The move by the National Australia Bank Ltd. (ASX: NAB) to be the first among its peers to raise capital amid the COVID-19 pandemic is likely to drag on the sector today.
NAB's ringing of the cap raise bell will force investors to guess who might be next and selling new shares at a discount will typically depress the share price of the company in question.
It is also likely to force some shareholders to liquidate some of their positions in the sector so they can participate in NAB's raising.
How some might try to profit from a raise
It's not necessarily a bad idea for quick-footed investors to sell some shares in the bank that is most likely to be next to join the cap raise queue as the second bank's share price is likely to fall.
The next inline will then have to announce the new offer at a discount to the depressed price, giving eligible shareholders an opportunity to buy back in to average down.
There is no guarantee this "arbitrage" will pay, but I have seen it work on more than one occasion.
First mover advantage
The decision to be the first to jump is strategically timed, in my view. The S&P/ASX 200 Index (Index:^AXJO) bounced from the bear market low of March 23 and it's better to go to the market now as the risk for a second sell-off looms.
NAB wasn't meant to be the first to release its results either. That was meant to be Australia and New Zealand Banking Group (ASX: ANZ) this Thursday, followed by Westpac Banking Corp (ASX: WBC) next Monday then NAB on 7 May.
But NAB couldn't wait that long as it would have lost its "first mover advantage". It didn't want to put its share price under a big cloud if another big bank went cap in hand to investors first.
Cruellest cut of all
NAB's bigger than expected cut to its dividend is another reason why it would have wanted to be the first to jump. The stock went into a trading halt for the cap raise, so it will be temporarily isolated from any repercussion from its decision to slash its interim dividend by 64% to 30 cents a share.
Some of the more bearish brokers were only tipping a 50% worst case cut with most estimating a 30%-40% reduction.
Investors will now think NAB's cut is the benchmark and will value ANZ Bank and Westpac on the same dividend assumption.
Is this the next bank to raise capital?
Commonwealth Bank of Australia (ASX: CBA) is the charmed one. It won't need to show its dividend hand until August. By then, the pressure on the banks to shore up their balance sheet might have eased.
CBA is also the strongest on the big four and deemed the least likely to need a capital injection. Even if it did lower its dividend in four months, it shouldn't be as drastic as NAB.
This brings us to the important question of which bank will go next to the market for more money. All eyes are on Westpac as it's seen to have a weaker balance sheet than ANZ Bank.
For the reasons I outlined above, the stock is likely to be under pressure until its results. It's going to be an interesting week for Westpac shareholders.
