As a follow-up to our piece on the Australian macro outlook (Australia: The Land Down Under(water in mortgage debt), We looked into the four largest Australian banks - Australia and New Zealand banking Group Limited, Commonwealth bank of Australia, National Australia Bank Limited, Westpac Banking Corporation. All the banks, except Commonwealth bank of Australia, have ADR.
The banks are trading at very high multiples when compared with their US counterparts. The current average price-to-tangible book value of the four Australian banks is 2.5x against the current multiples of less than 1.5x for US banks. The Australian banks are enjoying a premium largely owing to lower charge-off rates, delinquency levels and the NPL levels than their US counterparts. While the housing loans account for a substantial portion of the total portfolio of Australian banks, the housing bubble in Australia is yet to burst to result in defaults in this sector. Also, the Australian banks have additional shelter from two factors:
- The housing loans in Australia are recourse loans (borrowers are personally liable to pay even after foreclosure)
- The loans given in excess of LTV (Loan-to-value) of 80% have Lender Mortgage Insurance which covers the losses of the lending bank
The average Texas ratio of the four Australian banks is 25% and average NPL coverage ratio ( NPL+90 days past due to allowance for loan losses) is 68%. While the NPLs and the past due loans of the Australian banks have increased over the last year, a major portion of the increase is coming from business loans and commercial property while the delinquency rates in residential mortgage in Australia have remained stable (except for Commonwealth bank where substantial increase has been seen in the past due loans in the housing sector). The reported delinquency rates for mortgage or housing loans in Australia for the four banks are summarized below.
- Commonwealth bank of Australia – The total delinquent loans (1+ days past due) remained at 3.0% in 1H10, equal to the level of 3.0% in 1H09. However, owing to the aging of the some portion of the delinquent loans, the mortgage delinquency (90+ days) rate increased to 0.77% in 1H10 against 0.45% in 1H09 while the mortgage delinquency (30-80 days) rate remained stable at 0.86% and mortgage delinquency (less than 30 days) rate declined to 1.36% in 1H10 against 1.72% in 1H09.
The full analysis is available for download to subscribers below. Subscribers are also urged to review the Macro outlook document as well.
As excerpted from Australia: The Land Down Under(water in mortgage debt:
A few minutes ago, I posted an informational piece on Australia’s creeping protectionism in the form of taxing multi-national mining companies in ”In Australia, Tax as a Contagion“. This begs the questions, “Why is Australia So Tax Happy as to Potentially Chase Away Investment in the Down Under?” Well, the answer most likely is because it is actually a ”Land Down Under(water in mortgage debt) and foreign export reliance. We, at the BoomBust feel that the government is actually attempting to take a proactive stance in meeting the consequences of what is probably going to befall most export reliant countries which is why Brazil and Chile are strongly considering following suit!
As an extension of the Chinese macroeconomic discussion at BoomBustBlog throughout 2010, there may be an “Asian Contagion” spreading as a result of a Chinese
investment slowdown. Those at risk are the countries and regions that have supplied China with the commodities necessary to build empty cities. While the (comparatively, in terms of GDP) enormous Chinese stimulus package from the first part of the financial meltdown in 2008 has generated incredible growth in GDP and asset prices, the game appears to be over for flipping 1000 square foot apartments in Shanghai. After the direct hit taken to China, the picture looks very grim for Australia, where a bursting Chinese housing bubble could drive industrial commodities lower, sparking higher unemployment in one of the nation’s largest sectors, and in turn pop their domestic housing and property bubble. In the near to medium term, Australia is showing some major red flags.
June 9 (Bloomberg) -- France and Germany called on the European Union to speed up curbs on financial speculation, saying some bets against stocks and government bonds should be banned as markets suffer a resurgence of “strong volatility.”
In the news this morning:
- Stocks, U.S. Futures Tumble on China Growth Concern, BP Spill; Oil Plunges: We discussed the topic of China's unsustainable growth and the knock on effects its slowdown would have on other economies in detail just last week. How timely...
- The Narrowing Chinese Trade Surplus
- In Australia, Tax as a Contagion
- Australia: The Land Down Under(water in mortgage debt)
- BoomBustBlog China Focus: Inflation?
- BoomBustBlog China Focus: Interest Rates
- My China Ruminations Have Come to Pass As the Country Enters a Bear Market
- Chubble (The Unmistakeable, Yet Thoroughly Argued Chinese Bubble), Unemployed/Deleveraging Shopaholics Pushing Retail Stocks & Other News
- Euro Weakens Against Dollar on Speculation Crisis Hurting Region's Economy: Nothing new here. BoomBustBlog newcomers, see the Pan-European Debt Crisis here.
- BP Tumbles Most in 18 Years After Abandoning Attempt to Plug Leaking Well: The company's future doesn't look to bright!
- Paulson Drops 6.9% as Hedge Funds Post Biggest Monthly Losses Since Lehman (HNWs and institutional investors should take the time to read this article and my summaries): Many funds, including Paulson's, made hard bullish bets on the financial sector recovering, in direct contravention to my positions and research. Yes, the financial sector took off like a bat out of hell the last 3 quarters of 2009, but one shouldn't confuse sharp market price movements with fundamentals. Many, if not most are in bad shape, and it ain't lookin' much better in the near term either. See The Next Step in the Bank Implosion Cycle???. Most importantly, many (if not most) professional money managers and analysts totally underestimated the extent of the damage being done Europe. I have was weary of Europe since 2008, put short research and positions on in 2009 (with mixed results due to the bear market rally) and went full blown GRIZZLY BEAR in 2010 (reference the Pan-European Debt Crisis which publicly documents and details it all). Back to the news clip:
- (Bloomberg) -- John Paulson, Louis Bacon and Andreas Halvorsen navigated the global market turmoil of 2008 with little or no damage. They weren’t as successful last month as the Dow Jones Industrial average had its worst May since 1940. Hedge funds lost an average of 2.7 percent through May 27, according to the HFRX Global Hedge Fund Index, as the sovereign debt crisis in Europe triggered declines in stocks, the euro and commodities, and the gap in yields between U.S. short-term and long-term debt narrowed. It was the biggest decline since November 2008, when hedge funds lost 3 percent in the wake of Lehman Brothers Holdings Inc.’s bankruptcy two months earlier. Almost every strategy lost money in May, according to Hedge Fund Research Inc. in Chicago, as the Dow index of 30 big stocks sank 7.6 percent including dividends amid speculation that Greece’s debt problems would spread to nations such as Spain and Portugal. Some of the best-known funds saw their gains for this year erased. “Attempting to manage risk in an environment where everything that could go wrong does go wrong seems like a fruitless endeavor,” said Brad Balter, who runs Balter Capital Management LLC, a Boston firm that invests in hedge funds for clients. “The only defense that seems to work in months like these is being in cash.”
"SAC Capital Advisors LLC, the hedge-fund firm run by Steven Cohen in Stamford, Connecticut, with about $12 billion under management, lost 2.9 percent last month through May 21 with its SAC Capital International fund, trimming this year’s gain to about 4 percent, according to people familiar with the firm.
Citadel Investment Group LLC, the $12 billion hedge-fund firm run by Ken Griffin, lost about 2 percent with its biggest funds last month through May 21, said people familiar with the Chicago firm. The funds soared as much as 62 percent last year as markets rebounded after losing as much as 55 percent in 2008.
Brevan Howard Asset Management LLP in London, Europe’s largest hedge-fund firm, lost 0.1 percent for the month through May 21 with its Brevan Howard Fund Ltd., leaving it with a decline of 0.3 percent this year, according to an investor.
- I will gladly compare the performance of BoomBustBlog research to any bank, fund or asset manager that charges big commissions or 2 and 20! Reference Updated 2008 performance and the 2009 Year End Note to BoomBustBlog Readers and Subscribers for rough performance numbers covering 2007, 2008 and 2009.
- Analysts Boosting Forecasts See 25% Stock Gain Defying El-Erian New Normal: Yeah, but aren't analysts mostly wrong unless we're in a bull market? Stocks always go up, Right????!!!! Reference Blog vs Broker, Who Do You Trust?
- Cameron Bull Market in Gilts Beating Merkel Bonds as U.K. Keeps AAA Rating: For now, at least. Subscribers, see
UK Public Finances March 2010
A particularly leveraged approach to playing bearishness in Chinese "uber-growth" is Australia's export, housing and banking sector. We have explained this linkage in In Australia, Tax as a Contagion and Australia: The Land Down Under(water in mortgage debt (paying subscribers should download the full document: Australia Macro Outlook (611.47 kB 2010-05-27 04:43:48). The following is a summary from sources around the web that lend credence to the thesis that import machine for China is slowing down. There is a version in Mandarin at the end of the post, as well as links to much of our recent Chinese research and opinion.
The Narrowing Chinese Trade Surplus
Though China eliminated the trade deficit recorded in March by recording a trade surplus in April 2010, the surplus has been narrower, weakening the pressure for appreciation. The rising price pressures caused by commodities demand could be countered by an increase in domestic currency purchasing power.
A few minutes ago, I posted an informational piece on Australia's creeping protectionism in the form of taxing multi-national mining companies in "In Australia, Tax as a Contagion". This begs the questions, "Why is Australia So Tax Happy as to Potentially Chase Away Investment in the Down Under?" Well, the answer most likely is because it is actually a "Land Down Under(water in mortgage debt) and foreign export reliance. We, at the BoomBust feel that the government is actually attempting to take a proactive stance in meeting the consequences of what is probably going to befall most export reliant countries which is why Brazil and Chile are strongly considering following suit!
As an extension of the Chinese macroeconomic discussion at BoomBustBlog throughout 2010, there may be an “Asian Contagion” spreading as a result of a Chinese
From Blomberg: Mining Tax ‘Contagion’ Set to Spread From Australia:
May 20 (Bloomberg) -- Australia’s planned 40 percent tax on mining profits has set a benchmark for other countries weighing higher levies, reducing earnings forecasts for BHP Billiton Ltd. and Rio Tinto Group and the attraction of mining stocks.
“It could create what the miners are now describing at a global level as a type of tax contagion,” said Tom Price, commodities analyst with UBS AG in Sydney, in an interview. “They might levy a new tax at the miners in Brazil. Canada is another mineral province and South Africa.”
The new Australian mining tax coupled with rising worries over possible slowdown in China has become a serious concern for both domestic and international mining companies that have substantial exposure to Australian mining assets.
Here's a synopsis on the topic from my point of view...
Policy makers in China are likely to shift towards tightening with CPI inflation nearing 3% y/y. Inflationary pressures are induced by the sharp increase in money supply, higher food and housing prices, destructive weather patterns, and fuel and utility price liberalization. Inflation will be offset by industrial overcapacities, falling pork prices, and weaker wage growth.
China’s CPI increased by 2.8% y/y in April 2010, while producers prices increased by 6.8% y/y in April 2010. These statistics are not extremely inflationary and provides a time cushion for policy makers to implement monetary tightening measures.
The People’s Bank of China Q1 monetary report reiterated its commitment to maintain “appropriately loose” monetary conditions, but pointed out that inflationary pressures are not captured in stable CPI and PPI statistics.
Instead of fully withdrawing the current stimulus in China, the government may settle for stricter monitoring of wasteful projects and corruption due to an uncertain global macroeconomic outlook and export prospects.
The four main factors that determine y/y CPI growth in China include excess liquidity(defined as growth in M2 money supply subtracted by industrial growth), export, real estate prices, and share prices with a correlation of 0.36:0.13:0.22:0.04 to 1 unit of CPI growth.
The growing gap between M1 and M2 growth rates suggests that funds are being shifted from time deposits (interest rates capped at 2.25%) to demand accounts. This is driven by inflation expectations and will drive up inflationary pressure if the funds are spent.
Inflation rates tend to peak six months after money supply growth rates, and stronger-than-expected external demand could trigger overheating.
The high M2 growth rates are overblown because movements of households’ long-term savings moving between the stock market and deposits can affect M2’s growth rate and do not change the underlying purchasing power.
The great monetary expansion in China may contribute to asset bubbles, credit misallocation and bad loans if not controlled.
China’s economy continued to overheat in April despite substantial liquidity withdrawals, leading to expectations of further tightening measures.
Inflation continued to pick up during April because of rising feed costs, fuel costs, and housing prices, but the government pork purchases helped limit downward pressure on food prices and higher producer input costs being passed on to consumers.
There are signs of broad monetary tightening as the People’s Bank of China drained RMB437 billion of interbank liquidity through open-market operations, but China’s overall monetary policy remains excessively loose as April’s low CPI reading may delay an interest rate hike at least until June.
Strong output in manufacturing could keep industrial production above potential, which will eventually be inflationary.
The government announced tighter regulatory measures on the real estate sector on every other day for about a week in mid-April, and investment growth showed signs of slowing.
After a trade deficit in March caused by a slow restart of the processing trade after the Chinese New Year Holidays in late February, Purchasing Managers' Index (PMI) data suggests that the processing trade has returned to normal, shifting the trade balance back into surplus. The trade surplus is expected to narrow to US$120 billion for the year, down about 40% y/y due to weakening G-3 demand.
Retail sales have been supported by income growth and strong consumer confidence but may be affected by the cooling housing market. Even though Chinese consumption is expected to increase 11% in real terms in 2010, it will not be enough to make up for the drop in G-3 consumption.
May 11 (Bloomberg) -- China’s inflation accelerated, bank lending exceeded estimates and property prices jumped by a record, increasing pressure on the government to raise interest rates and let the currency appreciate.
Consumer prices rose 2.8 percent in April from a year earlier, the fastest pace in 18 months, and property prices jumped 12.8 percent, the statistics bureau said in statements today. New lending of 774 billion yuan ($113 billion), announced by the central bank, was more than any of 24 economists forecast.
Asian stocks fell, with the local benchmark index entering into a bear market, and oil and copper slumped on concern the government will move to cool the fastest-growing major economy. China should focus on preventing excessive increases in asset prices and liquidity after Europe’s almost $1 trillion loan package reduced the risk of another global slump, central bank adviser Li Daokui said yesterday.
“Price pressures have been building throughout the economy, strengthening the case for higher interest rates and a stronger yuan,” said Brian Jackson, a Hong Kong-based strategist at Royal Bank of Canada. “China is at risk of overheating, with spot fires breaking out in various parts of the economy.”
Subscribers interested in this sector should have their positions intact by now. Those that do not and are interested in my opinion should know that I believe China has a way to go. The equity market drop signals an official bear market. Non-subscribers should reference: