More Pressures This Week

Sydney, Aug 4, 2008 (ABN Newswire) - The credit crunch is a year old this week and with central banks in Australia, the US, UK and Europe meeting, there's no sign of any relief on financial groups in those and other countries.

Hundreds of billions of dollars have been lost around the world and trillions of dollars in market value wiped from stockmarkets here and around the world.

In Australia we have seen our financial stocks battered since January, with the prominent major banks, the ANZ, Suncorp Metaway and the National Australia Bank reporting problems with loan books and investments (not to mention insurance woes for Suncorp).



Westpac is due to update the market this Friday on its 2008 financial performance: will it prove to be the exception after the ANZ, National Australia Bank and Suncorp Metway provided shocks with bigger than expected write-downs or profit hits?

Analysts would be very surprised if it did as Westpac is on the top of most analysts' lists for being the one bank, along with the Commonwealth, to escape many of the problems that have hit the financial sector since January.

Still, it might pay not to believe anything until we see the detail in Westpac's update and accompanying commentary.

The bank under former CEO, David Morgan, plus strong chairmen in John Uhrig, Leon Davis and now Ted Evans, has had a very solid reputation for being conservative and sticking as close to its knitting as possible, even if it does have one of those off balance sheet financing 'conduits' called Waratah.

There is an irony now that 15 and 16 years ago Westpac was struggling to survive and the National Australia Bank was the conservative bank, with minimal exposure to dodgy loans (although it did put Alan Bond's Castlemaine Tooheys into receivership from memory during a Sydney-Hobart yacht race).

Now the roles are reversed: in the eyes of many in the market, Westpac is conservative and has stayed away from many of the riskier areas of local and international finance while the NAB is now the one exposed and taking a hit.

That's concerning the NAB which last week revealed a change in CEOs as John Stewart said he was going, only days after the shock extra provision of $830 million against some failing CDO derivatives in the US (on top of an earlier $181 million provision). The head of NAB's Bank of New Zealand group will take the helm from October.

NAB chairman Michael Chaney said yesterday that the bank was in "very strong" shape and any downgrade of the company's credit rating would be inappropriate.

Ratings agency Moody's Investors Service has downgraded its outlook on NAB's credit rating to negative, while Standard & Poor's has put the bank on a negative credit watch, warning it has a one-in-three chance of being downgraded.

The move by the ratings agencies comes after that $830 million write-down a week ago last Friday. Last week's change of CEOs also didn't help confidence, despite the bank's strong selling campaign that this was a normal change.

"We certainly don't believe any downgrade would be appropriate," Mr Chaney told ABC Television's Inside Business.

"The bank's in very strong shape and at an operating level things are going extremely well, but that's a matter for us to sit down and talk to the ratings agencies with, and to assure them that's the case."

Some analysts wonder if the NAB will be making further provisions against another $4.5 billion in collateralised debt obligations (CDOs) that NAB has as involving investments here, in the US, Europe and the UK.

Mr Chaney painted a bleak outlook for the global credit crisis, saying "It's possible the situation will get quite a bit worse"

He's right; it could very well worsen, especially with the news of an 8th small US bank failing last week and warnings issued to four more to lift their game. And the US Fed said last week that US banks were borrowing a record $US17.45 billion, compared to $US16.38 billion the previous week.

When you factor in the continuing rise in US unemployment (now at a four year high of 5.7%), falling demand, problems galore and huge losses for car makers and other financiers of car leases, plus personal loan losses, there's the very strong chance conditions are going to get a lot worse for financial groups before there's any light.

And in Australia, the whole idea of a financial group diversifying its financial services offering to include funds management and insurance should not be knocked firmly on the head by the disastrous update issued Friday by the country's sixth biggest financial group, Suncorp Metway of Brisbane.

Its revelation of a $500 million-plus plunge in forecast annual net profit for the year to June 30 caused its shares to drop the most in 19 years. At one stage Friday they fell nearly 19% but closed down 16.5% for the week (or $2.25) at $11.53.



The big problem was the result from the Promina, GIO and Suncorp insurance arms which were hammered by bad weather and falling investment returns (as was Insurance Australia Group). Seeing Suncorp paid $7.9 billion for Promina in 2006-07, it's a complete disaster. Suncorp will never get the returns from that takeover (done when the shares were around $16.80).

In its market update Suncorp estimated 2008 profit would be in the range of $525 million to $550 million, sharply down on the $1.064 billion earned in 2007.

Suncorp said it will leave its 2008 final dividend unchanged at 55c a share, and has forecast no dividend growth for fiscal 2009 after bad weather and the credit crunch crushed its profit.

That will make $1.07 in total for the year, unchanged for a third year.

But Suncorp will have to dip into reserves to the tune of more than half a billion dollars toy pay the unchanged final. 

The company's CEO, John Mulcahy justified the steady dividend and reserves raid by saying the bank expected a recovery in earnings in 2009.

They had better hope they do: the company will have to find around $525 million if all shareholders opt for the cash and not participate in the dividend reinvestment plan.

Many analysts had been expecting a profit of around $600 million to $700 million for Suncorp because of the insurance losses.

The bank and general insurer (it controls AAMI, Suncorp, APIA and other insurance brands) said ''Like all Australian financial services companies, our result for the 2008 financial year has been affected by external factors, including the global credit crunch, volatile equity markets and a succession of severe weather events".

Suncorp said its banking business expected to increase its fiscal 2008 annual earnings before bad debts, tax and one-off items by about 12%, at the top end of its 10% to 12% guidance.

For fiscal 2009, it has forecast high single-digit growth on the same measure.

But the insurance business was crushed by the same problems that hit Insurance Australia Group: bad weather in NSW, Queensland, New Zealand, the impact of the credit crunch and stockmarket drop on its investment funds and funds management business.

Insurance claims from the severe storms that have wreaked havoc in Australia and New Zealand will cost an extra $215 million off the bottom line after they exceeded Suncorp's normal provisioning level of $200 million.

Investment earnings will drop by $140 million and wealth management's contribution by $34 million because of the sharp drop in equity markets. Brokers said Suncorp's margin on its insurance profits would only be maintained at 10% by releases from reserves and lower claims valuations.

The release from reserves this time round was $241 million in the year, so Suncorp was forced to adjust its reserve ratio (by reducing it) to release another $220 million. Without that well-timed release, the result would have been terrible.


 

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