NAB raising leaves retail investors missing spoils
If Australia aspires to be a great share-owning democracy, it has to cut small investors into a larger share of the spoils from “emergency” capital raisings by the nation’s top companies.
About 85 per cent of the $18bn in capital raised by listed groups in the COVID-19 crisis has been through placements to institutional investors at a 14 per cent average discount to the market.
By definition, retail investors don’t get a look in, so that’s a significant leakage in value and a dilution of households in favour of institutions.
Investment banking fees of $332m will also help line the pockets of about 200 dealmakers nationwide at bonus time.
It’s nice work if you can get it, and the situation has only become worse since the global financial crisis, when the placement rate to institutions was only 40 per cent — less than half what it is now.
NAB said on Wednesday it had increased the size of its SPP from an initial $500m to $1.25bn, alongside the $3bn already raised from institutions. In both cases, the issue price was $14.15, with the SPP the second biggest on record after ANZ’s $2.2bn effort in 2009.
The key point about unfairness is that retail shareholders account for 48 per cent of NAB’s register, yet even after the SPP was super-sized they contributed only 29 per cent of the raising.
Valid applications were received from 155,000 of 615,000 eligible retail shareholders — a participation rate of 25 per cent, or 21 per cent by shareholding — for a total value of $2.9bn.
That means 75 per cent of NAB’s retail shareholder base will wear the cost of value leakage and dilution.
When the SPP closed on Friday, NAB shares were $15.35, well ahead of the $14.15 offer price.
The first point is that you can’t save small shareholders from their own poor investment decisions.
That said, the average application amount of $18,500 was clearly too much of a stretch for many households in the current circumstances.
The second point is the NAB board didn’t have a good handle on the likely extent of retail demand, or a more favourable outcome for retail shareholders might have been possible.
Directors would say in their defence that no one knew the likely depth of the COVID-19 crisis when the bank unveiled its capital raising late last month.
Less experienced boards have also shown their vulnerability to fee-hungry advisers, who have learnt to push all the right buttons about the speed and certainty of underwritten institutional placements.
The counterargument is that underwriters have rarely had to write a cheque for unplaced stock.
The clear preference of retail investors, supported by the Australian Shareholders’ Association, is the so-called PAITREO — a pro-rata entitlement offer with a rights trading period for retail investors.
While PAITREOs have taken a back seat, particularly in “emergency” COVID-19 raisings, a lot of the recapitalisations have so far been for growth initiatives rather than debt reduction.
Lenders on a tear
The extraordinary rally in major bank shares on Wednesday was the outcome of several factors, most notably a long-time “bear” spotlighting the sector’s persistent underperformance despite a run of upbeat economic data.
UBS bank analyst Jon Mott hasn’t fundamentally changed his view that the big four face some tough challenges from September, when about $100bn in policy support dwindles.
In the short term, though, Mott noted that they had been ring-fenced from the broader market recovery, underperforming by 19 per cent over the past three months.
The most recent instalment of good news was the $60bn “saved” from JobKeeper outlays.
On top of that, household cash flow has been boosted by $10.6bn in early superannuation withdrawals, card and retail spending has been recovering, many small-cap companies have reported strong trading updates, and auction clearance rates have recovered. In short, a few rays of economic sunshine have replaced the country’s dire predicament of only a few weeks ago, and the virus has co-operated so far by showing no signs of a second wave.
“While we are certainly not out of the woods, the likelihood of a more severe downturn with even larger credit losses … driving dilutive capital raisings appears less likely in our view,” Mott said in his note.
For many years, the major bank stocks traded at a surplus to book value: a tribute to the strength of their franchises. The premium evaporated more recently as the pandemic raised expectations of a wave of bad debts, with Westpac and ANZ trading at about 0.8 times book value.
The thinking in some sections of the market is that a 10 per cent return on equity would justify an upgrade to book value, implying a 25 per cent rally in share prices.
ANZ was the top performer on Wednesday, surging 8.6 per cent to $17.94, with Westpac up 8 per cent, NAB 7.8 per cent higher and Commonwealth Bank lifting almost 5 per cent. If the market’s optimistic assessment is right, there’s more to come.
Trust in CBA builds
Several years ago, the idea that Commonwealth Bank would feature among the nation’s 10 most trusted brands in April 2020 would have been dismissed as a joke.
Sure, it’s holding up the rest of the table in 10th position — a long way behind the top three of Bunnings, Woolworths and Qantas — but CBA is at least a participant instead of an also-ran.
Since late 2017, the Roy Morgan Risk Monitor has been asking 1000 Australians every month to measure their levels of trust and distrust in more than 800 brands across 25 industry sectors.
CBA’s brand damage over that period has been so effective that the bank has only appeared once in the top 10.
That was in December 2018, a month after chief executive Matt Comyn fronted the financial services royal commission and admitted that the bank had made some serious mistakes.
For whatever reason, Comyn projects trust when CBA’s reputation is on the line, in contrast to his predecessor Ian Narev.
The CBA boss, who celebrated two years in the job last month, repeated the dose in March as COVID-19 anxiety peaked across the nation.
On March 13, a day after Scott Morrison announced his first $17.6bn stimulus package, Comyn penned a note to staff that declared it was a “key moment” for the bank and “an opportunity to support our nation”.
“That’s exactly what being a bank for all Australians means and that’s exactly what we are going to do,” he said.
Coming from others it would have sounded jingoistic; from Comyn it proved to be effective.
Employee engagement in the bank is now the highest it’s been for four years.
It remains to be seen if Comyn can engineer a lasting turnaround in the bank’s corrosive culture, which was a key finding in APRA’s prudential inquiry handed down in May 2018, only weeks after Comyn became CEO.
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