UPDATE 3-NAB to raise $2 bln, Aussie rivals seen following

(Updates with NAB confirming increase in size of placement)

By Mette Fraende

SYDNEY, Nov 10 (Reuters) - National Australia Bank (NAB) (NAB.AX) is raising up to A$3 billion ($2 billion) in a share placement to strengthen its balance sheet, prompting analysts to predict other lenders would follow suit as bad debts increase.

Australia's biggest bank had initially said in a statement on Monday that it intended to raise A$2 billion ($1.4 billion) from selling new shares, but later announced it had increased the size of the placement due to strong demand.

"The size of this raise comes as a surprise ... management has been saying they think they are OK on capital," said Jarrod Martin, analyst at ABN AMRO.

"Clearly you don't want to be in a capital deficit position in the environment where you have got increasing bad debts going forward."

Last month, NAB reported a quadrupling in bad debt charges and a 28 percent drop in second-half cash profit. Rival banks also saw bad debts rising.

Australian banks have escaped the worst of the subprime mortgage fallout that has battered U.S. and European peers, but with growing signs of a global recession, they face increasing bad debts and will have to raise more capital, analysts said.

NAB offered the new shares at A$20 each, a near 10 percent discount to its closing price of A$22.15 on Friday, a source familiar with the transaction told Reuters.

"We think Westpac (WBC.AX) and ANZ (ANZ.AX) will come to the market at some point in the next 3-6 months," said a source familiar with NAB's fund raising.

"We have a general view that effectively all four majors will at some point try to tap the market."

Some analysts said second-ranked Commonwealth Bank (CBA.AX), which is paying $1.4 billion for HBOS Plc's HBOS.L BankWest unit, would be next in line to raise capital. CBA sold $1.3 billion of new shares last month to fund the acquisition.

Recent corporate collapses in Australia, such as Allco Finance Group Ltd AFG.AX and childcare operator ABC Learning Centres Ltd ABS.AX, have added to banks' fund raising pressures.

Australia's central bank on Monday cut its forecasts for economic growth for the next two years, saying it would review interest rates in the months ahead with the aim of avoiding an even sharper slowdown in domestic demand. (To read more, click on [nSYD390831])

FEELING THE PRESSURE

Proceeds from the share sale would take NAB's Tier-1 capital adequacy ratio -- the core measure of a bank's capital strength used by regulatory agencies -- to about 8.0 percent, nearing ANZ's benchmark 8.1 percent.

The placement would be followed by an offer to retail shareholders to participate in a non-underwritten share purchase plan for up to A$10,000 worth of NAB ordinary shares, the bank said.

Trade in NAB shares was suspended on Monday pending the share sale announcement but an index of Australian bank shares .AXFJ fell 1.4 percent, underperforming a 1.4 percent gain on the main S&P/ASX 200 index .AXJO.

"That tells you something in itself, that the sector faces significant headwinds," Martin said.

Investment firm Babcock & Brown Ltd BNB.AX said earlier it sold its rights to manage fund Babcock Capital BCM.AX, a move consistent with it narrowing the focus of the group's activities. Its shares dropped by more than a quarter.

In its statement, NAB said it was raising capital to strengthen its balance sheet and take advantage of organic growth opportunities, citing more favourable market conditions, which would be equivalent to expected shortfalls in its dividend reinvestment plan. ($1=1.477 Australian Dollar) (Additional reporting by Denny Thomas; Editing by Ian Geoghegan)