The big four ASX banks are surging higher this morning with the National Australia Bank Ltd. (ASX: NAB) share price leading the charge after it boosted its capital raise limits due to strong demand.
The NAB share price jumped 5.3% to a more than two month high of $17.52 at the time of writing.
The Westpac Banking Corp (ASX: WBC) share price and Australia and New Zealand Banking GrpLtd (ASX: ANZ) share price aren't far behind with a gain of around 5% each.
Commonwealth Bank of Australia (ASX: CBA) is the laggard with a 2.4% rise to $62.79, although that is still well ahead of the S&P/ASX 200 Index (Index:^AXJO), which slipped 0.4% into the red.
More demand than supply
Optimism towards NAB was likely triggered by its share purchase plan (SPP) update. The bank more than doubled its intended takings from the SPP after receiving better than expected demand from retail shareholders.
NAB said it will now accept $1.25 billion in new capital from the SPP compared to its original target of $500 million.
It could have accepted even more as the bank will be scaling back valid applications from shareholders. Its promising to allocate a minimum of 176 SPP shares, which are priced at $14.15 each, but said around 98% of shareholders will at least receive their pro-rata allocation.
Extra cash means extra options
The SPP amount is on top of the $3 billion it raised from institutional investors through a placement, and I think this is a good outcome for NAB.
The extra cash injection will go a long way to remove any worries about its capital adequacy. NAB is the only one of the big four that undertook a cap raise although its bad debt provisioning is the smallest at around $800 million.
Analysts believe that is too little when CBA and Westpac have set aside around $1.5 billion each to buffer against loan defaults in the wake of the COVID-19 pandemic.
Money buys time
NAB will likely have to increase its provisioning and the extra cash will come in useful. The extra ammunition will also give its new boss Ross McEwan extra flexibility for the scandal-prone banks to play catch up.
Further, the scale-back of the SPP will likely leave pent-up demand for its stock on the secondary market (i.e. shares trading on the ASX). This means investors are unlikely to be able to buy shares in the bank as cheaply as the $14.15 offer price – at least not for the foreseeable future.
Foolish takeaway on ASX banks
The banks aren't out of the woods yet and are still trading well below where they were earlier in the year. But the worst may be over unless we get a big second wave of coronavirus infection or some other black swan event.
This bodes well for the broader market and the economy as both can't outperform if the banking sector is sick.
As my wise former colleague at the Australian Financial Review, Andrew Cornell, once told me during a discussion about super profits – the only thing worse than a profitable bank is an unprofitable one!
