Education Article
Skeletons frighten the banking sector
22/02/2008
ANZ revealed it had some skeletons in the closet this week prompting a sell off not only in its own stock, but the entire banking sector. The big deals done in the rampaging bull market are being tested and the fallout could get much worse.
We’ve been warning members of The Intelligent Investor that there was plenty of room for skeletons in ANZ’s $82bn corporate loan book. Well, it didn’t take long for a few to pop out of the closet.
While lending and deposit growth is booming, according to its recent trading update, so too are bad debts. The bank disclosed that it has made a US$200m provision for a monoline counterparty exposure, a $90m increase in the collective provision due to one commercial property client (presumably Centro) and a $51m individual provision against a resources client.
The bad news is that with interest rates on the increase and a turbulent global economy, more bad debts are likely to emerge. The good news is the announcement wasn’t as bad as it first appeared. The $90m exposure was expected, and the US$200m provision was made primarily to comply with accounting standards – ANZ expects a ‘significant proportion’ of it to be written back in future periods.
ANZ is unlikely to be the only bank that reports credit losses, either. Lower lending standards are common in bull markets as bankers compete vigorously for business. Now that the tide is turning, some of those deals are turning bad. This could be the tip of the iceberg for bank shareholders who have become accustomed to the rampant returns of the past 15 years. Whether a catastrophe emerges or not, a period of lower returns seems likely.
With bank share prices down significantly, some think that this initial global wave of credit devastation has created a great buying opportunity. But the unwinding of a credit bubble of this magnitude could take years. Others believe the global credit crisis is just beginning.
If you’ve owned banks for years, or they represent a significant part of your portfolio, then The Intelligent Investor will help you understand how the credit crisis affects your portfolio. To avoid becoming snared in its net, take up our special introductory $99 offer today by following this link.
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