Bank stocks are leading the market lower with Commonwealth Bank of Australia (ASX:CBA) extending sharp losses and Australia and New Zealand Banking Group (ASX: ANZ) suffering its worst sell-off in more than six years after it emerged from a one-day trading halt.
Commonwealth Bank is being hammered on a report in The Australian that it will go cap in hand to shareholders to raise at least $4 billion in fresh capital.
The news comes hot on the heels of ANZ's decision to undertake a $3 billion equity placement, with the stock crashing 8.5% to $29.81 as it resumed trade following the news.
Commonwealth Bank is trading 1.5% lower this morning at $83.31 following its 3.2% belting on Thursday as investors sold down the sector to raise cash for ANZ's capital raising.
The speculation is that Australia's largest bank will announce a renounceable rights issue next Wednesday when it releases its full year result and some experts think the new share sale could top $7 billion.
Commonwealth Bank used to have the strongest balance sheet but equity raisings by National Australia Bank Ltd. (ASX: NAB) and ANZ will lift their tier-1 common equity ratio (CET1) to around 9.2% compared with Commonwealth Bank's 8.7%.
The CET1 ratio measures the value of common stock and reserves to loans and a higher ratio indicates a stronger balance sheet. Commonwealth Bank is keen to regain its crown and if its underwritten dividend reinvestment plans are included, the bank could raise as much as $10 billion.
The big banks are scrambling to shore up their cash position after the Australian Prudential Regulation Authority (APRA) imposed higher capital adequacy rules on the sector.
While Commonwealth Bank's capital raising could be larger than ANZ's, its new share sale may be more palatable to retail investors.
ANZ has copped some flak for allocating $2.5 billion of the $3 billion raised to institutional investors. This means retail investors could be diluted down.
A renounceable rights issue is seen as a fairer way to sell shares because it treats existing shareholders equally and allows those not willing to participate in the raising to sell their allocation to another investor.
NAB undertook a $5.5 billion renounceable rights issue in May and it remains my pick for the sector. Investors should use any weakness in the sector as an opportunity to buy or top-up their holdings in the stock.
