SYDNEY: Australia’s second-largest bank went further than its rivals in boosting the cash it holds against potential financial crises, raising home-loan rates on top of launching a multibillion-dollar equity raising.
Westpac Banking Corp. said it planned to raise 3.5 billion Australian dollars (US$2.5 billion) through a share offering to help the lender comply with new global banking regulation requiring more money be held in reserve against the risk of home-loan defaults in a crisis.
The move follows similar-sized capital raising by Commonwealth Bank of Australia, Australia & New Zealand Banking Group, and National Australia Bank. But on Wednesday, Westpac also said that from next month it would lift its variable-mortgage rates for owner occupiers and property investors by 20 basis points.
“This is a difficult decision and one that is not taken lightly,” said George Frazis, chief executive of the lender’s consumer-banking division. “We acknowledge it does impact customers, even in an environment where interest rates remain near historic lows.”
Australia’s banking regulator said in July that the biggest banks would have to set aside billions of dollars more against potential home-loan losses. On Wednesday, Mr. Frazis said the new regulation, rooted in the Basel III framework, would significantly increase the cost of providing mortgages—since the amount of capital that needed to be held against home loans would increase by more than 50%.
Westpac’s decision to raise mortgage rates, which may significantly weaken consumer confidence and spending if other banks follow suit, complicates the central bank’s efforts to stimulate growth as Australia’s decadelong mining boom draws to a close.
The nation posted its slowest quarterly growth in four years in the second quarter, as fading investment in the resources industry and tumbling export revenue linked to weaker commodity prices continued to put a brake on the economy—despite official interest rates remaining at a record-low 2% since May.
Some economists now believe there is a higher chance of the Reserve Bank of Australia, or RBA, cutting rates again as soon as next month to offset the possible economic impact of Westpac’s decision.
Sally Auld, debt strategist at J.P. Morgan, said Westpac’s move may well be followed by the other major banks, who may have been reluctant to take action for fear of a consumer backlash. “It’s a free hit for them,” she said. “On that basis, the hurdle for an RBA cut has just been lowered.”
The so-called big-four lenders have enjoyed years of steady earnings growth, as soured loans have fallen and mortgage lending has boomed since the financial crisis. But in recent months, their shareholders have been worried about the impact of Basel III, which aims to prevent a 2008-style meltdown of the financial system. Their shares have fallen on average by 23% from their peaks early this year.
Commonwealth Bank announced plans to raise A$5 billion in August, following a A$3 billion raising from ANZ earlier in that month. In June, National Australia Bank raised A$5.5 billion from investors. Earlier in the year, Westpac offered shares at a slight discount via a dividend reinvestment plan aimed at raising about A$2 billion for the lender.
Under Westpac’s latest entitlement offer, existing shareholders can purchase one new share for every 23 held, at an offer price of A$25.50 a share. That represents a 16% discount to the stock’s closing price of A$30.44 on Tuesday.