In a presentation to a Macquarie Capital Conference in Sydney yesterday, Commonwealth Bank CEO Ralph Norris handled an upbeat assessment of the bank’s current state, one that helped turn around the market from a big loss to a gain of almost 1% at the end.
His presentation included the following phrases: “No reliance on securitisation”, “Approximately $39bn in liquid assets (~$10bn surplus)”, “Strong capital position” and, “No current plans (or need) to raise additional capital”.
It was the last comment that caught the attention of the market and led to all banks rebounding.
What then are we to make of an announcement made yesterday evening to the ASX which detailed a “self-securitisation of Residential Mortgage backed Securities (RMBS), designed to raise funds from the Reserve Bank, if necessary”?
The Commonwealth Bank Group has created a portfolio of A$15.6 billion of residential mortgage-backed securities (RMBS) through its Medallion Trust. These RMBS will be held by the Group and if required, the Class A notes can be used for repurchase agreements with the Reserve Bank of Australia (RBA) to generate up to an additional $12.25 billion of liquidity for the Group.
Now capital is capital. It’s money, liquid stuff that can be used to buy things, raise more money. So what’s the Commonwealth’s game, telling credulous investment analysts and fund managers one thing, and then apparently doing the contrary a few hours later?
The answer is that the Commonwealth has signed an opportunity to get some easy money (liquidity, sorry) from the Australian taxpayer, via the Reserve Bank’s move to deal in RMBS in the money market. It did repurchase agreements of almost a year last month in two tranches covering $1.1 billion. It did a further $150 million on Wednesday this week. That takes the total amount it has done repos on to around $2.5 billion since it started dealing in them last October. The deals done last year were all short term, this year all for almost a year. This week’s deal was for 265 days.
But it is worrying that the country’s biggest home lender says it has no need for new capital and then reveals, within hours, a deal to try and take advantage of what is a market support operation being run by the RBA to ease liquidity pressures for everyone, not just the CBA.
Is the Commonwealth really saying that it has all these securities it can’t get rid of, or won’t it accept the price that investors want to pay for the CBA’s securitised deals?
And why should the taxpayer have any involvement in what is essentially a not very important funding deal for a major bank.
Now if the CBA really does need these deals with the RBA for all that money, then that is big news. That’s why a detailed explanation is required from the bank in advance of the short announcement at 4.54pm Thursday.