shareholder-capital-leveraged-157-times-nz-banks-giving-effective-loan-value-ratio-ba

[mortgage broker]

http://www.interest.co.nz/opinion/53...alue-ratio-ban

"Figures from the banks' general disclosure statements show they have total shareholder funds of NZ$21.7 billion behind NZ$340.6 billion of assets (mainly loans). That means if the value of those assets loans was to drop by 6.5% the shareholder capital in those banks would be wiped out. It means the owners of these banks effectively have NZ$21.7 billion of equity against assets 15.7 times larger than that. That's an effective loan to value ratio of 93.6%. For any home owner that would be a very aggressive level of leverage, but for a bank it's seen as normal"

Interesting article, fails to comment on the fact that banks have term deposits, mortgages and low equity insurance as well at times.

[gavinc]

<That's an effective loan to value ratio of 93.6%t>

Is that true? Don't they also lend the funds they have on deposit plus source funds from other overseas lenders? The shareholders funds are not the only backing the bank has. If they had no deposits at all then what you say would be true

[eri]

i think this is how it works under some normal business calculations

ie the value of the company being decided purely by share value and not hard assets

ie if you were to value toyota 1 of the ways to do so would not include their factories or their inventory of unsold cars

an exercise for sharemarket watchers

[spaceman]

TYPO alert ... big difference between 157 times and 15.7 times.

Lots of holes in the logic of the article: for one what if the loans ($340.6 B) secure $500 B of assets then a 10% drop in the value of the assets would leave $450 B >> $340.6 B = no prob's.

Also in line with Gavinc (hey hey!!!) Banks can borrow money at x % and relend it at x+margin % ...shareholder funds aren't only source of funds.

Typical crappy reporting

Cheers
Spaceman

[Winston001]

Banks are required by international banking rules to hold a capital adequacy ratio. Tier 1 requires something like 8.7% capital meaning that if all the banks loans were repaid, depositers etc repaid, the bank would still be worth a lump of money. Usually land and buildings, govt bonds etc.

See the Basel II Accords http://en.wikipedia.org/wiki/Basel_II