Not A Good Year for NAB
NAB did not have a great year this year. Its net profits fell marginally by 0.9% and came in at A$ 4.536 Billion. Its cash earnings did a lot worse however and fell 10.7% compared to the year before. A little lower than the guidance that it gave just last week. Cash earnings were A$3.9 Billion in line with guidance and forecasts.
CEO John Stewart said that the banks results reflected underlying profits after excluding provisions of $8.1 Billion, an increase of 13.9%. Mr Stewart was quoted by the AAP in its report as saying “Unfortunately, this strong result was marred by the provisions required against conduit assets in the nabCapital securitisation business, reflecting unprecedented conditions in global markets”.
He also made the case that the write off that NAB provided for of A$1 Billion was far less than its global peers. That to a large extent is true and NAB should be able to handle a write-down of that size without significantly affecting its outlook.
Mr. Stewart went on to add “The strength of the group’s underlying profit growth allowed this loss to be absorbed and still deliver cash earnings of $3.9 billion.” He also said “Our core banking franchises have performed well despite great volatility in financial markets.”
The bank said its core Australian operations continue to perform very strongly, Its New Zealand arm provided a solid contribution whilst its UK units have had to deal with very difficult trading conditions.
NAB holds A$ 66 Billion in liquid assets, assets it can easily turn into cash should that ever become necessary. NAB also said that its Tier 1 capital was strong as 7.35%. The bank trying to make the case to investors and the markets in general, that its financial position is strong.
Bad and doubtful debt charges were up 55 per cent, reflecting the tightening in the credit environment and a slowdown in economic growth. Some analysts suggested NAB could also have to raise additional capital if its $1.7 billion portfolio of toxic synthetic collateralised debt obligations (SCDOs) deteriorate to sub-investment grade.
Chief executive John Stewart said NAB was focused on organic growth, rather than mergers and acquisitions, and that there was no major need for it to conduct a major capital raising. Which many commentators thought was strange since NAB had brought forward its earnings report date by 10 days and many believed that was because it wanted to set the scene for a further capital raising exercise before any other reporting banks had a chance to do so.
NAB Reports Tomorrow
National Australia Banks‘ British unit has effectively no value or has a negative value attached to the business. The business actually reported A$ 592 Million in earnings last year. The valuation of the unit was based on NAB’s depressed share price. Goldman Sachs JBWere said that the stocks 29% discount to its peers was ahead of the historical discount of 5%.
The Investment Bank also suggested that whilst the British economy was deteriorating, that was factored into the current price of NAB shares. At current valuations, “the market was ascribing a negative value to the entire UK business” The Investment Bank said.
NAB owns the Yorkshire and Clydesdale bank brand and that operation lifted cash earnings by 14.3% to $592 Million last year. NAB’s business strategy in the UK has been repeatedly criticized by analysts who feel that its business in that country simply lacks scale to be able to compete effectively and they would be better selling it off. NAB chief executive John Stewart has pledged to retain the business Goldman said in its report that, even if NAB’s discount to its domestic peers narrowed to 20 per cent, the implied 2009 earnings multiple for Yorkshire and Clydesdale was only 1.6.
Last week NAB decided to bring forward its full year earnings report by 10 days and said it would report on Tuesday instead of the 31st. The bank also gave guidance that its annual profits would fall by 11% or in line with consensus estimates and come in at A$3.9 Billion. Pushing forward its reporting period was a move designed so that it would be able to tap the markets for a capital raising exercise before other banks could do so. The Bank has indicated that it plans to raise an estimated A$ 2.5-3 Billion by underwriting its dividend reinvestment for its next two dividends, NAB also intends to issue hybrid equity securities.
Initial fundraising efforts led by Merrill lynch and Goldman Sachs for A$ 1.5 Billion institutional placement was put on hold when NAB baulked at the fact that the placement would occur at a 15% discount to its current share price.
Goldman’s reiterate their buy rating on NAB but suggested that 3 risks had been removed from the bank following its clarification that rescheduling its annual results did not imply an important announcement.
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Australian Mortgage Rates Tumble
Over the weekend ANZ made the surprise move that it was lowering its variable mortgage rates by 25 basis points, providing relief to home loan owners that banked with the lender. On Monday NAB and Aussie Home Loans rushed to follow suite and are cutting their variable rate mortgages outside of the RBA’s loosening cycle.
NAB dropped its standard variable home loan rate by 20 basis points or 0.2%. The 0.2 per cent cut would also apply to business loans, and some rates on fixed mortgages NAB also cut its one year fixed home loan by 0.3%.. The move by NAB followed Aussie Home Loans decision on Saturday to drop its rate on variable home loans for first home buyers by 30 basis points
On Friday, ANZ lowered the interest rate on its standard variable home loan by 25 basis points for new and existing customers, effective from October 27.
NAB Spokesperson said policy measures undertaken by the Commonwealth Government guaranteeing all deposits and borrowing in international wholesale money markets had had a positive impact on credit markets, resulting in bank funding costs falling NAB’s Ahmed Fahour said “We welcome this new development and anticipate we will see some relief in the significantly higher premium we are currently paying for wholesale funds,” he went on to add “should this be the case, then we hope. . . we can pass on further interest rate cuts to our customers.”
The Commonwealth Bank of Australia also cut its home loan rates independent of the RBA variable home loan interest rates will be cut by 21 basis points, meaning the standard rate will drop from 8.53% to 8.32% and the basic variable home loan from 8.02% to 7.81%. The new rates will be effective from 30 October 2008 for new and existing customers.
Westpac spokesman David Lording declined to comment on whether the bank’s standard variable rate would come down from 8.56 per cent.
Research shows that the cut in interest rates were long overdue with most families and homeowners facing 12 consecutive rate hikes has caused them to work longer and cut back on spending.
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Banks to Report Results Soon
3 out of 4 of Australia’s biggest banks will be reporting full year earnings over the next two weeks allowing investors to examine the extent of their exposure to potentially debilitating assets. Investors will have the chance to evaluate the outlook of NAB, ANZ and Westpac, given that credit markets have ceased to function normally, and the economy is slowing down and going forward, credit growth will be anemic.
NAB and ANZ have both said earlier in the year that they will be hurt by provisions of over A$ 1 Billion each. NAB has had to hedge a Synthetic CDO portfolio tied to the US mortgage market and some European Corporates. ANZ on the other hand, has had to write down some short term money market derivatives on its book known as conduits. As a result the bank went cap in hand to institutional investors and raised A$ 1 Billion to shore up its balance sheet in the middle of a very difficult environment. Both banks have said that their full year earnings will be hurt by provisions of over A$1 Billion, whilst Westpac Banking Corp has said it will remain relatively unscathed.
Neither NAB nor ANZ shares have performed well this year, though to be fair neither has any bank or index in the entire world. NAB’s shares have fallen some 42% over the past year whilst ANZ’s have performed marginally better falling some 38% for the year. Westpac shares on the other hand have fallen just 22% for the year. Despite losing value, Westpac has held up remarkably well for the year when you compare it against its peers and when you compare its performance against the ASX 200 its performance has been remarkable. The ASX is a diversified index and in the same period dropped 37% according to The Age.
Australia’s biggest bank by assets, NAB, will begin results season by reporting for the 12 months to September 30, after bringing its reporting date forward by 10 days to October 21. ANZ, is expected to report two days later on October 23, whilst Westpac, is aiming to take over St George Bank Ltd, on October 30.
Analysts polled by The Age suggest that NAB’s cash earnings are to fall by at least the 11% guidance the bank gave on Thursday. In fact NAB issued a statement confirming that it was bringing forward its earnings announcement, and then said that its full year earnings were going to be in line with consensus estimates of A$3.9 Billion, foreshadowing capital raisings to bolster the bank’s balance sheet. ANZ on the other hand has said it expects cash earnings per share to fall 20 per cent to 25 per cent and the total figure to be over $3 billion.
Westpac, based in Sydney, is expected to grow earnings by 6.1 per cent and has so far avoided large losses related to the credit crisis, although Australia’s third largest bank has indicated provisions will rise because of the economic environment.
Going forward however, it is unlikely that any bank will be able to give meaningful guidance for the next financial year 2009, due to the amount of uncertainty present in global financial markets which is causing all the volatility. If Westpac manages to successfully merge itself with St George, it will become Australia’s second biggest bank and is forecasting cash earnings growth of between six per cent and eight per cent.
Commonwealth Bank of Australia Ltd, the only one of the big four to report on a year to June basis, announced its results in August. The bank, which increased full-year cash earnings by five per cent to $4.73 billion, is Australia’s biggest bank by market value and home loan lender.
ANZ Drops It’s Mortgage Rates
ANZ which at the beginning of the month remained silent on how much of the 1% RBA interest cut it would pass on to consumer and then mirrored the moves of other banks by passing on 80% of the cut to its customers, has now broken ranks with its rivals by cutting home loan rates by a further 25 basis points.
After the Reserve Bank of Australia (RBA) announced a 100 basis point cut in interest rates, all the major banks reduced their rates by only 80 basis points, failing to pass their entire savings on to their customers, citing continued pressure on their own funding.
At the start of the week, Prime Minster Kevin Rudd announced that the Commonwealth Government was guaranteeing all Australian bank deposits, and would act as guarantor on any funding that Australian banks obtained on overseas wholesale money markets. In effect helping to bring borrowing costs down for Australian lenders allowing them to remain competitive with European banks whose governments have given similar guarantees.
The measure has had the effect of bringing down funding costs for banks, though it remains to be seen whether it will be a viable outright solution to the freeze in interbank lending. ANZ has announced as a result, that it would cut its standard variable mortgage rate by a quarter percent to 8.32%. ANZ said it was delivering on a promise to pass on interest rate cuts as global market conditions eased.
ANZ’s chief executive officer for Australia Brian Hartzer urged customers to remain cautious and said in a statement. “We are pleased to deliver on the promise we made in January to pass on reductions in funding costs as we see market conditions easing. Although wholesale funding costs remain abnormally high, policy measures both here in Australia and around the world have restored some confidence to the global investment community and this is resulting in an easing of high wholesale funding rates. Passing on further interest rate cuts to mortgage customers may take some time, however, as it’s clear the damage caused to the global financial system from the US sub-prime crisis is significant and there may also be further volatility along the way.”
Treasurer Wayne Swan, was extremely pleased with the lenders move and said it provide further relief to families with an ANZ home loan. The Australian quoted Mr. Swan as saying “We said we expected banks to pass on any additional rate relief when it was possible, and I’m glad to see ANZ has started delivering the responsible action families expect and deserve.” The move by ANZ is somewhat of a validation for its policy of providing guarantees and clearly shows the move has had a positive effect.
Mr. Swan said he was “absolutely delighted” that the deposits guarantee the Government announced last Sunday had had an effect on confidence and interest rates and said “In such uncertain global times, we are heartened by this announcement and what it says about confidence in our banking system and the Government’s policies.”
Australia’s other lenders are likely to feel some pressure to replicate the cut after all four major banks hiked interest rates outside of the RBA tightening cycle earlier in the year, to help recoup skyrocketing wholesale funding costs and ease pressure on margins.
The Australian quoted a Commonwealth Bank of Australia Spokesperson as saying that the banks’ lending rates are “always under review” and that the bank “will remain competitive in this market”. Westpac Banking Corp. spokesperson also said the lender’s rates are under review, whilst a spokeswoman for National Australia Bank said the government’s efforts have had a positive impact on the funding environment, and the bank is assessing its position.
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Ratings Agencies Not to Upgrade Australian Banks
Global Ratings Agencies say it is highly unlikely that they will re rate Australian borrowers and banks after the government announced its measures. An upgrade by a ratings agency would make Australian banks more attractive to lenders, since the risk profile of Australian borrowers would have become more conservative and therefore less risky. Some Australian banks felt that an upgrade on their credit rating was inevitable given the commonwealth government now guarantees all bank deposits and any borrowings from the wholesale international money markets.
Standard & Poors on Wednesday said that its overriding assessment of Australian issuers had not changed because the scheme did not cover all the financial obligations of Australian banks and Financial Institutions. The guarantees exist for 3 years in terms of cash deposits and for 5 year for banks who borrow on the wholesale markets.
S&P also added that the measures undertaken by the government failed to address other risks that were present for banks, such as volatility in the financial markets and whether borrowers would even be able to access capital markets at all. The economic outlook does not look positive either and upgrading an Australian banks debt as a result would be very difficult for ratings agencies to do despite the strong balance sheet of Australia’s big four lenders and their superior credit rating as of now.
The main ideas behind the government plan were outlined over last weekend, the details of the plan still remain incomplete, including the size of the fee that banks must pay to the commonwealth government in order to be able to receive government guarantees. Guaranteeing debt of other issuers by governments or even companies with stronger balance sheets is a technique in the debt markets is known as credit enhancement, and as its name suggests it is a method of reducing the perceived risk of a default of an issuer, regardless of what the ratings agencies do. Though it will not reduce interest rates that Australian borrowers will pay, since their debt has not been upgraded, the theory is that there will be more institutions that are willing to lend too banks when the loans made are guaranteed by Governments.
There is a risk that some banks will become too attached to the government guarantee on their debt and not want to wean themselves of it when financial markets finally start operating more orderly. NAB chief executive John Stewart, who is chairman of the Australian Bankers’ Association, said that the fee needs to be high enough to encourage institutions to “come off the drug” once global markets stabilise.
S&P did however say that once banks had paid the fee and guarantees existed then it would only be natural for some particular issues or tranches of debt to be upgraded and to start to converge with the AAA Sovereign rating of the Australian Government. Banks themselves however will not be upgraded rather some of their debt issues may benefit and receive the highest rating.
NAB Reports a drop of 11% In Full Year Profits
National Australia Bank (NAB) has had to bring forward an earnings report to give equity markets and investors further clarity on its financial position. Australia’s biggest lender by assets issued guidance on Thursday, suggesting that earnings would be around A$3.9 Billion consensus estimates, falling some 11% year on year.
Though all of the Australian big four lenders remain relatively free of toxicity, of the four NAB had the most exotic assets on its balance sheet and the most exposure to US mortgage related debt. NAB announced a write down of A$1 Billion earlier in the year and has had to pay $400 million to hedge its derivative portfolio worth some $1.6 Billion over 5 years. The Australian Shareholders Association is proposing a motion at the AGM that if passed would effectively sack the Chairman of NAB’s risk committee.
NAB said its hedging related activities would lower full year profits by A$ 100 Million. Most analysts also agreed that A$ 3.9 Billion full year earnings, were indeed in line with their expectations, but that they were also looking to see what business plan the bank had going forward, given the conditions and what it thought its outlook might be. Some analysts fear that there may be large unrealised losses on its balance sheet, a fear shared by policy makers and Investors alike.
Australian Banks seemed to have managed to avoid many of the pitfalls that have befallen their US and European counterparts. Aside from precipitous falls in the value of their equity, analysts are also expecting double digit falls in their second half profits. As the Australian economy slows down there is a concern that this will cause an increase in bad debt and a slowdown in lending.
On Monday Prime Minister Kevin Rudd effectively offered a government guarantee on all Australian bank deposit in response to what European governments did over the weekend, either nationalizing banks outright or guaranteeing their deposits. Australia went a step further and also guaranteed any borrowing that Australian banks made on the International wholesale money market. The move was designed to make highly rated Australian financial institutions competitive with their European counterparts. On Monday there were large rallies in the equity market and for a few days it felt like there was some kind of respite and the worst was over. As the week has progressed it became clear that these measures are not enough and banks continue to hoard their capital in order to bolster their balance sheets rather than lend it either to their customers or to one another in order to earn a profit.
Even with their strong balance sheets, high ratings, and government guarantees, it is clear that Australian banks are going to go through a period of anemic growth in their credit portfolios. Analysts see NAB’s second half cash profits falling by up to 34% which cannot be to pleasant for NAB investors. Cash earnings are core profits that exclude one off and non cash accounting items, and as such form the basis of dividends payable to shareholders.
NAB fell more than 5 % today on choppy trade along with the broader equity market which sold of some 6.6% on Thursday. The Bank also said that it would bring forward its full year reporting date from the 31st October to October 21st.
CBA, NAB and Westpac Reduce Fixed Rate Home Loan
NAB and Westpac, both announced Monday that they would be cutting fixed interest rates on home loans. On Monday morning, Westpac was the first to announce that it was cutting fixed home loan rates by up to 1.1%. One year Westpac fixed rates now stand at 7.19% and 3 year fixed rates now stand at 6.99% according to the Herald Sun Newspaper.
The moved to cut fixed interest rate mortgages comes within a week of the Reserve Bank of Australia cutting its lending rate by 1% and the big four Australian lenders passing on 80% of that cut onto their floating rate mortgage customers.
CBA, the nation’s biggest mortgage lender reciprocated the move and it too will cut its fixed interest home loan rate by up to 1.55% it said today. The CBA cut is effective as of next Monday. It is still unclear exactly when ANZ will also follow suit, though it is inevitable that they will. None of the major banks have matched the pledge made by CBA’s chief executive Ralph Norris to reduce the bank’s mortgage rates by more than central bank cuts once markets return to normal.
Interest rate cuts should hopefully spur the Australian property market or at the very least contain the correction seen in Australian property prices over the last year which has seen home prices in some cases fall by as much as 10%
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Suncorp Says Thanks But No Thanks To ANZ
It is unlikely that Suncorp Metway, will be able to decide at least not until the end of the week on whether it wishes to continue with its strategy and seek a buyer for its Metway banking unit and exit that business altogether.
Given the Government has now guaranteed all deposits of every bank in Australia and will even guarantee all borrowing that banks may wish to undertake in international wholesale money markets. Australian banks, Metway especially after all this, is now in a significantly stronger position than it was only just a week ago, when it was having trouble raising funding and was effectively put up for sale by Suncorp.
The unit is no longer distressed since it now has clear lines of access to capital and as a result any acquirer would have to re evaluate their bid price to reflect the new set of circumstances that have been presented by the Prime Ministers announcement.
At the end of last week ANZ swooped in and made an offer for the troubled commercial lending arm of integrated bancassurance group Suncorp Metway. Perhaps in the hope that the environment of pessimism, fear and paranoia that pervaded financial markets last week would allow ANZ to pick up a strong franchise on the cheap, emulating CBA’s purchase of BankWest which was purchased at a 20% discount to book value.
Suncorp said in a statement to the Australian Securities Exchange that it expected to have discussions with various parties and update the market “in due course.” ANZ’s bid which came on Friday was valued at less than net tangible asset backing. Suncorp’s board met at the weekend and decided to postpone the proposed demerger between their general insurance business and their retail banking operations.
The company issued a statement which said “In light of the significant events in world financial markets over the last week and the federal Government’s constructive initiatives for the financial sector, Suncorp is assessing the implications for the potential sale of its banking and wealth management operations,”
The company’s stock price bucked the trend of the broader market and the banking index and actually fell rather than rallied on the Prime Ministers announcement. Presumably because the stock had probably priced in an acquisition cost which in the short run might no longer be realisable in the event the company stays combined.
Most other banks were ruled out of the running for an acquisition of Metway. Westpac is too busy with its impending A$ 17 billion merger with St. George, whilst rival CBA was also busy with its capital raising excercise and subsequent successful bid for HBOS’s BankWest and St Andrews units.
This left two potential buyers for Metway, neither of whom the market felt had much credibility for an outright acquisition. ANZ, which less than 2 weeks ago had to go cap in hand to institutional investors in order to raise more than A$ 1 Billion of equity. So that the bank could cover whatever indecent exposures it may have had left on its balance sheet. The Alternative to ANZ was NAB, which didn’t impress the market very much either when it announced a two weeks ago that is was purchasing an A$ 400 Million dollar hedge on a synthetic collateralized debt obligation portfolio that was only worth some A$1.6 Billion to begin with. An unimpressed market resulted in a depressed value of NAB’s equity price which meant it had a weak currency to pursue an acquisition with.
According to The Australian, a source close to Suncorp commented that the whole environment had changed since late last week, not only locally but also offshore after other sovereign governments introduced similar financial rescue packages. “The ability of bidders to pay (for Metway) is very different now compared to what it was last week,” he said. “With the new environment, the board is reassessing what it should do.” Last week, faced with schizophrenic financial markets, it was rumoured that the only bid received for Metway was in fact ANZ’s. In light of the fact that there is more optimism today about the banks future prospects given it already has a single A rating, Suncorp’s board is more than likely going to wait until there are either more bids from different potential buyers, or look for an increased bid from ANZ. Failing that if markets continue showing signs of optimism and interbank markets begin functioning again, then a final strategy may be for Suncorp to hang on to its Metway unit. After all Metway was a captive distribution arm for Suncorp’s insurance products and hiving them off for any other reason other than distress would not be a great strategy.
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Australia on War Footing, Guarantees All Deposits
The Commonwealth government of Australia today guaranteed all bank deposits in the country for up to 3 years, going well beyond the original financial claims scheme which it had initially proposed, which only insured deposits of up to A$20,000. The government went a step further today by also guaranteeing all the obligations of Australian banks in international wholesale money markets. The government was forced to take the additional step after some European governments had implemented the same measure which has resulted in Australian banks being at a disadvantage when undertaking borrowings abroad. The government also injected a further A$ 4 Billion into the Australian mortgage market, by buying up residential backed securities in the hope that the market would stabilize further.
The opposition party strongly backed the measures with Leader of the Opposition Malcolm Turnbull being quoted in an AAP report as saying “The Opposition welcomes the decision taken by the Prime Minister today to provide a guarantee for all deposits in Australian institutions, banks, credit unions, building societies and so forth.” The Liberal party leader even went so far as to claim credit for the idea. In an interview with the Seven Network Turnbull said “The deposit guarantee and the further investment in the mortgage market were recommended by us so we are delighted the Government is doing this”.
Abacus Australian Mutual’s, the industry association for credit unions and mutual buildings societies said that “it was pleased with the governments strong and decisive move” and the equity market largely took the same view with banking stocks rallying more than 6% on the news.
The Prime Minister, in his statement said the measures were “designed to help unclog the arteries of the global financial system”. He also went on to suggest that the government was on a war footing by saying
“We are in the economic equivalent of a rolling national security crisis and the challenges are great.”
And added “This global financial crisis has entered a new and dangerous phase with real consequences for growth, for jobs and, therefore, for the future.”
The Government in an effort to allow Australian banks to remain competitive internationally by guaranteeing their borrowings has mimicked the moves made by European governments of late to ease creditor concerns. The strategy is a risky one, since a guarantee is not necessarily a panacea. Both Fannie Mae and Freddie Mac had implied US Federal Government guarantees on their debt, yet that was not enough to prevent creditors from shunning those issuers altogether and forcing their complete nationalisation. Though the big four Australian Banks are in good financial shape and it is unlikely that the Government will need to deliver on its commitment, the larger strategy of governments offering guarantees or taking equity stakes in their lenders should be met with suspicion, even if it does help avoid outright economic collapse in the immediate future.
The financial market meltdown is a symptom of an illness which has been allowed to rampage unchecked since Margaret Thatcher and Ronald Regan challenged the conventional wisdom that governments knew better than their people. The two issued in an era of deregulation which has persisted for the best part of a quarter century and facilitated in large part the growth that we have all become so used too. Reverting back to protectionist and nationalistic tendencies simply to please the markets in the short run delays doing the needful. Markets are prone to waves of mania or paranoia rather than equilibrium, and procrastinating in the short run by offering guarantees does little if anything to fix the underlying problem of the banking system.
Markets do need to be free to allocate both resources and capital. They are indeed for the most, better at doing so than governments, but they need to be tightly regulated. Capital should indeed flow freely, but limits need to be placed on financial innovation and the methods that are used for credit delivery. We need to regulate the way financial institutions operate as tightly as we regulate the pharmaceutical industry, where new products can sometimes take years to receive government approval. Economies and industries must be penalized for misallocating resources. Though there is some wisdom to propping up failed lenders so that a wider collapse is prevented, it is little more than a Faustian deal. Going forward and for so long as societies function this way, bankers will go about their business knowing that if they do a bad job, behave recklessly or irresponsibly, the government and the people are there to pick up the pieces.
There is something deeply wrong when the leader of a country which has by in large remained untouched by the crisis, and whose big four domestic banks remain fiscally strong, makes the following statement: “As prime minister of Australia, I will not stand idly by while Australian banks are disadvantaged in international credit market places because of the actions taken by foreign governments in support of them.” Perhaps it is naïve to think that governments can remain impassive and allow financial crisis to transform into outright economic collapse in their respective countries, the alternative however, of profound government involvement in the banking system is very troubling. Governments should not be in the business of borrowing short and lending long or deciding whom should receive credit and who should not. At no time in history has that proven to be a successful strategy, other than at times of crisis. Though it is clear that there is truth in the argument that the government should do whatever it must to prevent calamity today, there is no question that tomorrow there is going to be pain.