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Westpac unveils $2.5B rights issue, raises home loan rates

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Cameron Spencer | Getty Images

Westpac, Australia's No. 2 lender by market value, on Wednesday said it will raise A$3.5 billion ($2.54 billion) to meet new stricter capital rules while pushing home loan rates higher by 20 basis points.

It set the price of the fully underwritten rights issue at A$25.50 per share, a 16.1 percent discount to Tuesday's close of A$30.44. The fund raising will add about 100 basis points to Westpac's common equity Tier-1 ratio, taking it to over 14 percent on an internationally comparable basis.

The move comes after the Australian Prudential Regulation Authority in July demanded that banks set aside bigger cash buffers against their mortgage books, a key source of revenue, amid fears of a house price bubble.

Westpac was widely expected to raise about A$3 billion by November after heavy-lifting by rivals earlier this year. But analysts lauded the bank's move to increase variable home loan and residential investment property loan rates by 20 basis points, effective Nov. 20.


"What I did like particularly in that was the announcement of the increase in home loan rates ... which I expect the other major banks to follow over the near term," said Morningstar analyst David Ellis.

"This is evidence that whilst they have to raise capital to meet higher regulatory requirement they are not going to smash their return on equity. That's the key to this."

Australia's four major banks - Westpac, Commonwealth Bank of Australia, National Australia Bank, and Australia and New Zealand Banking Group - have now together raised over A$20 billion since May.

Analysts, however, still estimate a shortfall of about A$20 billion over the next two to three years as Australian regulators try to bring banks' capital ratios in line with international peers.

Westpac announced a full-year cash profit of A$7.8 billion, up 3 percent from a year ago, in line with analysts' expectations, according to Thomson Reuters I/B/E/S. It expects to announce a dividend of 94 cents a share.

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Trading in Westpac shares has been halted and is expected to recommence next Monday.

Bank shares have fallen 5.7 percent to 12.9 percent so far this year as concerns mount over stricter capital rules and banks' ability to dole out large dividends. Westpac is down 8 percent so far this year.