in their commercial self-interest, and that means we could see a spate of rate rises across the big four banks as they aim to maintain growth in earnings per share.
Conversely, we could see rates stay flat as the other three banks attempt to steal market share from Westpac. Either way, it looks as though the recent rate rise added additional uncertainty to the Westpac investing thesis and I feel investors could be mistaken in their optimism for the stock.
The big four banks are expected to have to raise a significant amount of capital again over the next few years, and with the economy slowing and bad debts at rock bottom I think the downside risks are currently greater than the potential upside for Westpac shareholders.
While they are great companies, today is not a great time to stake the ranch on the value of Westpac or indeed, the other three Big Banks.
