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NAB's ugly surprise
Email Print Normal font Large font 'If Suncorp's share price falls too far, QBE will at least consider the prospect of having a crack.' Related Coverage
NAB shares slump on writedowns
Analysts fear more NAB calamities
Charts NAB share price
AdvertisementMichael West
July 25, 2008 - 4:26PM
Thank goodness for the word ''direct''.
Like many of his counterparts, National Australia Bank chief John Stewart has been keen to point out since the credit market seized up a year ago that the bank had no "direct'' exposure to subprime.
Whoops. A cool $830 million provision for CDO exposures bobs out of the blue.
CDOs are collateralised debt obligations, or thousands of loans bundled together and split into millions of securities so no one can quite value them by splitting them all apart.
They were supposed to be a nice robust security - having gained the ratings blessing of S&P and Moody's in return for a fee - which you could sell because the diversity of many debts supposedly offset the risk of holding specific debts.
Wrong, now no one wants to buy them and because they are not trading, few have seen fit to write them off yet.
As a consequence, local councils all around the country who were sold CDOs by investment banks for their lovely yield, their safety and their credit rating are now sitting on hundreds of millions of dollars of dud securities.
The councils are loath to write them off because the local investment manager is naturally reluctant to have a multi-million dollar loss in his portfolio.
NAB biting the bullet, therefore, triggered much anxiety. For NAB, the latest confession brings the bank's CDO provisions to $1.01 billion. It will dent the bottom line by about $450 million.
What next?
The critical question is, what else is out there?
When subprime first bit, the estimated losses for the global banking system were put at $US400 billion ($418 billion). By the end of last year it was touted at $US800 billion and by last month a US research firm Bridgewater Associates was saying $US1.6 trillion.
Pinning the tail on this subprime donkey is an exercise in high speculation but also, it seems, is picking even the exposures of the local banks. One, they don't want to tell us in one go. Two, they might not know what is good and bad themselves.
Citigroup banking research reckons ANZ and NAB are the leading candidates. ANZ heads the list with a $23 billion exposure to credit default swaps (CDS) and NAB with its conduits (off-balance-sheet dumping grounds for things you can't sell).
Not strictly subprime, CDS (as opposed to CDOs) are corporate debt insurance derivatives. There is a large amorphous market for these things, believed by some to be an accident waiting to happen as no one seems to have bothered making specific reserves for CDS unlike regular insurance markets.
According to Citigroup, Westpac and CBA are ''well down the risk'' curve on this fancy derivative risk. While neither has disclosed adequately on its credit issues, both have a ''smaller CDS counterparty risk'' estimated at $3 billion for CBA and $9 billion for Westpac. Their conduit lines are also smaller at an estimated $3 billion and $7 billion.
Watch out for other acronyms such as SIV (structured investment vehicles) and ABS (asset-backed securities). They are also dangerous.
Are the banks a buy?
The most common stockbroker ''buy'' cry over the past few months has been ''buy the major banks, they're cheap''. This call finally came right in the past couple of weeks as Wall Street financials recovered and a brief respite came in the cavalcade of bad news.
If you look at the market peak and rack up bank price/earnings ratios against what they were, this looks a good call.
On UBS numbers ANZ is trading on a forecast PER for 2009 of 9.1, NAB on 10.2, CBA 12.2, Westpac 11 and St George, which is under offer from Westpac, is on 12.2.
ANZ, therefore, is the cheapest and CBA the most expensive. Indeed the stock prices and therefore PEs are well down on the 14-times earnings and so forth which marked the bullmarket.
Choice multiples
Two things need to be considered here. One, earnings multiples are but one valuation metric.
On an net tangible assets basis, for example, the Aussie banks are trading way above their UK counterparts. By world standards, the local banking cartel is strong but it is not impregnable to large problem losses as this latest NAB confession would attest.
There will be much more of this to come.
Two, PEs are lower and they stay lower during bear markets and recessions. If we are even half a chance of a recession in this country, and the recent rally is merely a dead cat bounce, then we can start getting used to lower PEs for a while. This will likely be the case given markets inevitably swing too far in either direction.
Deutsche Bank research says three observations can be drawn from past recessions:
1) During all recessions the market's trailing P/E dropped to single digits (versus 13.2-times currently for 2008)
2) the market's trailing dividend yield bottomed at, on average, 4% during the recessions (versus 4.6% currently), and 3) company ROEs (returns on equity) dropped significantly the longer the recessions lasted.
All of these observations suggest to us that if a recession eventuates in Australia, the equity market may come under further downward pressure.
Looking at the rash of downgrades, the present fall in earnings mirrors a typical recession in company earnings. It's global.
Since recessions usually endure for 25 months on average and earnings fall in tandem by 25% there seems little cause for optimism.
Bad boy syndrome
While today's admission from the NAB throws the light on problem derivatives, and the spectre of a recession and consequent job losses looms as a problem for big bank mortgage books, the ''bad boys'' exposures also lingers.
The broking industry has coined a new phrase for the likes of Allco, Centro, ABC Learning and MFS which blew up in the first quarter of this year. They are the ''bad boys''.
At this point in the cycle, it is the bad boys who account for most of the significant problem exposures. As UBS notes today, though, the market is not seeing a ``systemic deterioration in credit quality'' -- at least, not yet.
And these bad boys are all being worked out, refinanced or extended.
In the wake of the 1987 crash and market fallout in 1989 which saw Bond Corp, Christopher Skase's Quintex, Adsteam and others crash into the warm embrace of the insolvency practitioners - and stay there for years - this time around the banks have sensibly opted to keep bad boys out of liquidation.
See the apparent generosity in terms and extensions to the bad boys, Macquarie Countrywide and other REITS, and recently Babcock & Brown.
The rationale is clearly this: the banks have seen the last of the Eighties wind-ups finally grind through the courts in the past two years (Bond Corp). The liquidators and lawyers made literally a billion dollars in fees out of these insolvencies.
Banks move first
This time around the banks have decided to employ the likes of Ferrier Hodgson, Korda Mentha and Deloitte themselves.
Get them in there, get them working hard, don't let them own the problem, own them, contain the costs, save ourselves a swag of massive writedowns.
Good idea. Over time however this will soak up substantial management time. It will cost the banks...but not as much.
This rump of bad boys then - which are already losing cashflow by bank mandates to sell off assets and raise cash to pay down debt - will battle on , their share prices in most cases will never recover to former levels.
There will, however, be many trading opportunities for the market and eventually some of the surviving bad boys may once again tap the market for equity.
The final, and most sexy focus of note for the banks will be corporate activity.
Four pillar protection
Prime Minister Kevin Rudd has indicated the Four Pillars policy is here to stay, Westpac is well down the track to swallowing St George, ANZ is casting about for acquisitions in Asia having hired new boss Mike Smith especially to get on that job, CBA is chasing ABN Amro and NAB ... NAB's M&A division have always got AMP on the radar.
Whether they move or not - and today's confessions don't exactly help the scrip component of any potential bid - the AMP remains vulnerable to predators whenever the stock price begins to look too bombed out below the $6.50 level.
On a PE of 14ish, it's not cheap in light of its sensitivity to markets, but given its wide distribution it does boast terrific strategic value.
NAB recognises this, as does the CBA, and has already made two approaches to the AMP board in recent years. Both were spurned.
Meanwhile, the second tier banks continue to struggle as they don't enjoy the access to cheap funding from large depositor bases as do the majors.
St George, with its onerous cost of wholesale funding, has been rescued from embarrassment or worse by a friendly bid from Westpac and can ''hollow-log it'' through its final stand-alone profit result for June.
Suncorp, AMP in play?
The other big one, Queensland bancassurance group Suncorp, has problems in its loan book and its aggressive lending practices may expose it to bad debts - particularly to high-risk Queensland property developers.
As an insurer, too, it can juggle its results for the full year. Suncorp rejected talk this week that it had put a lid on all commercial lending. It also denied there would be jobs cuts. We had heard 1,500 jobs would go in a restructuring announcement in the next two months.
Suncorp will get hit by having to ''mark to market'' investment losses for June but it may be able to use its reserves to make the headline figures look shiny.
For one, it can reduce its prudential margin by a couple of points to raise up to a couple of hundred million dollars in extra cash. It can also use acquisition reserves from its $7.9 billion buy of insurance group Promina at the top of the market.
Like St George, however, Suncorp's its funding costs are under pressure and a spokesman this week conceded the company was ''moderating'' its lending.
Chief John Mulcahy paid a high price for Promina at the top of the market but he is yet to moderate his earnings guidance or concede writedowns.
There is an outside chance that Frank O'Halloran at QBE, having been spurned by the board of IAG in his recent advances, could turn his attention to Suncorp.
How can Suncorp makes sense of a general insurance business in the former Promina which does not need a branch network.
You can be sure that if Suncorp's share price falls too far that QBE would at least consider the prospect of having a crack and spinning off the bank.
Westpac was sniffing around the Queensland company when it was $20 a share but opted for a move on St George instead.
mwest@theage.com.au |
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房屋维护、维修经验交流 (2009-6-7) Perth 
偶尔走神 (2012-6-22) big_beast 
发表于 2008-7-25 17:24
想象那时候我真的好傻好天真啊！
