A note from a Goldman Sachs JBWere analyst summed up the frustration many in the markets have at the moment.
After being surprised by the average interim profit from the Commonwealth last week and then the shock trading update from the ANZ and its $365 million in provisions for three dud deals, including a potential $220 million hit from exposure to US monoline insurer ACA, the analyst wrote in a report on the banks today: “(Mental note for future Macro Slowdowns – particularly credit induced: Banks are NOT DEFENSIVE)”. That’s the Goldman analyst’s emphasis.
The analyst could also write: “There are no new ways of losing money, but the Australian banks are trying hard to find them.”
Another note could read: “Banks are geared investments with the highest legitimate leverage in the market (around 12 times capital).”
The Commonwealth and ANZ have given us examples of what not to do as banks: lend large amounts of money to other geared investors, such as Allco and Centro Properties, and get involved in things they know nothing about, such as monoline insurance in the US.
The banks have shed around 25% of their value since the end of December, and more since their peaks late last year, as investors have come to understand that Goldman analyst’s mental note.
Investors should have some concern for ANZ that margin broker Tricom can’t find a big new shareholder and refinance its debt: the ANZ has had people working with Tricom to stabilise and reduce debts. ANZ also has $10.5 million advanced to failed NSW hotels group, Pubboy.
CBA has $200 million advanced to Allco Finance Group, which seems to be trying to negotiate the best deal for the executives led by chairman, David Coe, and not the creditors.
And now the ANZ has made a collective provision of $90 million in relation to its loan to Centro (but not a provision specific to that loan, as yet); the pressure will be on CBA to explain its policy in relation to its $160 million loan to Centro.
The ANZ didn’t explain why it thought it necessary to get into a relationship with the ACA group in the US. There are reports ACA marketed itself last year to the ANZ and DBS Bank in Singapore, which it signed up as counterparties. DBS has already replaced its CEO and taken multi-million dollar write-offs on subprime mortgage exposure and other dud credit derivative deals in the US.
A credit newsletter said this month that ACA joined up with arrangers of CDOs (collateralised debt obligations) looking for distribution and went looking for banks willing to put on “intermediation” trades. It had a single A rating and signed up 31 banks, one of which was ANZ.
ANZ said in yesterday’s statement: “Exposure to US monoline insurer – between 2005 and February 2007, ANZ entered into derivative transactions which involved selling credit protection on a portfolio of corporate names, and simultaneously buying matching protection from highly rated US financial institutions to remove market risk. This was perceived to involve little credit risk and generated modest trading income.”
Famous last words: “perceived” and “little credit risk”.
That was done CEO John McFarlane’s watch, as were the other two dud deals, Lafayette and Centro.
ACA was downgraded by the rating agencies from single A to triple C last December. Why has it taken ANZ so long to make a statement? You would have thought they knew by early last month there was a problem.
Given the way the market tumbled yesterday, you’d be entitled to wonder if ANZ investors were properly informed over the past six weeks.