* To issue new shares at A$25.50 vs Tuesday close of A$30.44
* To raise home loan rates by 20 basis points
* Australia's "Big Four" banks have now raised over A$20 bln
* FY cash profit up 3 pct to record A$7.8 bln, meets f'casts (Adds CEO comment, bank ROEs)
By Swati Pandey
SYDNEY, Oct 14 (Reuters) - Westpac Banking Corp WBC.AX , Australia's No.2 mortgage lender, on Wednesday said it will raise A$3.5 billion ($2.54 billion) to meet new stricter capital rules while pushing home loan rates higher in a cooling property market.
The decision to lift lending rates has stoked speculation that other lenders will follow suit and force the central bank to cut interest rates, already at a record low of 2.0 percent, at its November policy meeting.
Westpac CEO Brian Hartzer said the move was difficult but necessary to protect shareholder interests after the bank raised a total of A$6 billion this year.
"It is simply no longer sustainable to absorb these higher costs to providing mortgages," he said in a conference call.
The Australian Prudential (L:PRU) Regulation Authority (APRA) in July demanded that banks set aside bigger cash buffers against their mortgage books, a key source of revenue, amid fears of a house price bubble in Sydney and Melbourne.
That prompted the major banks to raise over A$20 billion since May but analysts still estimate a shortfall of a similar amount over the next two to three years, as APRA tries to bring capital ratios in line with leading international peers.
Analysts lauded Westpac's move to increase variable home loan and residential investment property loan rates by 20 basis points, effective Nov. 20, to help protect record profits.
"This is evidence that whilst they have to raise capital to meet higher regulatory requirements they are not going to smash their return on equity (ROE). That's the key to this," Morningstar analyst David Ellis said.
Australia's four major banks - Westpac, Commonwealth Bank of Australia CBA.AX , National Australia Bank NAB.AX , and Australia and New Zealand Banking Group ANZ.AX - have ROEs of between 12.2 percent and 17.9 percent, among the highest in the developed world.
Westpac set the price of the fully underwritten rights issue at A$25.50 per share, a 16.1 percent discount to Tuesday's close. The fund raising will add about 100 basis points to Westpac's common equity Tier-1 ratio, taking it to over 14 percent on an internationally comparable basis.
It also announced a full-year cash profit of A$7.8 billion, a record profit for a sixth straight year, up 3 percent from a year ago and in line with analysts' expectations. It will post detailed results on Nov 2.
Trading in Westpac shares will resume next Monday. ($1 = 1.3797 Australian dollars) (Editing by Stephen Coates)