By Swati Pandey
SYDNEY (Reuters) - National Australia Bank (AX:NAB), the country's top lender by assets, will raise A$5.5 billion (3 billion pounds) in a rights issue as part of plans to exit its troubled British unit, a strong signal the new CEO intends to boost shareholder returns.
Investors had long begged the bank to exit its UK business, including Yorkshire and Clydesdale bank branches, with charges for bad and doubtful debt behind annual profit declines four times since 2008.
The rights issue - one of the biggest in Australian corporate history - is the latest move by the country's banks to shore up their balance sheets ahead of an expected tightening of capital requirements.
But the increase in the number of NAB shares on the market could mean dividends have to be spread more thinly, one of the themes of a downbeat reporting weak for Australian lenders with Westpac (AX:WBC) and ANZ Banking Group (AX:ANZ) announcing lower-than-expected payouts.
CEO Andrew Thorburn, who took the reins in August last year, said the bank was "addressing our legacy and low-returning assets and doing so with urgency".
"We have built balance-sheet strength, post capital-raising. We are now positioned well for regulatory headwind," he said.
The bank unveiled 2-for-25 rights shares at A$28.50 each, a 25 percent discount to Wednesday's closing price. Macquarie Capital
It reported a 5.4 percent increase in first-half cash earnings to A$3.3 billion, meeting forecasts, and announced an unchanged dividend of 99 cents.
NAB shares are on trading halt until Monday as the bookbuild begins.
Although the capital raising will hurt NAB's earnings per share and return on equity in the near-term, fund managers welcomed the move and said it put pressure on other banks to emphatically bolster their balance sheets.
"It will be attractive given that they finally managed to find a solution to their long-term problems," said Don Williams, chief investment officer at Platypus Asset Management.
"It's not good for bank shares though, because every man and his dog will be selling non-NAB shares to fund the rights issue."
Westpac and ANZ also announced plans to raise funds this week as the government pressures lenders to hold more capital against home loans and rein in risky mortgage lending.
NAB also unveiled a re-insurance arrangement with a major global insurer for about 21 percent of its in-force retail advised insurance book, which will help it release A$500 million of core equity tier-1 capital.
It also appointed former Treasury secretary Ken Henry as its chairman, replacing Michael Chaney.