Big 4 banks

[wto23]

ANZ has come out with great results however failed to match expectations for the second half causing the share price to plummet up to 3% today. What intrigues me is that NAB and CBA are up between 1.5-2%. This just doesn't make any sense to me.

Can anyone shed some light on this?

 

[krisbarry]

Ohhh Ahhh more fall-out from the sub prime crap!

ANZ set to raise rates on its own

October 25, 2007 08:07am

ANZ Banking Group has posted a record profit of $4.18 billion and says that it may increase interest rates even if the central bank does not as its cost of funding home loans rises.

ANZ's net profit rose 13 per cent to $4.180 billion in the year ended September 30, from $3.688 in the prior corresponding year.

ANZ (anz.ASX:Quote,News), Australia's third largest bank, said the headline result was impacted by a gain on the sale of its Fleetpartners international leasing business.

Adjusting for these, cash net profit was $3.924 billion, up 9.4 per cent, while the cash profit before provisions was $6.114 billion, up 11.5 per cent.

But higher funding costs triggered by the US sub-prime mortgage crisis could force Australia's third largest bank to hike rates on its variable home loans.

Just three weeks into his tenure as ANZ's new boss, chief executive Mike Smith said ANZ (anz.ASX:Quote,News) had been absorbing the cost of more expensive funding and could raise interest rates independent of any moves in the official cash rate by the Reserve Bank of Australia (RBA).

“It is also important to understand that the banks have been absorbing the increased costs of funding for the time being,'' Mr Smith said.

”That's something that can't go on forever of course ... rates are purely driven by market forces so we will have to wait and see.''

Mr Smith said he believed the next “touch point'' on interest rates would come from the central bank and banks would have to wait and see what happens beyond that.

The RBA is tipped to raise official rates by a quarter of a percentage point in two weeks, with possibly another rate rise later this year or next.

ANZ margins decline

The annual profit result was driven by growth in personal lending and deposits, however, growth from mortgage lending was trimmed by higher funding costs related to the global credit crunch late in ANZ's reporting year.

Mortgages grew by 3 per cent, with personal lending growth of 12 per cent offset by higher funding costs and continued competitive margin pressure, the bank said.

ANZ's net interest margin declined by 12 basis points in the year, although four basis points of that was due to accounting treatment of hedging instruments.

In the second half of its year, ANZ said income growth of 6 per cent was offset by margin compression of five basis points, due mainly to higher funding costs.

Mr Smith said the financial result was a great platform from which ANZ could move. “There's more juice in the tank,'' he said.

”And I feel we can get far more out of this bank domestically. And also, obviously, I want to expand within the region because my belief is that the regional model makes most sense now as we move forward,'' he said.

 

[wto23]

With the more than likely interest rate rise along with global credit issues I cannot justify the rate at which these banks are rising especially CBA which has hit it's all time high.

I'll be shorting shorting this stock.

Any other views towards the banks?

At the moment I'm just confused by the bulls pushing this stock up.

 

[dhukka]

ANZ has come out with great results however failed to match expectations for the second half causing the share price to plummet up to 3% today. What intrigues me is that NAB and CBA are up between 1.5-2%. This just doesn't make any sense to me.

Can anyone shed some light on this?

ANZ's results were not great. Cash earnings is the number you need to look at. Cash eps was up just 8.1%. Credit loss provisions jumped 39%.

Some Investment managers may have changed their view on ANZ and therefore are rebalancing their portfolios in favour of the other majors.

 

[qr2007]

ANZ's results were not great. Cash earnings is the number you need to look at. Cash eps was up just 8.1%. Credit loss provisions jumped 39%.

Some Investment managers may have changed their view on ANZ and therefore are rebalancing their portfolios in favour of the other majors.

I agreed with you on this. The money is just moving around between banks by Investors. They just cant find any where else to locate the money. Eventually they will have to cash out. Wait until the other banks showing their results ????? Financial sector has been hit hard globally....

I used to love banks but ?????

Have a happy W/E

 

[greenfs]

Please read my commentary at the bottom in conjunction with the scary report from Plan Australia, a leading mortgage aggregator and wholly own subsidiary of listed Challenger Group.

October 2007
PLAN Australia WebsitePLAN a better mortgageAccess AdvantagePLAN Member WebsitePlan Brief
Alex Moulieris
Managing Director
Welcome to our new look monthly Member newsletter - PLAN brief.

Each month we aim to update you on new projects, important information and any current industry issues, which we feel will be of interest and relevance to you.

This month's article focuses on the current financial market melt down - how and why it has happened and what it means for the future.

Turmoil in the Mortgage Markets. What Happened?It has certainly been an exciting time in broker land lately with the financial markets melt down and its knock-on effect of waking up the politicians to broker regulation. Of course, the meltdown was a direct result of unregulated broker activity, as is global warming!! Over the last couple of weeks I have had many questions on the above but today I would like to talk about the financial markets as its impact is upon us right now. Most of the questions I have received regarding the state of our financial markets ask "what exactly happened" and "how did this happen" and of course "what's going to happen". I thought it may be useful to pull together and summarise some of the recent commentary on the subject and try and form a view of how we may be affected.

This problem certainly demonstrates how globally intertwined our financial systems are. A problem that originates in the US through unprecedented mortgage defaults creates the collapse of mortgage origination firms and hedge funds and sends global equity markets into free fall. The upshot is that nobody wants to buy debt securities today without bigger risk margins, causing an increase to funding costs for all lenders including ours in Australia.

How did this happen? It seems that many different but related factors came together to create this disaster. A US property boom which made home ownership difficult was made easier by sub-prime lenders freely extending substantial levels of credit to people who in reality had no capability of repaying the loans. These people may or may not have had a poor credit history but regardless did not have capacity to repay the quantums that they borrowed. These people were offered loans on low start up interest rates of 1 or 2% pa reverting to a standard rate after a couple of years. All this was underwritten not at the rate to which the loan reverted; rather it was underwritten based on the reduced honeymoon period rate. Add to that, the loans were typically fixed rate don't feel the recent impacts of 16 US interest rate rises taking rates to about 7% pa.

When the mortgage reaches the end of its low interest rate start-up period it "resets". Of course at reset date these people have no way of meeting the new and higher repayment amount. The resets started to occur earlier this year and are continuing still now, in fact they will keep occurring until next year. Apparently there were some 7 million of these loans written! To magnify this problem further property prices have started to fall and any equity in these homes are beginning to disappear and in many cases moving into negative equity.

Why has it affected us in Australia when we don't have a default problem? Without going into the complexities of the capital markets, global lenders to Australian banks or non-banks have been spooked by the issues in the US and as a consequence are either demanding greater "risk" premiums in the form of higher interest or indeed not lending at all. Essentially in an environment of fear and loss it is easier and safer to park money in cash or government bonds and wait.

This phenomenon is not unique to RAMS or other non-bank lenders as all Australian banks and lenders these days securitise mortgages or raise money as corporate debt from the capital markets. If we have a look at the ABS stat's (see following table) it tells us that today only about 20% of a banks funding comes from their retail deposits hence all lending institutions are impacted in some form.

RAMS is an example of a local good quality Australian mortgage business that is in great shape one day and literally the next day has a serious funding problem. RAMS was funding the majority of their loan book on a short term basis when the markets collapsed and all the investors ran for cover. RAMS now has to replace short term funding along with its new loans with a higher cost source of funds. Investors who have come out of hiding now want a higher margin for the higher perceived risk.

To illustrate this higher cost of funding Macquarie Bank earlier this month finalised the sale of a $500 million mortgage backed debt issue of which $485 million of AAA rated paper achieved a margin of 40 basis points or 0.40% over the 30 day swap rate, (being the rate that banks lend and borrow between each other). Six months ago the same paper was achieving a margin of 16 to 17 basis points. This means that the cost of wholesale funding is up 20 to 25 basis points. Similarly Westpac issued 1 billion of medium term notes the other week at a spread at 51 bpts versus 11 bpts, the historical levels. Add to that, the 30 day swap rate has increases to 40 bpts above the RBA cash rate from 12 bpts which means that all mortgages, bank and non-bank are now another 28 bpts higher as well. If I was to explain that graphically it is as follows and clearly shows that the current borrower rates are unsustainable as lenders are losing money.

So why haven't all institutions moved their rates yet? This is an interesting question because if we look at when the Reserve Bank lifts or lowers rates the banks are quick to pass on the interest rate rise or reduction. It is almost like there is an unwritten rule amongst them that when the Reserve Bank moves they all move uniformly and at the same rate.

Under today's situation the same law doesn't seem to apply. We have seen some banks and non-banks move but the ‘Big 5' seem to be holding, presumably because each bank is concerned if they are the first to move and the others don't follow they will be competitively disadvantaged and also will be left out there alone to bear the fire of the media and the customer.

This is not a good situation; I can't imagine what it is costing the banks while they are trying to work through this latest of margin erosion albeit ANZ has estimated the cost at around $20 - $25 million per month. I am very supportive of the banks moving rates to reflect the increased cost of funding and would be happy for us, their business partner, to help explain this to the customer.

In fact the sooner the rate move is made the better because the event that is causing the problem is fresh in the mind of the general public right now so the explanation for the rise is easy communicated and understood. Secondly, how will a new borrower feel about the bank that repeatedly tells them that everything is OK with rates and then puts them up anyway, do you think the borrower will feel cheated?

At the end of the day I do not want to bear the brunt of margin erosion that we would be happy to assist alleviate by helping to explain the facts to borrowers and thereby making its passage easier.

What is the lending environment going to look like after all of this?

We will certainly see the end of heavily discounted sub-prime and low-doc lending. We have over the past couple of years been in an unusual period where higher risk lending has been priced at near prime rates. As such we should not view the repricing of credit that is happening or about to happen as unjust but rather back to where it should have been. Investors will slowly re-emerge, they need to invest, and mortgages are still good investments but in future they will price them more carefully for risk.

For the standard full doc borrower I expect rates will be higher as well but not to the extent of the riskier end. Overall, the market will re-emerge with logical and sustainable risk/reward pricing albeit a number of smaller under capitalized players may well disappear through this period.

With hindsight the above should have been posted here. As a mortgage broker, I can assure everyone from speaking to most of my panel lenders that lending activity has come to a screeching crawl, if not a full stop.

When you have got CBA offering to refinance within ten days without even obtaining the title from the current lender (this is a new initiative with criteria involved) & Suncorp offering up soft commission to first home buyers when they settle, you can safely say.. "Houston, we may have a problem".

What does this mean to ASF members?

Firstly, one can assume that bank stocks have topped out and that maybe a short position in such stocks may in future prove rewarding.

Secondly, if this leads to future profit forecast adjustments then this will definitely lead IMHO to a permanent downward correction in the local market, which is probably not a bad thing.

Thirdly, it will almost inevitably lead to a rationalisation of the entire sector which now appears overbanked. This will potentially include takeovers of some of the smaller players and may finally result in the collapse of the four pillar policy as bank strive to maintain shareholder satisfaction.

The only possible mitigant to these bear trends may come with the long awaited floating of the broking arms of CBA, WBC & NAB all of which are a certainity and may if announced assist in sustaining current shareholders values.

I for one have recently cashed out some of my portfolio based upon the realisation that a more permanent market correction is now on the horizon.

 

[Pommiegranite]

Slightly off topic..but...

I moved from whingeland 1 year ago, and would like to practice my whinging on this subject of banks:

I was shocked to realise that banks here offer homeloans in the region of 1.5% above reserve bank rate. If really lucky, you might get the option of fixing it for a year or two.

In the UK, the Bank of England rate is 5.75%. People over there can shop about for homeloans and pick up upto 0.5% below this fixed for 10 years.

Okay there would be heavy exit fees etc, but at least the choice of homeloans is great. Discounted, tracker, fixed.

So what has caused this blatant ripoff from the public? I would like to know and what can be done about it?

How about this for a vote catcher:

Legislation so that no homeloans can be offered 0.5% above Reserve bank cash rate, and with strict lending criteria.

It seems as though the Australian public just accepts this as they accept it as the norm. Sad really that we can't really do anything about it.

Maybe, the future is to 'import' homeloans from Japan? Now that would be nice

 

[TheAnalyst]

The next issue for banks will be a re-rating in regards to increased risk, which will in turn drive the market PE ratios lower, to compensate for the risk, example ANZ, its PE is already lower than the others due to risk of being to one sided into lending and not as much depth into managed funds.It was not so long ago that the banks PE was set to 10, about 3-5 years ago, then they started their consistent double digit earnings run, so their PE was increased for their sector.

go AWC go

 

[dhukka]

With hindsight the above should have been posted here. As a mortgage broker, I can assure everyone from speaking to most of my panel lenders that lending activity has come to a screeching crawl, if not a full stop.

When you have got CBA offering to refinance within ten days without even obtaining the title from the current lender (this is a new initiative with criteria involved) & Suncorp offering up soft commission to first home buyers when they settle, you can safely say.. "Houston, we may have a problem".

What does this mean to ASF members?

Firstly, one can assume that bank stocks have topped out and that maybe a short position in such stocks may in future prove rewarding.

Secondly, if this leads to future profit forecast adjustments then this will definitely lead IMHO to a permanent downward correction in the local market, which is probably not a bad thing.

Thirdly, it will almost inevitably lead to a rationalisation of the entire sector which now appears overbanked. This will potentially include takeovers of some of the smaller players and may finally result in the collapse of the four pillar policy as bank strive to maintain shareholder satisfaction.

The only possible mitigant to these bear trends may come with the long awaited floating of the broking arms of CBA, WBC & NAB all of which are a certainity and may if announced assist in sustaining current shareholders values.

I for one have recently cashed out some of my portfolio based upon the realisation that a more permanent market correction is now on the horizon.

Interesting post greenfs, it's always good to get an insider's view. The issue of margin erosion is an important one. I wonder how long the majors can go before they start hiking rates to combat the attack on margins.

On a more basic level investors should realize that we are moving into the bad end of the credit cycle. That means provisions for bad debts will jump substantially, margins will be squeezed and loan production volumes will slow. In such an environment it's unrealistic to expect banks to continue to produce double digit earnings growth.

As ANZ has a Sept year end, the latest result only included a few months of the credit crunch. NAB and WBC are in the same boat. 1H08 results will be more interesting as a gauge of the impact of the so-called repricing of risk.