Westpac Leads Australian Bank Shares Lower Amid Capital Concerns

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Westpac CEO Brian Hartzer
Brian Hartzer, Chief Executive Officer of Westpac Banking Corp. who took over in February, arrested a drop in mortgage market share in his previous role as the retail bank head. Source: Westpac Banking Corp. via Bloomberg

Westpac Banking Corp. shares slid the most since 2011 as its plan to raise A$2 billion ($1.6 billion) in capital fueled concern that Australia’s biggest banks will need more equity to meet stricter regulatory requirements.

Westpac, which revealed the capital proposal Monday as it reported lower-than-estimated profit, dropped as much as 4.9 percent, the biggest intraday drop since September 2011. The lender, the nation’s second largest by market value, sank 3.4 percent as of 1:51 p.m. in Sydney, while its three biggest competitors dropped at least 0.9 percent.

While their capital levels currently exceed minimum national requirements, Australian banks may face regulation demanding higher buffers including increased reserves against mortgage losses. Westpac said Monday a number of changes “are under discussion that are likely to impact future” capital, with Chief Executive Officer Brian Hartzer pointing to reforms from the global Basel Committee on Banking Supervision presenting “the bigger issue.”

The bank’s decision to raise equity indicates its board is concerned about capital levels and “ratios need to likely move higher for the sector,” said Omkar Joshi, a Sydney-based analyst at Watermark Funds Management.

To boost capital, Westpac said it’s offering a 1.5 percent discount to shareholders willing to swap all or part of their dividend for new shares and will also partially underwrite the dividend reinvestment plan to raise A$2 billion.

Lower End

The plan would add 60 basis points to its common-equity Tier 1 capital ratio, which stood at 8.8 percent as of March 31, compared with 8.4 percent three months earlier. That’s at the lower end of the bank’s preferred range of 8.75 percent to 9.25 percent, and compares with the 8 percent minimum Australian lenders will have to hold by January 2016.

Australia & New Zealand Banking Group Ltd., Commonwealth Bank of Australia and National Australia Bank Ltd., will declare their March 31 capital levels when they report earnings later this week.

The government’s Financial System Inquiry in December recommended lenders hold “unquestionably strong” levels of capital and increase their average mortgage risk weightings to 25 percent to 30 percent, from the current average of 18 percent held by the biggest banks.

Wayne Byres, chairman of the nation’s banking regulator, said last week risk weight rules can be “dealt with sooner rather than later.”

Dividend Miss

The Basel committee may also present banks around the world with tougher controls over how they measure risk. The international group of standard setters is considering draft plans unveiled in December that include setting a capital floor and reinforcing standard, regulator-set methods to measure possible losses.

One of Westpac’s challenges “is trying to work out what our long-term position is going to be,” CEO Hartzer said on an investor call Monday. “The Basel committee is hopefully going to give us a clearer position later in the year.”

Westpac’s cash profit, which excludes one-time items, was A$3.78 billion in the six months ended March 31, the lender reported, in line with a year earlier and lower than the A$3.85 billion average estimate of five analysts surveyed by Bloomberg. Statutory net profit dropped to A$3.61 billion from A$3.62 billion the prior year.

The bank’s dividend increase also missed estimates. Westpac said it will pay a dividend of 93 cents, compared with expectations for 94 cents a share. The one cent dividend increase from the previous six months is the first time since 2009 the lender hasn’t paid out at least a two-cent rise, according to data compiled by Bloomberg.

The lender’s board limited the increase based on current business conditions and possible regulatory changes, said Hartzer, who took over in February.

Bad-debt charges increased in the six months to September to A$341 million from A$309 million in the previous six months. Net interest margin, the spread between the interest it earns on loans and its cost of funds, dropped to 2.05 percent from 2.06 percent in September.

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