Apart from Australia’s lead in the current Tri-nations rugby contest, things are turning distinctly pear-shaped Down Under, notes Lex. As they reveal bad news and more bad news, banks are jacking up provisions with gusto, the Aussie dollar is sliding and the stock market is tanking; the ASX index has shed 17 per cent in the last couple of months.
ANZ, the fourth biggest lender, referred to deterioration in global credit markets and legacy problems when it unveiled $1.1bn worth of provisions on Monday. Its shares plunged more than 13 per cent before recovering in the afternoon to a slightly-less-than-abysmal level of A$15.81, down 11 per cent at virtually half their A$31.55 peak recorded in the last 12 months.
National Australia Bank’s $800m shock hit, announced Friday, relates to exposure to US mortgages. Glimpses of what is happening elsewhere on the banks’ portfolios, however, hint at broader carnage to come. And what is coming is much more than a spot of Anglo-Saxon contagion, warns Lex, regardless of what the Aussie banks say.
In the view of Glenn Dyer, business commentator for Crikey.com, the sharp rise in the banks’ bad debt provisions are a major blow to the market’s confidence in the banking sector, “challenging its assumption that Australian banks had escaped the US toxic debt crisis and had not been stuck with dodgy loans of the type that afflicted Centro, Allco, Octivar and other property and financial engineering firms”.
NAB was placed on credit watch negative Friday evening by S&P and it’s now likely that ANZ will join it after its own little Monday shocker, predicts Dyer.
As Lex notes, ANZ’s arrears are marching higher: in ANZ’s New Zealand business, around 1.3 per cent of unsecured loans are more than 90 days overdue, more than double the level this time last year. Household loan arrears are also creeping higher; unsurprisingly, since interest rates have risen 100 basis points in the past 12 months.
Australian bulls like to believe life is different Down Under, Lex adds: the commodity boom and full employment, the argument goes, offer a buffer against defaults. By extension, lending banks are sitting pretty once you erase the toxic, made-in-USA paper.
But the Australian consumer does not look that robust, in Lex’s view:
Household debt-to-income ratios, at 177 per cent, are higher than in the US, according to Morgan Stanley. And homes are every bit as over-valued as elsewhere, if not more so: the average house price/income ratio is 5.5 times. Assuming the economic cycle turns at some point, helped by inflation-batting central bankers, that leaves plenty of scope for a sharp increase in bad debts.
And amid the battering that banks are administering to investor confidence , there’s a new forecast of a further downturn in business confidence.
NAB, in a key quarterly survey, has forecast a further fall in business confidence, reports Crikey. NAB’s quarterly business confidence survey, to be issued Tuesday, is expected to show a further fall in the September quarter.
In a Monday statement, NAB said that many companies report negative expectations – especially home builders, household goods and car retailers, real estate agents and transporters. Only mining and health are positive about near term.
Overall expectations for business confidence have fallen further to “relatively pessimistic levels” for the September quarter 2008, it said, noting that NAB’s Business Confidence Expectations Index is down 4 points to negative 8 points for the September quarter – 18 points lower than a year ago or its largest four quarter fall in over a decade (“relatively pessimistic albeit still well above levels reached in the early 1990s”, adds Crikey).
NAB cites a triple whammy of reduced activity/lower customer confidence, rising costs (borrowing, oil and other key purchase costs) and volatile and lower equity markets which continue to weigh on the business outlook.
That is, almost 30 per cent of Australian businesses expect a minor deterioration in their industry conditions in the September quarter, in contrast to about 20 per cent that expect a minor improvement, while only a few businesses anticipate either a significant improvement or deterioration and over 40 per cent of businesses expect no change.
As if that weren’t enough, the Australian dollar, having ridden high, is succumbing to pressure, trading on Monday at a two-week low of 95.59 cents after ANZ’s announcement, reports Bloomberg. Barclays Capital only added to the pressure with a Monday prediction that the Aussie dollar may decline to 95 cents within a month on prospects that slowing economic growth will prompt the Reserve Bank of Australia to cut interest rates in coming months.
Meanwhile, after two days of sell-offs, Australia’s big four banks are trading on 8-12 times this year’s earnings, and downward profits revisions are surely pending.
Lex, therefore, may be spot on in advising those wanting a punt on Australia to “stick to rugby”.