Australian Bank Credit Ratings Under Review By Moody’s
Global credit ratings agency, Moody’s Investor Service said that it would review the credit ratings of Australian banks as economic conditions in Australia continue to deteriorate worse than expected.
Moody’s says the review is required since it believes that there will be a 0.4 per cent economic contraction in Australia this year, and it expects the lagging indicator of unemployment to peak at 7.2 per cent in the following year 2010.
Moody’s issued a statement on Wednesday saying,
“The outlook for the Australian economy continues to weaken; Moody’s will consider the potential impact on asset quality and earnings — and how this may affect Australian bank financial strength ratings.”
Australian banks retain some of the highest ratings in the world, with the big four lenders, CBA, NAB, ANZ and Westpac each carrying a deposit and debt rating of Aa1.
Westpac, Australia’s second biggest bank by assets and largest bank by market capitalisation yesterday reported a fivefold increase in bad and doubtful debt. CBA, ANZ, and NAB have all recently reported an increase in bad debt provisions which has resulted in slowing profits growth.
Australian banks regardless, remain relatively robust, the big four form a quarter of all banks that have the highest ratings attached to them, and for the most Australian banks have weathered the sub prime and broader credit crisis rather well. The big four have had to write down perhaps less than US$4 billion in assets between them, out of a total of US$1 trillion written down by banks globally.
Australia’s biggest banks have issued more than $45 billion in sovereign backed debt since November 28th, when the AAA-rated government first backed their funding in a bid to thaw credit markets frozen by Lehman Brothers Holdings Inc.’s bankruptcy, according to data compiled by Bloomberg.
Australian banks’ Tier 1 ratios, a key measure of financial strength, now “compare better to their international peers than pre-crisis,” Moody’s said. The Australian government’s flexibility to support the financial system and stimulate the economy is “strong,” it said.
The ratings company said it expects to make a more detailed report by March.
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Bank of Queenslands Forecasts 25 Percent First Half Profits Jump
Regional lender Bank of Queensland (BoQ) issued a statement saying that first half cash profits are set to increase by my more than 25 per cent, sending BoQ stock soaring during Thursday’s trading session.
“Growth in cash profit after tax has been underpinned by good cost discipline, strong asset quality and targeted growth, a very pleasing performance given the challenging economic environment,” managing director David Liddy said.
Mr Liddy added that BoQ’s asset quality remained “strong”.
“Our impaired assets and 90 days-past-due results continue to demonstrate the relatively higher asset quality of our book, and we expect to report ratios similar to those of our 2008 financial year end,” he said.
The lender, which focuses on secured housing and small-to-medium enterprise lending in Queensland and Western Australia, repeated that net interest margins were likely to be lower in the first half due to a focus on “sticky” retail term deposits and pricing pressures. The bank expects margin expansion in the second half of the year driven by recent asset and liability pricing strategies.
BoQ expects a first-half normalised cash profit of at least $79.3 million in 2009. Last year the lender recorded a normalised cash profit of $65.3 million during the same time period. Cash profit is a smoothed measure closely watched by analysts, which the bank normalises to exclude one-off items such as asset sales.
Australian financial institutions, its lenders and banks have seen strong revenue growth despite weaker economic conditions and an increase in bad debts. The growth is as a result of reduced competition in the wake of consolidation and some exits in the Australian banking landscape. The Federal Government guarantee on bank deposits has meant there has been strong deposit growth, which has resulted in a stable cheap source of funding for banks.
However, the major banks have all recorded a spike in bad and doubtful debts mostly due to exposure to troubled corporates, eroding what would have otherwise been solid earnings growth.
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IAG Says It Needs To Raise A$500 million
Insurance Australia Group (IAG) has warned of a sharp drop in its first half profits after incurring a loss on the sale of a business in the UK and poor investment returns. The insurer said it would have to raise A$500 million in fresh equity as a result.
IAG, Australia’s top general insurer for cars and homes, cut its full year insurance margin forecast from 10 per cent, down to 6 per cent. The company cited widening credit spreads and also wanted to reflect the large increase in claims this year which have occurred as a result of the Victoria bush fires.
IAG reiterated that underlying gross written premium growth would still be between 3-5 percent. However the company added that it needed to raise funds in the face of difficult conditions.
IAG said it wants to raise A$400 million through an institutional equity placement at A$3.00 each, a 13.3 percent discount to Tuesday’s close, with an extra A$100 million to be raised through an offer to retail shareholders.
IAG said it expects to report a net profit of just A$4 million for the six months ended December, down from A$110 million a year earlier. IAG will release its results on Feb. 26. In December, IAG agreed to sell its mass distribution businesses in the United Kingdom for about A$165 million.
IAG’s downbeat profit forecast follows Suncorp Metway Ltd’s disappointing earnings earlier this month. Suncorp also announced plans to raise up to A$1.3 billion in new equity, which coupled with the bush fire exposure has lead to the stock taking an absolute beating, with current shareholders unimpressed with the size of the discount being given as incentive for new investors.
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Westpac See’s Five Fold Increase In Bad Debts
Big Four Australian lender, Westpac Banking Corp, Australia’s largest bank by market value reported quintupling of bad and doubtful debt in the fourth quarter of 2008, with bad debt escalating to A$800 million. The bank said the increase was as a result of the deteriorating Australian economy.
Westpac’s largest fourth quarter exposure was a A$300 million loan to the troubled domestic Australian investment bank Babcock & Brown according to an update issued by Westpac to the Australian Securities Exchange.
Westpac’s bad and doubtful debts totalled only A$144 million in the same period of the previous year, according to the statement. Cash earnings for the quarter fell 2 percent year on year to A$1.2 billion.
“Our underlying performance remains solid as we continue to support our customers in what is clearly a deteriorating economic environment. With global conditions continuing to be volatile, operating conditions will remain difficult,” Chief Executive Gail Kelly said in a statement.
Westpac’s Tier 1 capital ratio, a measure of financial strength, was at 8.3 percent at Dec. 31. The bank said its access to funds benefited from the re-opening of global capital markets, with approximately A$13 billion of term wholesale funding completed. It also raised more than A$3.8 billion in equity in the last four months, according to the statement.
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ANZ Rumored to be Front Runner In Acquiring RBS India Assets
ANZ is reportedly a leading contender to buy the Indian assets of troubled British banking giant RBS. RBS acquired the international operations which include the Indian franchise of ABN Amro after purchasing ABN in a three way transaction alongside Fortis and Santander. The acquisition at the height of the market and at a cost of US$ 97 billion has proven to be a bitter pill to swallow for all parties.
According to the Australian, ANZ has received informal clearance from the Reserve Bank of India, the banking regulator and India’s central bank for a possible acquisition. Clearance has also been given to another possible bidder which is unnamed.
Though RBS has not yet put any assets up for sale, it is likely that assets sales will have to occur and that sale documents will eventually be circulated after RBS reported the largest ever loss in British corporate history.
Curiously ANZ sold its India franchise ANZ Grindlays which had a full banking license and was a well established business to Standard Chartered in the early part of the decade. Its strategy back then was to sell off non core international assets and retreat back to its domestic market.
In retrospect that move was probably a bit of a blunder, since it will now probably have to pay higher multiples for what is although a larger business now, than it sold its previous business for, a business it could have developed itself organically.
Since that asset sale, it has become clear that in order to sustain growth ANZ, as will all major Australian banks, have to use the opportunity of high ratings, strong balance sheets, depressed asset prices, coupled with vulnerable targets to seek growth beyond Australia’s borders. Mike Smith ANZ’s chief executive has repeatedly stated his ambition of becoming a super regional bank, whilst CBA recently suggested that it too was keen at looking at opportunities in Asia.
The Indian business website livemint.com has suggested, citing officials from the Indian banking regulator that ANZ is the front runner for ABN Amro’s India operations, ahead DBS and Standard Chartered.
However, a banking regulator, other than providing permission for ANZ to make a bid, would have little clue about the size of any forthcoming ANZ bid which has not been formally made, its size in relation to rival bids, and RBS’s willingness to consider ANZ’s bid as front runner.
The Reserve Bank of India did say however that Standard Chartered would not be able to acquire all the branch licenses that ABN Amro currently possesses, therefore putting it at a distinct disadvantage with either ANZ or DBS, which have a much smaller or even non existent network in the country.
“We have conveyed to Standard Chartered that it will not be possible to transfer the 31 branch licenses of (RBS-owned) ABN AMRO to them,” the official said. “ANZ has a negligible presence in India, and hence among the three it has an edge. However, it all depends on the global negotiations of RBS. After that is finalised, ANZ and RBS will come to us with a formal proposal.”
ANZ told The Australian earlier this month that it remained “enthusiastic” about the ongoing opportunities in the Asia-Pacific region, including India.
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NAB Restructures Senior Management
Australian banking major National Australia Bank (NAB) according to multiple news reports, is set to reshuffle its senior management, with the head of business and private banking reportedly being elevated to the number two man at the bank.
Cameron Clyne, NAB’s chief executive will announce the restructuring before revealing his strategic blueprint for the bank on March 12th.
Mr. Healy who is responsible for 40 per cent of the NAB’s revenues has been brought in as number 2 clearly to establish Mr. Clyne’s power base at NAB, and the ascent of Mr. Healy has meant talented former Australian CEO Ahmed Fahour, who was associated with the old leadership has now clearly been sidelined.
An NAB spokesman refused to comment on the report, but said any change regarding the role of an executive that reports to the CEO was material and would be announced to the Australian Stock Exchange (ASX).
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Volumes Doubling In Australian CFD Market
There has been an increasing trend by retail investors to eschew traditional fund management or investment products in favour of cheap and fast off market derivative instruments known as Contracts For Difference (CFD’s) according to CFD market maker IG Markets.
IG Markets Chief Executive Tamas Szabo said that his companies trading in CFD’s in Australia in the six months ending at the start of December was double the volume it was in the same period year on year. Mr. Szabo went onto add that account numbers were up 65 per cent and said,
“Client uptake is very healthy and we haven’t had any reduction in client balances, so our clients seem fairly resilient, People are losing a bit of faith in traditional fund managers and in giving their money to somebody else to handle.”
Contracts For Difference allow investors to speculate on the direction of financial assets, everything from exchange rates equities, their indexes or commodity prices. The instruments allow investors to wager whether the prices of these assets, will move up or down without actually owning the underlying, and provide the speculator with as much as 95 per cent leverage, greatly magnifying any losses or gains.
Mr. Szabo reckons that the global financial crisis and the resulting high degrees of volatility has not scared away potential customers in fact suggesting quite the opposite has occurred, crediting the crisis with creating a new pool of customers.
“If someone loses their job they have more time on their hands, and they see this as a money-making activity, so we’re seeing more of the day-trading type of client in the current climate,” he said.
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ANZ Rules Out Capital Raising Sqaushing Market Rumours
Australian big four lender ANZ on Thursday, effectively ruled out any capital raising exercises in the foreseeable future. Market participants had begun to speculate whether ANZ would go to its stockholders to raise new funds in order to boost capital ratios. ANZ’s went out of its way to squash those rumours, declaring its balance sheet the strongest amongst all the major Australian banks.
ANZ issued a statement saying “ANZ been made aware of market speculation about a potential capital raising. In response, ANZ can advise its pro-forma 2008 Tier 1 capital ratio stood at 8.35 per cent, substantially above regulatory requirements and among the strongest of the major banks in Australia and globally. There are no current plans for a capital raising.”
Of the big four lenders, ANZ is the only one not to have executed a capital raising through an institutional share placement. ANZ, however did raise A$1 billion last year through a dividend reinvestment plan. ANZ also issued more than $1 billion in convertible preference shares last September, shortly before global market dislocation took hold, but has since not sought to raise new capital as its rivals have.
NAB has raised $3 billion from shareholders, Westpac has raised $2.5 billion and the Commonwealth Bank has raised $2 billion.
ANZ, like its rivals has also issued billions of dollars in sovereign guaranteed bonds in a variety of currencies on international credit markets. This week alone, it raised a record 180 billion Yen ($3.05 billion) in samurai bonds marketed in Japan. The company says it has now raised 75 per cent of the $21 billion it required by September.
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CBA Interested in Asian Expansion
Australian banking major, Commonwealth Bank of Australia has suggested a future growth strategy that would include an increase in its exposure as a lender to Asia. The bank said it would be extremely interested in examining any opportunities that become available.
Of the big four banks ANZ has been the most vocal about its desire to become what Chief Executive Mike Smith calls a “super regional bank” ANZ already has strategic partnerships or holds stakes in banks from Indonesia, Vietnam, and China. ANZ is also reputed to be interested in bidding for CitiFinancial’s Asian assets, should they become available.
NAB has a more developed market strategy with two retail banking units in the UK and an agricultural bank in the US.
CBA for the first time expressed a desire for an expansion strategy beyond Australia, having just acquired BankWest. CBA chief Ralph Norris, told CNBC a business news channel, in an interview “Asia is an area of interest to us, we have operations and exposure into Asia, and certainly we would be interested in increasing our exposure to Asia going forward,”
Mr. Norris suggested that in the aftermath of global market volatility caused by credit markets shutting down and freezing in the last quarter of 2008 has meant that there is an abundance of attractive opportunities present, which the bank would be interested in looking at.
“You see opportunities that may never come up again, or in a generation anyway, you see opportunities in some markets you may not have considered previously because of the fact there were barriers to entry there as far as costs were concerned,” Mr. Norris said.
Mr. Norris’s comments came a day after the nation’s second biggest lender by market capitalisation booked a sharp jump in bad debts and warned it cannot guarantee the level of future dividend payments as economic conditions deteriorate.
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IAG And Suncorp Face Minimum $500 Million Bush Fire Exposure
Australian insurers Suncorp Metway and Insurance Australia Group (IAG) will have to make use of their reinsurance contracts in order to be able to cover an expected minimum $500 million payout related to bush fires in Victoria.
Market analysts expect this catastrophe and the large exposures that IAG has to it, may force it to launch its own capital raising exercise, similar to the one being carried out by Suncorp for which its stock is paying a heavy price. IAG’s has had repeated exposure to a variety of disasters in recent years and its balance sheet is in need of strengthening, after having been depleted.
Insurance companies like investors have experienced substantial losses on the value of their investment portfolios. 2008 saw insurance companies in Australia being hit without about $1.2 billion in claims, double the previous year’s rate, in the aftermath of a number of storms, which affected areas on the outskirts of Sydney, and south eastern Queensland.
The losses incurred by insurers over the last few years is expected to result in higher costs of housing and vehicle insurance, with some types personal insurance costs having been increased by almost 9 per cent by certain insurers.
IAG and Suncorp both saw heavy sell offs in the their shares during Monday trading, IAG closed down nearly 9.5 per cent, whilst Suncorp which was already on the receiving end of a beating resulting from investor displeasure at its capital raising program, lost more than a fifth of its value during Monday’s trading session. QBE, the country’s largest insurer is thought to have limited exposures to the catastrophe.
Suncorp Metway clarified its exposure on Wednesday, saying through a statement that the combined cost of claims related to the recent bushfires in Victoria and floods in Queensland is expected to be around $180 million. It went on to add that it was still too early to provide an indication of ultimate claims numbers and costs.
But it was clear the events would trigger its aggregate reinsurance arrangements.
“Therefore, the maximum combined cost of the Victorian fires and North Queensland floods to the group, including reinstatement premiums and the purchase of additional reinsurance cover, is expected to be approximately $180 million net of reinsurance recoveries,” Suncorp said in a statement.
“Any additional claims events throughout the remainder of the financial year would cost the group a maximum of $10 million per event, with a limit of $300 million on recoveries under the aggregate cover program.”
Suncorp said as of 5pm yesterday, it had received 1250 claims from the Victorian fires from AAMI, GIO and Apia home and contents policy holders. It has also received 1000 claims related to the storms and flooding in Queensland, the majority of which are from Suncorp home and contents policy holders.