The biggest news in banking this week does not include the major banks, unless one includes the Commonwealth Bank's (CBA) final result out yesterday that came in with a slightly higher than consensus profit. But we'll get the pillar-news out of the way first before turning to other disasters.
While CBA posted a record half-year profit, bringing the full-year result to $4.604 billion ahead of a consensus forecast of $4.549 billion, management did flag an expected slowdown in consumer and business credit ahead. It did, however, expect 2008 profit to either match or exceed the bank's peers. While the result would have gone some way to supporting the stock price in yesterday's most recent carnage, CBA has outperformed the other pillars in recent months.
Westpac made the only other announcement of interest this week, regarding its intention to spin off part of its BT funds management arm. While analysts thought this wasn't a bad idea, and may be replicated, the valuation effect was deemed immaterial.
As the five majors again fell less than the broad market in another week of global panic selling, some analysts reiterated their calls that the big boys are always safe havens in such times, or as ABN Amro put it - shelter from the storm. UBS agreed and both brokerages are pointing to valuations that were only three weeks ago looking stretched and are now looking fair. Of course, "Buy" ratings on the sector reflect a relative recommendation and not an absolute one. In other words, don't necessarily expect banks to rise, just expect them to fall less.
The ASX 200 fell 5.1 per cent this week while the big five fell 2.7 per cent. Top pick Westpac was this week hardest hit with a 3.9 per cent fall, and Macquarie analysts downgraded from Outperform to Neutral.
Relative movements for the week ending 15 August 2007:
National -1.64 per cent
CommBank -1.83 per cent
St George -2.50 per cent
ANZ -3.50 per cent
Westpac -3.94 per cent
ASX 200 -5.11 per cent
There was some consideration given to the impact of the interest rate rise, as there always is at such times. Suffice to say rate changes are a bit 'swings and roundabouts' for banks. A rise is generally seen as negative, however lost credit demand and increased loan losses are to some extent offset by not raising the deposit rate as much as the lending rate.
But black sheep amongst the bank analysts - JP Morgan - reiterated its warning last week that the global credit crunch is going to have a more marked negative impact than many might believe. JPM advised that while buying the dips might prove profitable, selling the rallies would also be prudent.
There was big news amongst the regionals this week as Bendigo Bank (BEN) rather shocked analysts and announced an intended merger with (takeover of) Adelaide Bank (ADB). Not one analyst could see any particularly sensible reason why Bendigo should make such a move, given Bendigo has a significant deposit base compared to Adelaide's reliance on now expensive outside funding, and that Adelaide has a large lower-quality mortgage book. A strange strategy in these troubled times. Not even Adelaide shareholders' big win was enough to enthuse, given they will receive Bendigo scrip.
The suggestion was made that Bendigo was simply reacting to attempt to shore up its independence in light of the failed Bank of Queensland bid. While BOQ appears to have shrugged and moved on, snapping up Mackay Permanent in an ongoing Queensland consolidation move, at least one analyst suggested a counter bid for Adelaide by BOQ is not out of the question.
And now on to the real stories of the week - the diversifieds.
No Macquarie Bankers (MBL) - it wasn't just a bad nightmare. Last week the diversified investment bank had recovered 12 per cent of its 28 per cent fall from its high but this week it gave that back with interest to be down 15 per cent at yesterday's close. For the hundreds-of-thousandaires factory workers, the global credit crunch and panic reaction could not have come at a worse time. Staff have only two windows per year in which to sell their vested stock bonuses, and now is one of them. JP Morgan notes the bank's shares have been hit by a wave of short-selling from near and far and whether or not it is justified, it is certainly effective.
JP Morgan insists, along with other brokers, that Macquarie Bank is now ridiculously cheap, but when to buy? Perhaps September 14 when management is due to provide an update. Short covering could be just as volatile.
Macquarie's Mini-Me - Babcock & Brown (BNB) - was even more harshly punished by the avalanche of selling orders during the week. The stock lost close to 20 per cent in value.
But the biggest news in the sector was the announcement by ASX-newcomer RAMS Home Loans that difficulty in acquiring credit, despite having negligible "sub-prime" loans on the books, could force a 15 per cent profit reduction. Shares in RAMS have now fallen 51 per cent from their July 23 $2.75 listing. The news resounded through the entire financial sector, knocking down share values of similar institutions through to the Mac Banks and even pillars of the market, proving that this global credit crunch is more than simply a problem with a few US sub-prime mortgages.
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FNArena for The Sheet.