Market tap an insurance policy

Are we all casually strolling into Armageddon? Hand in hand with that mob we hate/love that oils/finances our lives?

I mean, what the hell is going on with our banks?

They’ve been announcing record profits, but are now rattling the tins for cash injections, while punishing property investors by sharply increasing interest rates.

And all this, as market volatility surges, snatching, temporarily at least, billions from our investments. Almost no sector has been battered as much as the banks – the biggest single sector of Australia’s stock market – which have dropped about 18 per cent from their peak.

The last time the banks went to investors to ask for wheelbarrow loads of capital was when the world was imploding during the GFC.

Back in 2008 and 2009, we were staring into the abyss. It was scary. The whole planet was financially imploding. Offshore banks were toppling over. Ours weren’t looking flash. Governments were panic-splurging to try to hold economies together. Pants were being pooped. Investors were bathing in blood.

Banks needed capital. And they were struggling to get it.

Now, in 2015, they are seeking an even greater amount of capital. Are banks raising cash now because we are again facing oblivion?

NAB raised $5.5 billion in May. Westpac looked for $2 billion in May also, then another $750k in July.

In early August, ANZ put its shoulder down and charged the door, trying to get its begging bowl in front of investors before it believed the Commonwealth Bank would.

Understandable. It’s got to be easier to get cash out of investors when you’re first, rather than last. ANZ raised $3 billion, CBA is looking for $5 billion by September 8.

The feeling is that Westpac will also have to go back and tap the market again soon.

While the economy generally seems to be doing okay, banks are coming under pressure. Earnings are increasing at a slower rate than previously and bad debts are rising, despite official interest rates continuing to fall.

The Australian Prudential Regulation Authority, the corporate regulator, is concerned. Worried the banks are over-leveraged to the residential property market in general and investment property in particular.

Could they implode? It’s hard to believe so. But APRA wants our banks to become “unquestionably strong”. And, to do that, they’ve issued an edict for them to hold more capital, as a form of insurance.

Banking is an inescapable part of our lives. However, as institutions, they’re about as popular as a kid with gastro at a birthday party.

They keep our savings safe. They lend us money to buy homes and investment properties, and cover us, often via credit cards, when we’re short for a week or a month.

Anyone with superannuation has a portion of their retirement tied to the continued success of our banks. Your super almost certainly is partially invested in them, if not managed directly by one of them, as banks own most of the superannuation platforms and fund managers.

And it can be hard to go past them as direct investments. They are paying an average fully franked dividend yield of around 6 per cent – grossed up, it comes to more than 8.5 per cent. (But their falling share price suggests that the market isn’t confident those yields can hold.)

Other savings will struggle to earn 3 per cent. With shares, your capital is at the whim of share market fluctuations, but those dividends sure are juicy.

So, do you take them up on this latest tin-rattling? Banks often raise capital via discounted shares. The value of existing shares will drop to somewhere between what they were originally trading at before they announced the raising and the price they offer the new shares at.

Reasons for taking them up can be that your holding will be diluted if you don’t, and that the cheap shares are often at an attractive discount that seems to suggest an instant, and easy, win.

But some fund managers have shied away from these capital raisings, believing bank share prices have further to fall and they will be able to pick up the stock cheaper still in the coming months.

While banks raising capital is rarely a great sign, it seems like insurance rather than a stroll into Armageddon.

Bruce Brammall is the author of Mortgages Made Easy and managing director of Bruce Brammall Financial. E: bruce@brucebrammallfinancial.com.au.