Banks raise cash as bad loans grow

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(Agencies)
Updated: 2008-12-11 07:59

Commonwealth Bank of Australia, Westpac Banking Corp and Australia & New Zealand Banking Group Ltd raised $6.7 billion this week selling stock and bonds to boost balance sheets dented by rising defaults.

Commonwealth said yesterday it will sell up to A$750 million ($496 million) in stock to Merrill Lynch & Co and priced A$2.7 billion of bonds, including A$2.2 billion of government-backed notes. Westpac, the biggest bank, sold A$2.5 billion in stock and $1.5 billion of notes, sending its shares 8.5 percent lower. ANZ, the No 4 bank, sold $1.75 billion of debt.

"The spate of raisings hints that bad debt provisions will have to rise in the face of a weakening economy," said Hans Kunnen, head of investment market research at Colonial First State Global Management, which manages $86 billion. "Banks are setting themselves up for a difficult period ahead amid a very tough funding climate."

Australian banks are putting aside more money to cover defaults after lending to firms that later failed, including Allco Finance Group and ABC Learning Centres Ltd. Lending growth has moderated to the slowest in 16 years as the economy cools, while investor demand for corporate debt has dried up amid the global credit crisis.

The world's biggest financial companies have raised $894 billion in new capital since the crisis began last year, triggering almost $1 trillion in write downs and losses, data compiled by Bloomberg show.

Australian financing costs declined for the first day in six as the new money eased banks' need to hoard cash to meet year end funding requirements. The difference between the rate banks charge each other for three-month loans and the overnight swap rate, a measure of cash scarcity, fell three basis points to 80.50 in Sydney.

The measure rose to a one-month high of 83.50 basis points yesterday after averaging 11 basis points in the five years before the credit crunch started in July 2007. A basis point is 0.01 percentage point.

Credit markets, which began seizing up after BNP Paribas SA halted withdrawals on three funds in August 2007, froze after the bankruptcy of Lehman Brothers Holdings Inc on Sept 15, spurring governments and central banks around the world to bail out financial institutions and pump cash into money markets.

Australian banks have initiated about $4.9 billion of government-backed bond sales since a guarantee came into effect Nov 28. That adds to more than A$9 billion of share sales announced in the past two months.

National Australia Bank Ltd, the country's biggest by assets, plans to sell bonds in euros backed by the government, according to two people involved in the proposed transaction.

The Melbourne-based bank hired Deutsche Bank AG, JPMorgan Chase & Co and Merrill Lynch & Co to manage the sale, which may happen early in 2009, said the people, who declined to be identified because the information isn't public.