Fitch: Westpac's Capital Raising Supports its High Ratings
We believe that Westpac's capital raising initiatives have largely addressed the bank's capital shortfall arising from the increased average advanced mortgage risk weights for Australian residential mortgages from 1 July 2016, as announced by the Australian Prudential Regulation Authority (APRA) on 20 July 2015.
Westpac declared it is raising AUD3.5bn through a fully underwritten entitlement offer - adding approximately 100 basis points (bp) of common equity tier 1 (CET1) capital - to strengthen its regulatory capital levels to address these changes.
The AUD3.5bn capital raise takes Westpac's 2015 capital initiatives to AUD6bn. Westpac has already raised AUD2.5bn of capital through a AUD2bn partially underwritten dividend reinvestment plan (DRP) of its dividend for the first half year ending March 2015 (1H15), and the partial sale of BT Investment Management which raised AUD500m capital. Both initiatives have been completed prior to today's entitlement offer announcement. The combined initiatives have increased Westpac's CET1 ratio by 170bp and the bank estimates its pro-forma CET1 ratio, including the increase in average residential mortgage risk-weights, was 9.3% as of end-September 2015.
Westpac's entitlement offer follows other major Australian banks which have all raised fresh capital totalling AUD17bn from the market. Commonwealth Bank of Australia (AA-/ Stable) announced a capital raise of AUD5bn on 12 August 2015 following Australia and New Zealand Banking Group's (AA-/ Stable) AUD3bn capital increase announcement on 6 August 2015, while National Australia Bank Limited (AA-/ Stable) raised AUD5.5bn CET1 capital in May 2015. Capital is mainly raised to address anticipated changes in regulatory capital requirements.
Westpac expects to announce a statutory net profit of AUD8bn on 2 November 2015 of which around 25% is likely to be retained in line with the group's unchanged dividend policy. Fitch expects that a reasonable portion of the dividend could be retained through the DRP which is not underwritten and Westpac does not offer a discount on the shares. We expect Westpac's CET1 ratio to remain on the upper end of its CET1 ratio target range of 8.75%-9.25% in the financial year 2016 (FY16). At the same time, Westpac announced a 20bp increase in pricing on all Westpac-branded variable-rate residential mortgages from 20 November 2015 to offset the impact of increased capital requirements. We also believe this should support profitability and internal capital generation in FY16.
Fitch believes further increases in regulatory capital requirements for Australian banks are possible, mainly as a result of changes to the global framework, and subject to APRA's final definition of "unquestionably strong banks" as raised by the Financial Service Inquiry in December 2014.