It would have gone unnoticed by most market observers, but the US originated sub-prime mortgages crisis morphed into a new stage in the week ending September 12.
After the initial expert denial there actually was a crisis prior to July this year and the subsequent acceptance the world might be experiencing something more powerful than a few dodgy home loans defaulting in the world's largest financial market, experts across the globe have now started trying to assess the potential future losses due to troubles in the US housing finance-related markets.
So far, estimates range from US$100bn to US$250bn in total losses for investors and financial institutions across the globe over the next few years.
Relative movements for the week ending 12 September 2007:
CommBank +0.18 per cent
Westpac -0.57 per cent
ANZ -0.73 per cent
St George -1.89 per cent
National -3.11 per cent
ASX 200 -0.69 per cent
In Australia, the acceptance of a more widespread liquidity problem was rapidly followed up by management presentations by some of the country's major banks. It was pure coincidence, but as it turned out the timing for these presentations was simply impeccable.
As a result of these presentations, and some public declarations, by ANZ Bank, National Australia Bank, CommBank and St George, investors and banking experts in Australia seem to have at least some understanding about the potential impact of the global debt and credit crunch on banks and companies in Australia - unlike their peers in Europe and the US where silence has remained golden at the majority of financial institutions.
Investors and experts in the US will likely have to endure another week of uncertainty with most investment bankers releasing quarterly updates from September 18 onwards.
Though the matter may have disappeared from the front pages of newspapers in Australia, the Reserve Bank and financial institutions in the country remain hostage to an ongoing global liquidity squeeze which has kept three month bank bill rates at a decade-long high of seven per cent plus for most of the past week.
With global short-term money rates above official interest rates, the world economy is effectively driving uphill with the handbrakes on. As one would expect, at some stage worries about global economic growth will take centre stage. This week saw some very disappointing economic data released in Europe, Japan and the US and experts all of a sudden seem less convinced about the health of the global economy outside Asia ex-Japan.
This makes the task for Australian companies and financial lenders of assessing the impact of what started as sub-prime mortgages defaulting in the US much more complicated. It is hardly surprising that amidst all these worries and uncertainties, Australian banks continued their relative underperformance against the rest of the market.
Despite their traditional safe haven status, Australian banks have now consistently underperformed the broader Australian share market for the past twelve months and as things stand right now it would take a brave man to call for their quick turn around.
ABN Amro hosts a few brave men these days with the team of banking specialists upgrading their sector call to Overweight while also issuing individual upgrades, to Buy, for CommBank and National. ABN Amro's upgrades have reshuffled the picking order in the sector with National jumping over CommBank to claim the number three spot. The picking order for the five major banks in Australia, as far as securities analysts recommendations go, is Westpac number one, followed by ANZ, National is now third, CommBank shifted to four and St George remains on five.
ABN Amro believes that all it would take for Australian banks to regain their status as safe havens is for the market to realise that increased lending costs will put pressure on profit margins for corporate Australia while at the same time increasing business lending volumes for the Big Four Banks in Australia.
While that may be true, all investors seem to be focusing on right now is how long short-term money rates will remain above the official cash rate of 6.50 per cent and how long it will be before the major banks start incorporating these increased costs in their mortgage rates? So far, only smaller players have raised certain rates for certain categories of home loans in Australia, indicating the big banks seem happy to absorb the temporary margin squeeze in exchange for a larger market share later on.
Few would disagree with this strategy of short-term pain in exchange for longer term gain, but the big question that remains unanswered is: exactly how bad will the pain be?
While the market remains divided between optimists such as ABN Amro, and others such as Macquarie who decided this week to replace the banks with some alternative defensive assets in its model portfolio, the current situation was probably best described by banking analysts at UBS who stated: "We have been positive on the Aussie banks based on defensive and insulated earnings streams. However, we remain vigilant on our forecasts if current market displacements do not normalise."
Don't expect any disasters to be revealed locally, but be alarmed nevertheless.
Produced by
FNArena for The Sheet.