Australian Banking Majors Sound Warning Over Rising Bad Debt
Both NAB and ANZ have added their voices to the warning issued by CBA after its botched equity placement earlier in the week, that as the Australian economy slows the banking industry is liable to see an increase in bad debt.
Outgoing ANZ CEO John Stewart told the shareholders at the bank’s Annual General Meeting (AGM) in Melbourne yesterday, “In over 30 years in this business, I have not known such a time of economic and market uncertainty. For the year to date, the fairest update I can give you is that overall our group results are acceptable so far, but we anticipate that it is going to get more difficult for all banks as the economy slows We would generally expect to see slowing volume growth and rising impairments as a natural consequence of a slowing economy, and when combined with the ongoing higher cost of funding, this is likely to result in tougher times for banks across the board”
The ANZ’s credit impairment charge almost quadrupled to $1.95 billion in fiscal 2008 chairman Charles Goode said “There will be implications for the banking industry, through bad debts, which will continue to arise from these economic conditions,”
NAB Chairman Michael Chaney told his shareholders that the main concern was the wholesale funding costs would continue to remain high or even increase going into 2009. Australia’s biggest bank by assets said that its UK units have “demonstrated resilience under exceptionally difficult market conditions”, whilst its US subsidiary had performed as expected.
NAB recently raised A$ 3 billion through an institutional equity placement in a bid to increase its tier one capital ratio which should go some way to providing a cushion against rising bad debt. NAB said it has liquid assets of $66 billion, more than double the pre-market dislocation levels.
Westpac at its AGM last week also warned over rising bad debt and pledged to scale back lending to highly leveraged borrowers after drawing sharp crisitism by shareholders for its exposure to Allco and ABC Learning Centres. Westpac has so far set aside A$ 1 billion to cover bad or doubtful debts, though it added that this was only a small proportion of its total loan portfolio.
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S&P Upgrades BankWest Credit Rating
S&P raised its BankWest credit rating after the proposed acquisition by Commonwealth Bank of Australia (CBA) received Federal Government Approval. S&P raised BankWest’s ratings from “A+/A-1″ to “AA/A-1+”, with a stable outlook, and removed it from credit watch with positive implications.
The ratings agency equalized the credit ratings of the two financial institutions because it believes that the acquirer CBA, was well placed to integrate the acquisition into its business. It went onto say that it believed BankWest would become a core subsidiary.
“Standard & Poor’s expects BankWest to be operationally integrated with CBA in terms of funding, risk management, system, and processes,” S&P said, and went on to add “moreover, BankWest will be a material part of the CBA group, representing more than 10% of total group capital.”
CBA acquired BankWest The Australian banking unit of troubled UK lender HBOS for A$2.1 billion, after the latter was forced to sell the asset as the credit crisis began making its overall position more tenuous. The ACCC last week approved the proposed merger.
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ANZ Issues Sovereign Backed Samurai Bond and Increases Upsize of US Dollar Issue.
Australian & New Zealand Banking Group (ANZ), increased its Sovereign backed US dollar bond issue yesterday by a further US$ 850 million. Separately Australia’s fourth largest lender issued a Samurai Bond, raising ¥35 billion or A$ 564 million also backed by the Australian Federal Government.
The total size of the US dollar issue now stands at US$ 2.6 billion with the final amount to be confirmed on December 29th. The US$ 850 million consisted of US$ 650 million added to the US$ 1.25 billion ANZ initially raised as fixed rated priced at 90 basis points over swap. A further US$ 200 million was raised and added to ANZ’s floating rate tranche. The floating rate notes were priced at 70 basis points over Libor.
ANZ’s sovereign backed Samurai bond was managed by Daiwa Securities and is five year floating rate paper priced at 117.5 basis points over Libor.
According to Reuters, Australian banks so far have raised US$ 22 billion in Government backed debt, as they rush to secure funding after the sovereign guarantee became operational at the end of November. ANZ is the second Australian financial institution to issue a Samurai bond after CBA raised ¥20 billion.
The vast majority of funding raised by Australian banks has been denominated in US And Australian dollar.
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ANZ Seeks Ambitious Asian Expansion
Australian Banking major ANZ says it wants to take advantage of the opportunities that have arisen from the financial crisis and grow its business in Asia with the plan of becoming a “super regional” bank.
ANZ Chief executive Mike Smith speaking at the bank’s annual general meeting in Brisbane yesterday said “US and European banks operating in the region are retreating to their home markets and are being forced to offload good clients and good assets to shore up their domestic businesses, In this environment, bank share prices have been reducing, which is creating potential opportunities to advance our strategic agenda in Australia and in Asia in a disciplined and measured way.”
ANZ is the smallest of Australia’s so called “big four” banking majors, is seeking a strategy of Asian growth from fast growing emerging economies to drive its profits going forward. Mr. Smith has previously said that he aimed to have 20 per cent of ANZ’s revenue generated in Asia by 2012 “Despite the compelling logic, we are the only one of the major Australian banks with the presence in the region, the capability and the ambition to create a super regional bank,’” Mr. Smith said.
If ANZ is serious about an Asian expansion strategy, then it faces a number of issues which may thwart its ambitions, the main one being a lack of available acquisition targets. Asian financial institutions have largely avoided the worst of the credit crisis, and though valuations are low, none are in any distress and are not in any immediate need of a merger partner.
The other issue it faces is that if potential targets do become available over the next 24 months, they are likely to result in competitive bidding by rivals with deep pockets. HSBC has an aggressive Asian franchise and expansion strategy and has also managed to avoid the worst of the crisis; it would have the ability to make any acquisition that ANZ, its much smaller rival undertakes comparatively expensive simply by including itself in the bidding process.
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IAG selling UK Units
Australia’s largest general insurer Insurance Australia Group (IAG) is selling its UK mass market distribution business for A$ 162 million. IAG says it will sell its UK insurance branch network to the Swinton Group for £50 million and will divest the Hastings and Advantage businesses through a management buy-out for £23.5 million.
The asset sales combined with the cost of closing its Lloyd’s syndicate Alba and underwriter will be recorded as a pre-tax loss of £40 million in 2009 financial year IAG said in a statement. “We believe the transactions announced today represent the best outcome available to IAG shareholders, particularly in light of the deterioration in market conditions which has occurred since July,” chief executive Michael Wilkins said.
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NAB Combines It’s Group And Divisional CEO Roles
High profile NAB executive director Ahmed Fahour’s future with the bank has seemingly been called into question after incoming NAB CEO Cameron Clyne has decided to combine the roles of Group chief executive with that of the Australian divisional head. A role previously managed by Mr. Fahour.
Mr. Fahour is a highly regarded NAB executive and previously carried the responsibility for running NAB’s Australian business, which accounted for more than two thirds of the group’s annual profits.
Responsibility for NAB’s Australian retail banking network, business banking and wealth management activities would now rest with Mr. Clyne, who formally replaces the out-going CEO John Stewart on the 1st of January. Mr. Clyne has been effectively running the group on a day-to-day basis since the beginning of this month in any case.
Today’s announcement was timed to coincide with the start of NAB’s annual general meeting in Melbourne and is the first major operational and management shake-up announced by the new CEO. The move raises doubts over how long Mr. Fahour will continue to stay on with NAB after missing out the race to succeed Mr. Stewart.
Mr. Fahour, a former senior investment banker, was recruited by Mr. Stewart nearly five years ago to help overhaul the group’s operations and restore its Australian business to a leading role following a foreign exchange trading scandal that almost brought down the bank. Since then, he has overseen a continual rise in operational profits and was at one time thought to be the natural successor to Mr. Stewart who had only planned to stay at the helm of NAB for two years following his own appointment to the CEO’s job in early 2004.
In the final stages of an eighteen month-long recruitment process, the NAB board overlooked Mr. Fahour in a decision which raised significant doubts about the tenability of his position and long-term future with the group. Nevertheless, Mr. Fahour has always maintained a public display of loyalty to the bank and rebuffed any suggestion that he was preparing to leave.
The loss of Mr. Fahour’s operating powerbase however, will most certainly see the possibility of his departure reemerge. Mr. Fahour’s new role is undefined and the announcement that he will have a floating executive role that he will take up at NAB’s group head office will certainly add fuel to the fire that he may leave sooner rather than later.
Mr. Fahour’s former experience as an investment banker and his knowledge of some of the specialised and complex financial instruments that have been, in part, for responsible global credit crisis will make him an extremely useful foil to Mr Clyne whose background is in management consulting rather than banking.
Mr Clyne, who ran NAB’s New Zealand banking operation for 18 months before being elevated to CEO, has decided to scrap the Australian divisional role and take it under his wing to ensure he has more direct control over the major profit driver of the group.
The simple objective, he said, was for him to be “closer to customers, employees and those leading our various Australian businesses as they represent a significant majority of group revenue and profit” Mr. Clyne said of the restructuring.
Mr Clyne said in a statement to the ASX that Mr Fahour would be working with him and other key senior managers on “operational, commercial and strategic challenges”.
“Ahmed has done an outstanding job moving the Australian business into a market leading position,” said the CEO-designate.”I look forward to utilising his talents across the broader group.” He said.
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NAB Front Runner in Wizard Acquisition
Australian banking major and the country’s largest lender by assets National Australia Bank (NAB) announced late on Tuesday, that it was in advanced discussions to acquire Wizard Home Loans for an undisclosed price. The deal would include the brand name and the Australian distribution network. NAB also said that it was negotiating the acquisition of up to A$ 4 billion of fully insured Wizard originated prime mortgages.
Wizard Home Loans is a subsidiary of the US industrial conglomerate General Electric’s (GE) retail financial division GE Money. Wizard was acquired by GE Money back in 2004 for more than A$ 500 million as part of the larger acquisition of Australian Financial Investments Group.
GE Money has wanted to divest the asset since May and said back then that it was considering strategic options for the business which included strategic partnership, joint venture or outright sale. The company’s parent General Electric has suffered greatly from the credit crisis since over 40 per cent of its profits come from financial services businesses. The parent uses its industrial business as the means for securing the highest quality credit rating which it then uses to secure the cheapest possible funding on capital markets which finances its consumer lending and investment business. As a result GE is divesting non core assets in a bid to preserve its coveted triple A rating. Any ratings downgrade could be catastrophic for the company.
National Australia Bank has emerged as the front-runner to acquire the chain, which has a network of franchisees across Australia, though there have been reports that founder Mark Bouris was also interested in finding investors to help him try and buy the company back.
NAB noted in its statement that the mortgage portfolios being acquired include prime mortgages with a maximum loan to valuation ratio of 90%, all of which are 100% mortgage insured. The transaction is not expected to have any material impact on its Tier 1 capital ratio.
The deal, if it goes ahead is expected to complete around February or March next year, with a transition period to follow. The bank added that the funding requirement associated with the purchase of the mortgage portfolio could be accommodated within the group’s funding plans for 2009. The unknown purchase prices are understood to be significantly lower than the $110 million referred to in the market earlier this month.
Though the discussions are at an advanced stage, a final decision on the transaction is yet to be taken and there are according to GE other bidders.”NAB is one of the parties we are in discussions with,” GE Money spokesman Geoff Lynch told the AAP. Mr Lynch would not comment on the number of parties involved.
NAB intends to make available the full details of the transaction as soon as possible. The transaction would boost National Australia Bank’s retail strategy of providing its customers with products and services that match individual needs, using a multi-brand approach.
While Wizard was created to challenge the big banks, pressures in mortgage and credit markets have led to significant consolidation in this area, with Westpac taking a stake in Rams, CBA taking a stake in Aussie Home Loans and dealer group Count Financial taking a stake in Mortgage Choice.
Wizard has a network of almost 200 branches. The sale does not extend to the group’s wholesale mortgage business.
GE Money said separately yesterday, that it will close its Wizard Home Loans business in New Zealand because of spiralling funding costs and deteriorating mortgage market conditions. “GE Money will continue to service all existing loans in the normal way, however Wizard branches in New Zealand will cease writing new business at a date to be determined in discussions with the branch licensees,” The company said in a statement.
CBA & Merrill Lynch Botch $ 2 Billion Institutional Share Placement
Commonwealth Bank of Australia (CBA) in an unprecedented move scrapped a botched capital raising exercise yesterday. The bank initially raised A$ 2 billion in an equity placement underwritten by Merrill Lynch on Tuesday, but had to relaunch the placement through UBS on Wednesday, after investors complained that there was a failure to disclose the materially important fact that there had been an increase in bad debt provisions prior to the capital raising.
Investors, who declined to be named said CBA had relaunched the issue at A$26 per share, down from the A$27-a-share offer it announced to the market on Tuesday.
On Tuesday night after the market had closed, CBA announced that it had completed a share placement, but by morning, it asked the ASX to suspend its shares citing the placement had not been finalised. A bank spokesperson told Reuters that they could not make any immediate comment and said the bank would issue a statement later.
Investors said the initial deal was scrapped after CBA announced an increase in loan impairment charges in the current fiscal year after completing Tuesday’s capital raising. “CBA made an announcement about an hour after the deal was done, which essentially had a profit downgrade in it. Anyway …the decision was made to scrap the deal with Merrill’s and then UBS are currently raising that money as we speak at A$26 a share,” one fund manager told Reuters.
Late Wednesday afternoon, CBA confirmed that it was in the process of finalising the underwritten UBS placement for $1.65 billion at $26 a share. In a separate statement it said it had ”terminated” the placement through Merrill “on the basis that Merrill Lynch did not inform potential investors of the various disclosures made by the bank”.
In yesterday’s statement, Commonwealth said it expects bad debts to rise to 0.6 percent of total loans, up from as much as 0.5 percent it forecast on Nov. 13.
They Must Be Nihilist’s
The amount raised by UBS replaces an institutional placement of shares for the same amount completed by Merrill in two hours yesterday afternoon. UBS’s rapid intervention, and its offer to underwrite the replacement underlines the fact that its Australian unit continues to boast significant capital market distribution power despite the holding company having absorbed significant losses as a result of the credit crisis.
Merrill Lynch also separately raised $350 million to replace CBA hybrid paper yesterday, and that part of deal has not been withdrawn. The amount CBA has raised is therefore the same as the $2 billion it announced late yesterday. CBA’s Tier-1 Capital Ratio now stands at 8.5 per cent after the A$2 billion capital raising, which is above the benchmark of 8 per cent investors have been demanding of late.
This latest fund raising takes amount raised by the Commonwealth from its large shareholders to just over $4 billion since October when it harvested $2.1 billion to pay for its acquisition of the West Australian-based regional institution, BankWest, from its financially troubled British parent, HBOS.
A legal battle is now likely to ensue between CBA and Merrill Lynch over who should bear responsibility for the botched placement. CBA believes it gave the investment bank the information about the higher loan loss provisions ahead of the placement occurring, including a draft of the planned press release about the placement. Merrill for its part is believed to be arguing that CBA’s disclosure to it ahead of the placement occurring was late, and that it could not be disclosed by Merrill ahead of a formal disclosure by CBA in any event.
Australian banks have raised more than A$10 billion in share sales in the last six months according to data compiled by Bloomberg, diluting shareholders’ funds as they shore up capital in preparation for rising bad loans. Commonwealth said last month bad debts may double this year, citing lending to companies including Lehman Brothers Holdings Inc. and Allco Finance Group Ltd.
Australian Federal Government To Lend Money To Struggling State Governments
Federal Treasurer Wayne Swan plans to aid struggling individual states that are having a tough time raising money, by issuing sovereign debt and using some of the proceeds to purchase state issued bonds.
Mr. Swan announced the measure late Monday evening and said he would direct the Australian Office of Financial Management to issue $5 billion in securities after raising $4 billion from a $5 billion issuance announced in May.
Mr. Swan said the AOFM would invest the proceeds of the increased issuance in assets that would best offset the cost and risk of the additional issuance. “This includes bonds issued by state and territory governments,” he said. “As a result, the increase in borrowings is not expected to involve any net cost to government.”
The measure comes after earlier this month it emerged that states have been struggling to raise money to finance infrastructure projects. At the time, Queensland Treasurer Andrew Fraser said capital markets had become dysfunctional and states were talking to the Commonwealth about how it could help.
Acting on behalf of state treasurers, Mr. Fraser wrote to the Federal Treasurer at the beginning of the month asking the Federal Government to borrow money on behalf of the individual States. Mr. Swan’s initial reaction was to reject the idea outright, but he then refused to rule out the creation of a specifically mandated infrastructure bank which could borrow money on international capital markets, taking advantage of the sovereign guarantee to obtain funding, and lending the proceeds on to the individual State Governments, which would be effectively the same thing.
Mr. Swan released the initial A$5 billion worth of bonds onto the market and said yesterday all but A$1 billion worth of bonds had been sold. “Further issuance is likely to be necessary over coming months to maintain the liquidity and efficiency of the Treasury bond market.” The Treasurer said.
Because they are risk-free, Australian Government Treasury bonds are the benchmark used by participants in Australia’s financial markets to set interest rates beyond the short end of the yield curve, including in the bond futures market. “The Government is committed to ensuring that its bonds can play this role effectively.” Mr. Swan added.
Mr. Swan made the point that the existence of a robust debt market alongside the banking system ensured that the Australian financial system remained healthy.
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Westpac Stays Silent On Madoff Exposure
Three of Australia’s so called Big Four banks have issued statements saying they have no direct exposure to the collapsed Ponzi scheme run by an American investment firm owned by Bernard Madoff. ANZ, Commonwealth Bank and NAB all said on Monday that none of them had any direct exposures to the scheme, whilst Westpac had no comment according to The Daily Telegraph.
“It’s not the business we’re in, in New York, and he had a fairly limited client list, so we’re 99.9 per cent certain we don’t have any direct exposure,” an NAB spokesperson told the Daily Telegraph. Spokesmen, from both ANZ, and Commonwealth Bank, similarly denied any direct exposure.
Domestic Australian banks are trying to identify whether they have any indirect exposure to the scheme as regulators scramble to uncover the scale of losses related to perhaps the largest ever financial swindle to ever occur on Wall Street.
Mr. Madoff was arrested last Thursday in New York for allegedly defrauding customers through a giant pyramid investment scheme after confessing to two senior executives of his company thought to be his sons. The firm’s assets were frozen on Friday in a deal with US federal regulators, and a receiver was appointed to manage the firm’s financial affairs.