The National Australia Bank Ltd (ASX: NAB) share price has started the week on a disappointing note.
In fact, in afternoon trade the banking giant’s shares are the worst performers on the ASX 200. NAB’s shares are down 3.4% to $27.45 at the time of writing.
Why is the NAB share price dropping lower today?
The catalyst for this decline has been the release of the Westpac Banking Corp (ASX: WBC) full year result.
This morning NAB’s rival reported a 16% decline in statutory net profit to $6,784 million and a 15% decline in cash earnings to $6,849 million.
Whilst this was disappointing, the bank’s decision to cut its dividend materially and launch a capital raising is what appears to have spooked investors most.
Westpac has slashed its final dividend by 15% to 80 cents per share and revealed a whopping $2.5 billion capital raising.
It is undertaking this capital raising in order to strengthen its balance sheet and CET1 capital ratio. The latter is expected to increase to ~11.3% (from 10.7%) following the capital raising, putting it comfortably ahead of APRA’s unquestionably strong benchmark of 10.5%.
The bank also believes it will give it the flexibility to respond to changes in capital rules and for potential litigation or regulatory action.
Why does this matter to NAB?
This matters to NAB because at the end of the third quarter it had a CET1 ratio of just 10.4%. Or 10.65% if you factor in $1 billion (25bps of CET1) of dividend reinvestment plan underwrite proceeds.
Given how Westpac elected to raise funds when it finished the financial year with a CET1 of 10.7%, it looks as though investors believe NAB will have to follow its lead this week.
NAB is due to release its full year results on Thursday morning. No doubt the market will be watching that one even more closely than normal.
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Motley Fool contributor James Mickleboro owns shares of Westpac Banking. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.