BNZ's parent cites tax case in bid for $3b

Photo / Kenny Rodger

National Australia Bank has cited the loss of a tax case against its New Zealand subsidiary Bank of New Zealand as one reason behind its decision to raise A$2.75 billion ($3.4 billion) in new capital.

The Melbourne-based banking group went into a trading halt yesterday as it announced plans to raise A$2 billion through a fully underwritten institutional share placement and up to A$750 million in a non-underwritten share purchase plan.

The bank said the capital raising was designed to improve its Tier 1 position, a measure of financial strength, in the face of the tough economic cycle, volatility in capital items and possible tax case provisions.

The BNZ last week lost a case in the High Court at Auckland which could cost it $654 million in unpaid tax and interest and more in penalties.

It is one of a number of banks facing similar cases over international structured finance transactions. The banks are treating the cases as contingent liabilities.

BNZ has said it is likely to appeal the case and has 20 days in which to do so. But the bank said the New Zealand tax case had the potential to affect capital in the foreseeable future should provisions be taken.

However, it was more upbeat about the New Zealand economy.

"The New Zealand economy is experiencing a protracted recession with lower commodity prices, higher unemployment and weak asset prices, but there are signs that conditions are starting to stabilise as lower interest rates and fiscal stimulus support demand," the bank said.

While its New Zealand lending volumes had continued to slow, deposits were growing.

The ratio of 90 days past due and gross impaired assets to gross loans and acceptance increased to 125 basis points at June 30 from 113 basis points at March 31 in New Zealand.

But it said BNZ had maintained prudent capital and liquidity positions.

NAB group chief executive officer Cameron Clyne said the group continued to deliver a solid performance despite the subdued economic environment. Clyne said the extra capital would add to the group's funding and liquidity positions.

"This capital raising not only ensures we maintain a strong balance sheet position, but also provides us with the flexibility to support our existing customers."

But the decision to raise more capital on top of a A$3 billion issue in November surprised some analysts.

"It's diluting EPS [earnings per share] a little bit too much," said Peter Vann at Constellation Capital Management in Sydney. "It's a bit overly defensive, unless they have an acquisition up their sleeve that they haven't told us about."

Australian banks have tapped demand for their shares to bolster balance sheets dented by asset writedowns, rising bad loans, and to finance acquisitions.

Australia & New Zealand Banking Group said this month it sold A$2.2 billion of stock to shareholders, more than six times the amount the lender announced in May, as it bids for Royal Bank of Scotland Group's Asian units.

"Both ANZ and NAB have raised capital with acquisitions on the agenda," Citigroup analysts wrote. "With other banks having done deals this cycle and a further blowout in bad debt looking unlikely, we think this will likely signal the end of the Australian bank capital raising cycle."

The NAB institutional share placement will increase the bank's Tier 1 ratio, to about 8.8 per cent from 8.2 per cent, it said.

The bank will sell A$2 billion to institutions at a minimum A$21.20 a share, 10 per cent below Tuesday's closing price.