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What’s the outlook as NAB launches $3.5 billion capital raise?

'Underlying asset quality remains sound but the outlook is uncertain given economic disruption arising from COVID-19.'

NAB share price and dividend Source: Bloomberg

The $3.5 billion question

NAB’s lacklustre first-half results have been overshadowed by news that the bank was looking to tap the markets for ~$3.5 billion in fresh capital.

Like many of the listed companies looking to raise capital in the current environment, NAB described this as a proactive decision, made in light of the deep economic uncertainty Covid-19 has created.

The aim here is simple: ensure that the bank has 'sufficient capacity to continue supporting [its] customers through the challenging times ahead,' and, of course to ensure that NAB’s capital levels are sufficient to ensure the bank can weather ‘a range of possible scenarios, including a prolonged and severe economic downturn.'

To do this, the bank is launching a $3.0 billion, fully-underwritten institutional placement, targeting institutional and sophisticated investors.

Here, NAB intends to issue approximately 212 million new shares – representing approximately 7.1% of the bank’s outstanding ordinary shares – at a fixed price of $14.15 per share. This itself represents a 8.5% discount to NAB’s last traded price, and stands out as a significant far cry from the bank’s 52-week high of $30.00 per share.

Rounding out the raise, NAB is also launching a $500 million share purchase plan (SPP) – to eligible shareholders.

Goldman Sachs and Macquarie Capital are the lead underwriters of the institutional placement. The SPP will not be underwritten.

NAB share price: first-half results in focus

Though many are likely preoccupied with news of NAB’s mammoth capital raise – the largest for an ASX-listed company in the ‘Covid-19 era’ – the bank did also today release its first-half results, for the half period ending 20 March.

Many investors were likely disappointed by the H1, though in the current environment, these results were not at all unexpected. Here, NAB slashed its interim dividend (though didn’t cull it completely); saw its cash earnings collapse and its credit impairment charges skyrocket.

All up, NAB revealed that its cash earnings had crumbled to $1,436 million – representing a 51.4% decline on the previous corresponding period (PCP). The big four bank did however note that when excluding two large notable items – including customer remediation expenses ($293 million) and capitalised software charges ($742 million) – its H1 cash earnings stood at $2,471 million, down a more bearable, but still significant 24.6%.

An uncertain outlook: provisions blow out, dividends cut

Like most companies around the world, NAB’s releases today were dominated by a single theme: uncertainty.

Besides raising capital to shore up its balance sheet, NAB noted that it had increased its provisions, with credit impairment charges climbing in the half as a result, hitting $1,161 million – representing a staggering 158.6% increase PCP. This was driven by a significant uptick in provisions, with the bank saying:

'Underlying asset quality remains sound but the outlook is uncertain given economic disruption arising from COVID-19. To allow for this, 1H20 collective provisions include an additional forward looking economic adjustment of $807 million for potential COVID-19 impacts.'

Finally, and likely to the displeasure of income-focused investors, NAB today announced that it would be slashing its interim dividend to 30 cents per share – in the name of bolstering its capital position.

In H1 2019 NAB paid an interim dividend of 83 cents per share.

How to trade the big four banks – long and short

Though NAB is currently in a trading halt as its placement bookbuild is completed, investors can still trade the likes of CBA, ANZ and Westpac – long or short – using IG’s world-class trading platform now.

For example, to buy (long) or sell (short) CBA using CFDs, follow these easy steps:

  • Create an IG Trading Account or log in to your existing account
  • Enter ‘CBA’ in the search bar and select it
  • Choose your position size
  • Click on ‘buy’ or ‘sell’ in the deal ticket
  • Confirm the trade

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.

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