CBA to raise more capital?

On Wednesday 12 August, CBA announces its full year results and the market will be watching closely to see whether the bank announces any new capital raising initiatives. Estimates are that CBA needs around $7bn of new tier 1 capital. ANZ’s announcement last week that it would raise $3bn of fresh equity capital led to sharp equity markets falls. Investors saw it as the first of numerous upcoming bank capital raisings that would dilute existing shareholders but ultimately make banks safer. The mantra seemed to be ‘better to sell bank shares now and buy again when the new issues hit the market.’ ANZ CEO Mike Smith said the bank moved because APRA, the bank regulator, had moved quicker than expected.

In mid-July APRA flagged that it was adjusting the risk weighting model for residential mortgages and that the big four banks plus Macquarie would be required to hold more capital against those mortgages. The new weightings would take effect on 1 July 2016 and this was seen as a short time frame for banks to raise new capital. Banks have a range of ways to meet the new weightings but markets are mostly focusing on banks issuing straight equity or using their existing dividend reinvestment plans to effectively convert their dividend payouts back into equity.

The amount of capital likely to be raised is the subject of much conjecture and range between $12bn and $30bn. The various bank analysts use individual pricing/analytical models to assess this, hence the conjecture. One such analysis of CBA’s capital profile was published by Credit Suisse and is attached below.

CBA Capital Adequacy ($m)

Source: Credit Suisse