S&P lifts NAB, BNZ outlooks after A$3 bln share issue

Standard and Poor's has upgraded its outlook for its AA credit ratings for National Australia Bank and BNZ to stable from negative after NAB surprised many by raising a bigger than expected A$3 billion in new capital through a share placement to institutional investors. This increases the pressure on ANZ and Westpac, who are expected to raise A$1 billion each later this week through share issues, possibly to back dividend reinvestment plans. "The outlook revision reflects our view that the risk of a ratings downgrade on NAB in the medium term has been lessened by the bank's ordinary-equity capital raising of more than A$2 billion, which has been fully underwritten," said Standard & Poor's credit analyst Sharad Jain. "We anticipate that similar to its domestic peers, NAB's earnings are likely to remain under pressure in the near term due to potentially higher credit and asset provisioning, and pressures on asset growth. However, credit losses stemming from mortgage and consumer loans are expected to remain manageable within the "˜AA' rating level." This boosts NAB's tier one capital ratio to over 8% from 7.35% at September 30. "Although fiscal 2008 cash earnings are 10.7% below the previous year's, the bank's profitability remains strong and supportive of the group's credit profile. Despite the continuing global financial-market dislocation, we consider that NAB's funding and liquidity are supported by the measures announced by the governments and central banks in Australia, New Zealand, and the U.K. in the recent weeks," S&P said. "If the dislocation in global financial markets prolongs and worsens, similar to NAB's peers, the bank's credit profile could be negatively affected in four broad areas: * Reduced access to funding and capital. This risk is accentuated by the Australian major banks' dependence on offshore wholesale funding to make up the gap between loans and customer deposits; * Increased credit losses from exposures to financial counterparties, although the current indications are that these exposures are currently small and being reduced; * Increased credit losses through increased corporate and retail defaults; particularly because the outlook on the Australian economy is weakening, and there is more downside risk than upside potential. Although NAB's credit losses in the U.K. have remained manageable, and are lower than peers, we note that the U.K. housing market is experiencing more severe stress than Australia; * Changes in risk appetite and business models due to potential earnings impact, M&A opportunities, or changes in the financial market environment." * This article was first published yesterday in our daily subscription newsletter for the banking and finance industries. The email costs NZ$365 per annum and carries exclusive news and analysis for New Zealand banking and finance industry executives, regulators and investors. Sign up for a free trial here.