Westpac share price: why another capital raise may be necessary

Best of two?

Westpac's (ASX: WBC) recent attempt at a capital raise didn’t quite go to plan: well it did, right up until the point that it didn’t.

The bank first announced the $2bn cap raise as part of its FY19 results. One day later, the raise was finalised. Sure, the bank’s share price took a bit of a hit: but at least its balanced sheet was shored up.

Then – as we covered previously – AUSTRAC alleged that the bank had breached the AML/CTF Act on 23 million different occasions. Payments that may have been used to facilitate child exploitation were also flagged. A firestorm followed: the share price dove more and Westpac’s CEO took an early exit.

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Westpac share price: the current situation

Adding to the current situation, the Australian Securities & Investments Commission (ASIC) noted recently that:

‘It commenced an investigation on Thursday, 21 November 2019 concerning possible breaches of legislation it administers arising from AUSTRAC's actions in relation to Westpac.’

Specifically, and as the Australian Financial Review (AFR) elaborated:

‘Westpac and investment banks will be investigated by the securities regulator over whether they adequately informed investors of alleged money-laundering violations before selling more than $2 billion of shares.’

Indeed, as the AFR pointed out, since that first cap raise, some $6bn in shareholder value has been destroyed.

Besides that, the other question that has followed as a result of this whole debacle is: will Westpac (ASX: WBC) have to raise fresh capital?

Bloomberg, quoting Jefferies analysts, noted:

‘”Thinly capitalized’ Westpac doesn’t look well placed to pay an about A$1 billion ($679 million) fine without raising more CET1 capital; Share purchase plan may not raise as much as expected due to ‘disillusioned’ retail investors.”’

Simply put: Westpac may need the capital to help cover any potential AUSTRAC fine – which analysts from Bell Potter has estimated could run as high as $3.7bn.

In addition to this and in its current state, Westpac’s all-important CET1 ratio may also become stretched – with Morgan Stanley forecasting this ratio to fall to 10.9% in FY20; still, at least above APRA’s unquestionably strong requirement.

Though the investment bank suggests that a fine of around $1.0bn is most likely, a fine in the realm of $3.0bn could see Westpac’s CET1 ratio pushed down as low as 10.5%.

Like Jefferies, Morgan Stanley also believes that Westpac (ASX: WBC) will need to pursue another capital build. According to the investment bank this will most likely be undertaken through a dividend reinvestment plan (DRP).

Moreover, while Morgan Stanley thinks WBC’s dividend will remain flat next year, recent news developments has increased the chance of further dividend cuts.

The Westpac share price currently trades at the $24.64 mark.