The big move in the Australian banking sector post the Fed rate cut came last Wednesday, when the big five gained an average 2.6 per cent in value on the day. The week ending yesterday saw more of the same as the banking sector attempted to keep pace with a broad market dominated by the resource sector. The ASX 200 rose 2 per cent and the bank average rose 1.6 per cent. The favoured whipping boys of the past month - National and St George - outperformed.
Relative movements for the week ending 26 September 2007:
St George (SGB) +2.35 per cent
National (NAB) +2.12 per cent
Westpac (WBC) +1.28 per cent
ANZ (ANZ) +1.23 per cent
CommBank (CBA) +1.02 per cent
ASX 200 +1.97 per cent The Fed rate cut has allowed for a semblance of calm to return to financial markets. The Libor rate in the UK and the equivalent 90-day bank bill swap rate in Australia have eased off in yield, with BBSW falling from 57 basis points over cash to below 30 points over. This relieved some of the immediate concern faced by the big banks, who were ready to increase mortgage rates the moment they had to.
And the signs are tentatively positive elsewhere in the financial sector. Macquarie Bank put on close to 5 per cent, Babcock & Brown close to 10 per cent, and Rams Home Loans jumped 20 per cent, although at $0.96 - and now the plaything of day traders - it is still a long way south of its $2.50 issue price. Macquarie's mortgage arm Puma successfully issued $500 million of full documentation, prime residential mortgage-backed securities at a 22 basis point higher spread than their previous, pre-crunch issue. Rams, which last month failed to refinance over $6 billion in debt, also lifted the lid on the sale of $250 million in asset-backed securities which went on sale yesterday.
Assisting the calming of the waters were two reports from the RBA. The first, released on Monday, was the September Financial Stability Report in which the central bankers suggested the repricing of global risk as precipitated by the credit crunch was actually beneficial for the continued steady growth of the Australian economy. This news, along with some frenzied activity in the resources sector helped to push the Australian stock market to a new high on Monday.
And it continued on Tuesday. Deputy RBA governor Ric Battellino made a presentation in which he suggested the soaring levels of Australian household debt everyone is rather concerned about are not really a problem at all. Debt levels are likely to increase further, said Battellino, but any problems related to home mortgages would be contained largely to Sydney's western suburbs. The bulk of mortgage debt across the country is owned by older and wealthier Australians and not by young and cash-strapped first home buyers. This more secure demographic has plenty of debt capacity and little repayment burden, Battellino concluded.
So things couldn't be rosier really, as far as our monetary guardians are concerned.
Overseas developments also helped to boost faith in the banking sector. The Northern Rock disaster has now moved off the front page and the big four US investment banks, which reported third quarter earnings last week, scored a 2-2 against The Street. Lehman's losses were not as bad as expected, Morgan Stanley's were slightly worse, Bear Stearn's were rather ugly but Goldman Sachs absolutely blew financial analysts out of the water by posting an 88 per cent increase in quarterly earnings. The sly Number One investment bank had been short mortgage securities all along.
The general feeling among analysts is that the Australian banking industry will continue its tentative steps towards normal operations. Banking sector valuations should also continue to improve as investor confidence returns. The banks themselves have been upbeat, with ANZ delivering a positive update on its personal banking division this week and Westpac likewise for its business division.
ABN Amro went as far as to upgrade the bank sector to Overweight. However, its reasoning was more relative than absolute. The analysts suggest the market has been quick to jump on potential bank funding problems while ignoring the inevitable consequence that all corporate financing costs will increase. Hence ABN suggests Overweight against the rest of the industrial sector.
JP Morgan, nevertheless, is still yet to be convinced. The analysts acknowledged the small bond issues from Westpac and ANZ of last week at 18 points above pre-crunch, but scoffed in the knowledge that there has been a bit of interbank back-scratching going on. The Puma issue at 22 points over preceding spreads was similarly small, and JPM notes the Rams issue will be at 27 points over prior spreads. But most noteworthy has been a subsequent five-year eurobond issue from Westpac of €1.5 billion which, when swapped back to Aussie, was sold at 35 basis points worse than earlier. This means the real spread is 35 and not 18, says JPM. That is not as healthy a situation as the banks are trying to pretend.
Produced by
FNArena for The Sheet.