National Australia Bank (NAB) has taken advantage of a stronger equity market and share price to raise $2.75 billion capital for acquisitions and to buffer it against rising bad debts.

NAB’s move to tap institutions and retail investors will take to over $10 billion money it has raised in equity and debt issues since a $3 billion institutional placement in November.

The latest raising prompted at least two broker upgrades and a sell-off in Westpac’s shares, with market players tipping Westpac will be next to raise capital.

IG Markets institutional sales adviser Chris Weston said NAB’s $23.58 closing share price on Tuesday was near a 52-week high and the bank was moving now to avoid the risk of a market pull-back.

“The stars are aligned quite nicely for NAB to do this (now),” Mr Weston said.

“There’s huge interest from the public if they can buy these banks at a discount so it will be very well supported.”

NAB and ANZ Banking Group have the most upside on a price to earnings basis, and Westpac’s credit issues mean they may be next to raise capital, he said.

NAB also announced a retail raising of up to $750 million from a non-underwritten share purchase plan and said shares under the placement will be priced at a minimum of $21.20 each, with the final price to be determined by a bookbuild.

The bank’s shares were in a trading halt on Wednesday during the institutional bookbuild, with some reports suggesting brokers were bidding as high as $22.50.

NAB’s chief executive Cameron Clyne said the new capital would be used to bolster the bank’s balance sheet, propel its proforma tier 1 capital ratio to 8.8 per cent - 1.8 per cent above the target - and fund bolt-on acquisitions.

“We are not seeking to build a warchest,” Mr Clyne said.

“Nor are we contemplating anything transformational.”

No acquisition is likely to be larger than NAB’s recent $825 million acquisition of Aviva that will make the bank the market leader in the local wealth management space.

Nor will the funds be used to cover $4 billion in losses from its portfolio of toxic debt which is the subject of discussions between NAB and the Australian Prudential Regulation Authority, Mr Clyne said.

The structured credit portfolio was held in nabCapital and includes corporate bonds, commercial mortgage backed securities, collateralised debt obligations (CDOs) and synthetic CDOs (SCDOs).

All are being held on a hold-to-maturity basis and analysts say any writedowns could cost shareholders $3.9 billion.

NAB booked a $1.441 billion loss provisions on CDOs in the portfolio since March 2008 but has yet to mark the value of the instruments to market, which could result in more writedowns.

So far, the provisions have been set by NAB’s internal credit risk ratings, which chief financial officer Mark Joiner said have the underlying assets rated at BBB - the lowest investment grade used by ratings agencies.

Dividend affordability would not be affected by the capital raising Mr Joiner said.

The capital raising comes as NAB reported June quarter cash earnings of $900 million on lower revenue and $1.064 billion in bad and doubtful debts - $747 million below the total for the six months to March 2009.

A lower revenue run rate from the bank’s Markets trading division pulled total revenue lower as defaults are booked through the revenue line, Mr Joiner said.

NAB’s bad and doubtful debts are expected to peak over the next 12 months.

Mr Clyne blamed one-third of the June quarter level on exposures to troubled corporates but said asset quality had declined across all of the bank’s businesses.

“While market conditions have shown some improvement we remain cautious on the outlook,” he said.

“For example how procyclicality (the impact on capital from deteriorating credit quality) will play out through the cycle remains uncertain and items such as the US pension position will be affected by market volatility.”

“It is prudent to ensure we continue to maintain an appropriate buffer for these items.”

NAB said its total provision balances at June 30 stood at $5.426 billion, up from $4.861 billion at March 31.

Mr Clyne said the Australian economy appeared to be showing some signs of recovery, reflecting government fiscal policy initiatives and improved global sentiment.

However, unemployment and credit quality trends, which tend to lag, remain negative.

AAP