International Banks Scale Back Lending Exposure To Australia
Business borrowing fell by the second biggest monthly drop on record in December, largely resulting from a reduction in foreign currency lending according to the Australian Central Bank the RBA.
The total level of loans to business fell by 1.1 per cent or $6.7 billion during December, whilst total lending to households and businesses fell 0.3 per cent, the first monthly fall since the 1992 recession.
The reduction in lending and almost continuous stream of negative information emanating from around the world means that the Reserve Bank of Australia (RBA) is more than likely to cut interest rates when its board meets on Tuesday.
Currently the official lending rate stands at 4.25 per cent whilst standard home loan rates hovering around 6.9 per cent. Analysts believe the RBA would not be uncomfortable with home loan rates at 5.5 per cent or lower even. The market believes that the RBA will cut interest rates to their lowest in over 40 years when it meets. New Zealand’s central bank cut its interest rates by 1.5 per cent last Thursday.
The central bank singling out foreign currency loans by itself is unusual, and comes after a week of intense debate with the government coming in for severe criticism for having established an A$4 billion fund which corporate borrowers can draw, should international lenders decide they are withdrawing from the Australian market and not roll over their part of any syndicated loans made to commercial property developers.
The measure has been derided by the opposition as nothing more than a government attempt at propping up commercial real estate prices, with fears of a lending shortfall overdone. Opposition Treasury spokesperson Julie Bishop denied that there was any evidence that international lenders were withdrawing from Australia.
Figures released by the Australian Prudential Regulation Authority last Thursday contrast with that view, and provide further evidence that international banks are indeed scaling back their Australian exposure, with their total Australian lending having fallen by $15.1 billion in December.
Analysts make the point however that any drop in lending would not be confined exclusively to the commercial real estate sector and the Government should make the fund available to other types of lending and sectors of the economy as well.
International banks finance about 20 per cent of total borrowing in Australia and their customer base comprise Australia’s biggest companies.
The APRA data suggests that international lenders are not the only ones scaling back lending activities, with domestic Australian banks also reducing their exposure to corporate borrowers. Of the big four Australian banks only Westpac increased its lending activities, lending an additional A$ 899 million whilst the other three, CBA, NAB and ANZ reduced their exposure by a combined A$ 11.9 billion.
The IMF in its review of global financial stability raised the warning that financial markets continue to remain reluctant to meet the financing needs of corporations around the world, and if they continued to fail to meet the short term needs of corporate borrowers at a time of weak global economic growth and recession in some parts, there would increasingly be widespread corporate defaults.
Australia’s non-financial corporations owe $95 billion to foreign lenders, while the banks and other financial institutions owe $813 billion. About $500 billion is short term, most having to be rolled over every 90 days or less. Aided by the Government’s guarantee, the banks have been covering their requirements for medium-term funding, but their dependence on short-term finance is rising.
The shortening of maturities is being passed on to the business sector, which is reporting, anecdotally, that it is hard to raise funds with more than six months’ maturity.
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QBE Raises A$ 2 billion. Will it bid for AIG?
QBE Insurance, Australia’s largest insurer announced that it would be raising capital into order to repay debt and fund foreign expansion through acquisitions. The exercise should raise A$ 2 billion and would take place in the form of a fully underwritten institutional share placement.
Insurance assets globally are looking very cheap currently as the banking crisis and quasi nationalisation of AIG has meant global stock markets and financial stocks in particular have taken a pummelling in recent months.
QBE has already agreed to buy some overseas assets, but the company may also be gearing up to make a bid for some of AIG’s assets when it finally divests them, in particular its Asian franchises which are the jewels in the crown. If it does not intend to do so, then the thought will most certainly have crossed the company’s mind.
It must be said though that AIG’s South East Asian assets have a speculated valuation in the region of US$ 10 billion, and potential suitors mentioned so far have been the UK’s Prudential and India’s Reliance ADAG. If QBE did intend to become a bidder for those assets it would need to raise far more than the A$ 2 billion it plans to raise this week.
QBE whose shares are suspended until Thursday also added that it planned to raise A$ 100 million from retail investors. The institutional book build is being led by JP Morgan and Merrill Lynch. A$ 1.25 billion of the proceeds are to be used to convert a hybrid issue into reduced debt.
Chief Executive Frank O’Halloran said “The capital raising and other capital management initiatives will assist in funding the acquisitions and our 2009 growth as well as provide further balance sheet strength and flexibility for other opportunities,”
The Aussie insurance major is buying buy US mortgage insurance services firm ZC Sterling for US$ 575 million whilst it has also agreed to buy two further underwriting agencies in the US and one in Europe. The initial purchase price of all 3 acquisitions is US$ 695 million.
“Based on our projections and the increased number of shares, the acquisitions will be earnings per share accretive in year one,” Mr O’Halloran said.
QBE, which earns four-fifths of its premium income from overseas has benefited greatly from a weakening domestic currency and has said it is revising its earnings targets upwards. The company now expected 10 per cent growth in net earned premium to $11.2 billion if the value of the Australian dollar remains around current levels until the end of this year.
“Net earned premium for 2009 is targeted to increase by 25 per cent compared with our 2008 forecast,” said the company, adding that the estimate was based on an average Aussie dollar exchange rate of US70 cents and sterling 40 pence.
The great AIG divestment has been talked about for some time now. AIG management has issued conflicting statements about its intentions; initially CEO Edward Liddy indicated a desire to become a traditional property and casualty insurer, but wanted to South East Asian life insurance assets. As conditions deteriorated and the US Federal Government had to pump in more money to prop up the failed insurer, it has become more obvious that the holding company will not be able to hang on to its prized assets. AIG though has the luxury of time with the US Government being the major stakeholder now. The insurer may now choose to wait until conditions improve and valuations return before auctioning of the china.