Ugly bank futures and dark days for NAB

[ManlyBacker]

I am incredibly upset by the announcement from NAB last week of an additional writedown of $830M only 2 months after taking a writedown of $181M against a portfolio of US collatorised debt obligations (CDOs). This has resulted in a drop in share price of around 17% since the announcement.

This announcement follows from a statement from the CEO that they had no further major exposure to the US market. Similar statements by a corporate leader in the US would result in a class action for losses by investors and the charging and most likely incarceration of senior executives.

This week the ANZ announced a provision of $1200M against bad corporate loans. This will equate to about 25% of this year's profit and comes on top of the Opes Prime and Primebroker/Chimaera fiascos along with a $680M hit from Centro.

All the promises of being careful corporate governers with risk management practises account for very little in the Australian banking world it seems. From dodgy future trades, overseas exposure to instruments worth about 5c in the dollar, failed investments in overseas banks, to unannounced bad debts it looks like a very, very bumpy ride for investors and also those with loans as these organisations try to claw back profits.

For me all credibility is shot. The statements of fiscal responsibility aren't worth anything. The legal fraternity can look forward to massive payments.

 

[The Wheel]

Ryan must have something to with this

 

[Guest]

If you read this article you will see that Merrill Lynch had a lot to do with the unexpected write down.

How Merrills dragged NAB into an $830m writedownTuesday,
29 July 2008

Glenn Dyer writes:

The National Australia Bank's shock write-down of $830 million worth of collaterallised debt obligations (CDOs) can now be explained.

It was triggered by a move from struggling US investment bank Merrill Lynch to get rid of billions worth of CDOs in which the NAB was a co-investor.

Merrill's took a decision to sell the CDOs at a written-down value and the NAB had no option but to follow suit. Its larger write-down than Merrill Lynch (90% vs. 78%) reflects its lower ranking of security.

The NAB was involved in a parcel of what’s called "super-senior" CDOs with a face value of $19.9 billion.

NAB and the Australian stockmarkets were directly affected by the Merrills move, which reflects the US banker's desperate desire to quit as much of its toxic subprime mortgage related investments as it can, without regard to the flow on impact to other banks and markets.

In effect Merrill's move to sell these holdings of CDOs to a distressed debt fund investor, forced the NAB to write-down the value of its holding in the CDOs, a move which triggered a huge sell-off of Australian bank shares Friday and yesterday. Yesterday the ANZ revealed a completely unrelated set of write-offs and provisions, butr these had more to do with the slowing Australian economy.

At the same time, I understand that APRA, the Australian Prudential Regulation Authority, has been talking to the NAB and ANZ and were liaising with them on these moves and had a full understanding of both banks' actions. APRA has been actively talking to banks and other financial groups it regulates about their exposures to the US and to Australian corporate basket cases, such as Allco and Opes Prime.

Confidence in banks has been hit by the NAB and ANZ announcements, but not all banks are in that boat. Westpac revealed this morning it had successfully raised just over $1 billion from an issue of stapled securities to boost its regulatory capital.

The bank said its previously announced offer of 10.36 million Westpac stapled preferred securities at $100 each to shareholders, broker firms and institutions has closed and was completed in full.

That shows the nervousness about banks in recent weeks hasn't stopped big investors making positive decisions: Westpac's issue was announced last month and finished in the turmoil of the past two days.

Merrill's move, revealed this morning in a shock statement to Wall Street after trading closed was part of a $US8.5 billion emergency fund raising and another $US5.7 billion in write downs.

Merrill said it would sell CDOs with a nominal value of $US30.6 billion to Lone Star Funds, a distressed-debt investor. At the end of the second quarter, the bank had estimated the value of the CDOs at $11.1 billion. However, it said yesterday it was selling the securities for just $US6.7 billion, or about 22 cents on the dollar; and financing 75% of the purchase. This smacks of desperation:

On a pro forma basis, this sale will reduce Merrill Lynch's aggregate U.S. super senior ABS CDO long exposures from $19.9 billion at June 27, 2008, to $8.8 billion, the majority of which comprises older vintage collateral -- 2005 and earlier. The pro forma $8.8 billion super senior long exposure is hedged with an aggregate of $7.2 billion of short exposure, of which $6.0 billion are with highly rated non-monoline counterparties, of which virtually all have strong collateral servicing agreements, and $1.1 billion are with MBIA. The remaining net exposure will be $1.6 billion. The sale will reduce Merrill Lynch's risk-weighted assets by approximately $29 billion.

It's that phrase in the above paragraph; "super senior ABS CDO" which reveals what happened. This sale was dated June 27 but only completed yesterday, but it preceded the NAB announcement on July 11 when it warned that there could be further write-downs.

Then last Friday NAB warned that there would be write-downs of $830 million (on top of the earlier $181 million), meaning it was cutting the value of its investment in the CDOs by 90%. It was a 'senior' ranked investor in the CDOs and when a super-senior ranked investor decided to liquidate or sell the CDOs at a lower value, the other investors have no say in the matter and have to follow suit.

Super-senior investors hold all the cards in these complicated deals. The NAB has super-senior securities among the $US4.5 billion of various derivatives still in its off-balance sheet investment conduit.

If Merrill had not decided to liquidate its position and sell, the NAB would have been in all probability, still an investor today with a $181 million write-down.

 

[Matabele]

I know Westpac have been taking the knife to their approved loans list. 

 

[Canteen Worker]

I am just glad that I am not retiring now or shortly. My super has enjoyed a slippery-dip ride down the slopes!!!!

 

[The Gronk]

so MB, when do you think the time to get into bank shares would be - they are just getting cheaper and cheaper with all this news. 

 

[ManlyBacker]

I waded back in in no small way on 15 July. Bought CBA, QBE, some retailers (although I know I said wait until after Sept. but they seemed like good value), miners, building and gambling. Despite the last week's turmoil I am still about 8% ahead on these trades so no real complaints. In the banks I already had good holdings from a long time ago of NAB and Westpac.

I would have said banks were good value right now. But I am as shocked as everyone else that the assurances from Australian banks that they were responsible and had things covered appear to be blatant lies. However, even if their dividends in the short term were to fall by 40%, which appears to me quite possible, and taking into account my belief that interest rates will fall later this year and next and this is where banks do make profits, then the returns are still very good especially with franking credits.

It is a sort of cop-out from me here as it is very possible they could fall another 25%. Still, I only invest for long term and only sell anything when I think the business is completely on the nose. If you can put bank shares into a super fund where the franking credits will be a huge advantage (tax rate 15% plus the return of the 15% of the corporate tax rate of 30%) and you are looking long term then buy some now. Hold back some cash for another buy in 4 months as they may be better value, but to me they still look good today.

 

[The Gronk]

thanks mate...I might dip the toe in in a couple of months.  I need a return of better than 10% p.a. to really justify not putting that same cash off the mortgage though I think. 

 

[ManlyBacker]

Put the money in the mortgage and then use it as collatoral to obtain a loan for your share purchase. That way you get a deduction for your interest against your salary as it is for investment purposes. The net effect should put you just in front plus you get the shares working for you and the dividends will cover a large part of the interest bill.

 

[The Gronk]

is that the same philosophy as negative gearing?

 

[Matabele]

I am just glad that I am not retiring now or shortly. My super has enjoyed a slippery-dip ride down the slopes!!!!

Baby Boomer. 

 

[ManlyBacker]

is that the same philosophy as negative gearing?

Yes TG, there is a bit of that. I could write a thesis and don't have the time but the basis is that you are 'swapping' (for want of a better word) undeductable debt for deductable debt.
- yr home mortgage is not deductable
- borrowings for investment purposes that derive income, no matter how small, are deductable
- the presumption is that you already intended to buy shares

The advantage in borrowing against the house collateral or the additional payment made, or even using the 10k as a flat amount put forward to buy shares as part of a loan arrangement, is that the interest now paid becomes deductable. You need to do the sums or speak to a financial advisor but what happens is that you can reduce your tax bill (over 34k to 80k is 30c, over 80k to 180k is 40c in the dollar). This is obviously offset by the higher borrowing cost - margin loans are currently around or under 10.4%. So you gain the 30 or 40c, plus any dividends to offset the borrowing repayments. You still have your house and you still have some shares working for you.

Probably clear as mud but hope that helps.

 

[The Gronk]

nah I sort of get it. I think if I sit down with a caluclator I should be able to work out how well the shares have to go to cover me. 

 

[Matabele]

I really like the scene in Dark Knight where the Joker lights the pile of cash that is his half and lambasts the Mob blokes for their obsession with money.  Brilliant and seer-like. 

 

[Guest]

I heard today that the NAB has more exposure to US property and can expect to more provisions for loss over comming months. 

 

[Matabele]

What's the bet the banks soon start to shed their bloated middle management ranks within the next 12 months, just as they did in the early 90s. 

 

[The Wheel]

Dont say that

 

[Matabele]

*sniggers*  ;-)

 

[Canteen Worker]

Mata, are you suggesting that Wheel is bloated???

 

[Matabele]

I thought Wheel was a teller!