westpac research - their take on the spp

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PS - no link can be provided as its inside the westpac trading platform
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ANZ Banking Group Ltd (ANZ)

Gorging on SPP raises institutional ire

Recommendation 13/07/2009: Hold
Investment Rating
ANZ is a major Australian-based bank operating retail and business banking franchises throughout Australia, New Zealand and the South Pacific. ANZ’s goal is to become Australasia’s leading, most respected and fastest growing major bank. The strategy embraces distinctive customer service, delivered at low cost and low risk resulting in market leadership and superior market growth combined with sustainable shareholder value. Strategic expansion in Asia differentiates ANZ from its peers.

Event

* After being the last of the four majors to tap the equity market and raising new equity at a smaller discount, ANZ leapfrogged the peer group in extraordinary circumstances. Initially ANZ raised $2.5 billion in an institutional placement on 27 May via the issue of 173.6m new shares at $14.40 per share. Retail shareholders were to be accommodated via a Share Purchase Plan (SPP), being able to subscribe for up to $15,000 worth of ordinary shares.

* On 9 July ANZ announced following “outstanding support” for the SPP it accepted all compliant applications and would issue 151.8 million new shares raising $2.185 billion. The new shares will be allotted on 13 July and trade on a normal basis from 14 July. This is likely to add some downward pressure on ANZ’s share price in the short term. The waiving of the scale back on the SPP will alienate institutions and sophisticated and professional investors and underwriters in the future.

Full Event Analysis

Impact

* ANZ has in effect had two bites of the equity cherry. The proceeds from the SPP temporarily push Tier 1 capital ratio to near 9.5%. Additional capital increases ANZ’s financial flexibility to pursue strategic and organic growth opportunities. Management is prepared to carry additional capital given the uncertain economic environment.

* We retain our existing NPAT estimates for FY09 and FY10 having already assumed what we consider the appropriate impairment charges. EPS for both FY09 and FY10 are impacted by the issue of extra shares following the SPP. FY09 EPS declines from 127.0¢ to 125.6¢ and FY10 from 131.6¢ to 125.0¢. Weighted average shares on issue become 2230m and 2600m respectively.

* Fair value falls from $16.80 to $16.30 and price triggers adjust accordingly. We reduce FY10 DPS from 94.0¢ to 92.0¢.


Recommendation Impact
(Last Updated: 13/07/2009)
No Change

Event Analysis

After being the last of the four majors to tap the equity market and raising new equity at a smaller discount, ANZ leapfrogged the peer group in extraordinary circumstances. Initially ANZ raised $2.5 billion in an institutional placement on 27 May via the issue of 173.6m new shares at $14.40 per share. As is now normal practice, retail shareholders were to be accommodated via a Share Purchase Plan (SPP), being able to subscribe for up to $15,000 worth of ordinary shares. “However, ANZ reserves the right to scale back applications under the SPP if total demand exceeds $350 million.” This indicated to institutional investors the maximum dilution from the SPP would be the issue of a further 24.3 million new shares. It would have been on that basis the placement was underwritten and the price set. The right to scale back was reaffirmed with the SPP details in a media release on 10 June.

On 9 July ANZ announced following “outstanding support” for the SPP it accepted all compliant applications and would issue 151.8 million new shares raising $2.185 billion. This is the largest SPP on record. The new shares will be allotted on 13 July and trade on a normal basis from 14 July. This is likely to add some downward pressure on ANZ’s share price in the short term. The waiving of the scale back on the SPP will alienate institutions and sophisticated and professional investors and underwriters in the future. ANZ’s $2.85bn capital raising swelled to $4.7bn. It confirms our view expressed in Forecast 2009-10 ‘Banks – Time for a breather’ published 26 June 2009 that all four major banks are likely to raise additional capital over the coming months. The capital raisings of the last six months have effectively repaired individual balance sheets by replacing the hole in earnings left by large FY09 credit impairments. With these impairments likely to remain at elevated levels in FY10 the same process is expected to be followed with a further $12bn likely to be raised before June 2010. While there is significant corporate and personal deleveraging activity underway throughout the world, banks are also deleveraging. They are raising capital, lifting deposits and lending cautiously. Deposits are growing at a faster rate than loans as banks try to reduce exposure to the more expensive wholesale markets. Additional capital is not being leveraged in the traditional way. Restrictive lending practices are curtailing loan growth.

ANZ has in effect had two bites of the equity cherry. The proceeds from the SPP temporarily push Tier 1 capital ratio to near 9.5%. ANZ has ongoing negotiations with the Royal Bank of Scotland Group plc regarding the acquisition of certain Asian assets. Success is likely to require up to $2.5bn. At the time of the FY09 interim report management indicated the 2H09 credit impairment charge would be around $1.72bn – some 20% higher than 1H09 of $1.435bn with additional stress was evident in the commercial - middle market - segment in March. There has been no material change in this guidance and we have allowed for a charge of $3.2bn in our FY09 estimates.

Additional capital increases ANZ’s financial flexibility to pursue strategic and organic growth opportunities. Management is prepared to carry additional capital given the uncertain economic environment. It may provide the opportunity to repay maturing hybrid capital or buy back subordinated debt at a discount.

We retain our existing NPAT estimates for FY09 and FY10 having already assumed what we consider the appropriate impairment charges. EPS for both FY09 and FY10 are impacted by the issue of extra shares following the SPP. FY09 EPS declines from 127.0¢ to 125.6¢ and FY10 from 131.6¢ to 125.0¢. Weighted average shares on issue become 2230m and 2600m respectively. Fair value falls from $16.80 to $16.30 and price triggers adjust accordingly. We reduce FY10 DPS from 94.0¢ to 92.0¢.