National Australia Bank Ltd. said it plans to raise A$5.5 billion ($4.4 billion) in the country’s biggest rights offer to bolster capital and cover the cost of potential misconduct fines at the U.K. unit it is exiting.
The company will offer 194 million new shares, equal to about 8 percent of issued capital, at A$28.50 each, 19 percent less than Wednesday’s closing price. The lender plans to hand over as much as 80 percent of its U.K. businesses, Yorkshire Bank and Clydesdale Bank, to shareholders and sell the remainder through an initial public offering by the end of 2015, it said in a statement on Thursday.
The rights offer, the biggest for the Asia-Pacific region since 2010, takes the amount of equity raising announced by Australia’s biggest lenders this week to about A$8 billion. The banks are girding themselves against the possibility of fresh regulations demanding higher capital buffers.
“National Australia is biting the bullet and getting ahead of the other banks in sprucing up its capital ratio,” said Angus Gluskie, managing director at White Funds Management Pty in Sydney, who oversees about $550 million including National Australia shares. “It’s making progress on two fronts: its U.K. exit and bolstering capital.”
National Australia shares have been halted from trading until May 12. Of its largest competitors, Westpac Banking Corp. lost 0.3 percent in Sydney on Thursday. Australia & New Zealand Banking Group Ltd. dropped 0.6 percent and Commonwealth Bank of Australia gained 0.2 percent.
Creating a standalone U.K. bank will add another independent challenger to Britain’s four largest lenders, which together control about 80 percent of the market.
National Australia said the unit will have about 38.9 billion pounds ($59.3 billion) of assets, making it the largest publicly traded lender behind HSBC Holdings Plc, Barclays Plc, Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc.
The current biggest publicly traded challenger to the big four by assets, TSB Banking Group Plc, with about 27.4 billion pounds, is being sold to Spain’s Banco Sabadell SA for 1.7 billion pounds.
“We’re pretty different from the rest of the challengers,” Debbie Crosbie, acting chief executive officer of Clydesdale and Yorkshire banks, said in an interview. “We offer absolutely everything that the big banks do, and I think we offer it much better. We are already largely standalone.”
To spin off the U.K. operation, Britain’s Prudential Regulation Authority has required National Australia to inject 1.7 billion pounds in capital to cover potential compensation for customers sold payment protection insurance they didn’t want or need, as well as wrongly sold interest-rate hedging products on small-business loans, the bank said in the statement.
National Australia has set aside 806 million pounds to cover PPI, which across the industry is Britain’s costliest banking scandal. Lloyds has reserved more than 12 billion pounds, the most of any U.K. lender.
“This is about providing additional capital support, and that is a safety net,” Crosbie said. “It’s an important part of creating a strong standalone bank.”
National Australia said it’s targeting a common equity Tier 1 ratio, a measure of financial strength, of 13 percent for the U.K. business. The ratio was 11.9 percent at the end of March.
For National Australia as a whole, the pro-forma common-equity Tier 1 ratio was about 10 percent including the impact of the capital raising and the U.K. separation, as at March 31, it said. Its capital raising is expected to reduce pro-forma cash earnings per share for the six months to March 31 by about 4.5 percent, it said.
“This is obviously a very significant raising and clearly we believe we would rather go and take one step,” CEO Andrew Thorburn told reporters in Sydney. “Going to the capital markets, given the state they are in now, strong and open, we think this is really the right thing to do.”