NAB warns of US sub-prime bad debts
Katherine Jimenez | July 12, 2008
THE worsening global credit crisis threatens to shake Australia's banking sector after National Australia Bank yesterday warned its bad debt provisions on sub-prime US financial securities could widen.
NAB revealed that a $US1.1billion exposure to collateralised debt obligations in the US might result in further losses -- news that sent a shudder through the entire banking system and focused the market's attention on bank earnings figures.
NAB, which has an exposure to CDOs through conduit financing vehicles such as US companies TSL, Centre Star and Mirarstar, said in a cleansing statement that since making a $181 million collective provisioning on March 31, "the economic environment has deteriorated further".
While the CDO portfolios were currently meeting all principal and interest obligations, the bank warned "there continues to be a risk that further provisioning may be required".
The announcement came as the Commonwealth Bank and ANZ yesterday raised their variable home loan interest rates in an attempt to offset the high cost of funds brought on by the global liquidity crunch. The other majors are set to follow next week.
NAB was forced to make the disclosure as part of its underwriting agreement for the dividend reinvestment scheme. It also contradicts a reassurance from former federal treasurer Peter Costello last year that no Australian banks had exposures to the the CDO market in the US.
NAB's warning weighed down the banking sector yesterday, in particular ANZ, which also has an exposure to US CDOs.
ANZ's shares shed 42c to $17.95, while NAB stock finished 16c lower at $27.45, but was down more than $1 when the news first hit the market. In February, ANZ made a $226million provision related to embattled US monoline insurer ACA Capital.
A banking analyst said: "If NAB is feeling like it needs to flag to the market that it might be needing to raise additional provisions, then possibly the same thing applies to ANZ."
An ANZ spokesman said the bank had already made disclosure about its monoline exposure and that "the market is fully up to date with that issue". A CBA spokesman said: "The bank has no exposure to sub-prime or US mortgage-backed CDOs."
NAB is estimated to have about $15 billion worth of conduit assets, with about $10 billion originated by the bank. Conduit assets are a type of structured investment that sits within the commercial paper market.
About $5 billion worth of assets were purchased to start the conduits, of which the bulk are AA or AAA-rated. But the biggest risk within the $5 billion portfolio is around the $1.1 billion worth of CDO assets, which contain some $360 million in US sub-prime.
A total write-down of the $1.1 billion low-rated portfolio is unexpected, but NAB might end up writing off the sub-prime exposure and possibly some CDO assets.
The $1.1 billion portfolio is made up of 10 assets that are CDOs, which were downgraded by credit agency Standard & Poor's in January and led to the initial $181 million.
In its statement, NAB emphasised that "these exposures are being actively managed to minimise the potential for loss".
Deutsche Bank analyst Ross Brown told clients: "NAB stated that given economic deterioration since March 31, additional provisioning may be required on its $US1.1 billion CDO portfolio, but the amount has not been determined.
"The 1H08 CDO provision number was $181 million out of a bad debt expense of $726 million.
"Our 2H08 bad debt expense forecast is $631 million and we believe this should be sufficient to absorb further provisioning on the CDO exposure, especially as CDO spreads since March 31 have not deteriorated further."
Mr Brown also noted that the absence of any commentary regarding consensus forecasts implied NAB remained comfortable with current market estimates.
Katherine Jimenez | July 12, 2008
THE worsening global credit crisis threatens to shake Australia's banking sector after National Australia Bank yesterday warned its bad debt provisions on sub-prime US financial securities could widen.
NAB revealed that a $US1.1billion exposure to collateralised debt obligations in the US might result in further losses -- news that sent a shudder through the entire banking system and focused the market's attention on bank earnings figures.
NAB, which has an exposure to CDOs through conduit financing vehicles such as US companies TSL, Centre Star and Mirarstar, said in a cleansing statement that since making a $181 million collective provisioning on March 31, "the economic environment has deteriorated further".
While the CDO portfolios were currently meeting all principal and interest obligations, the bank warned "there continues to be a risk that further provisioning may be required".
The announcement came as the Commonwealth Bank and ANZ yesterday raised their variable home loan interest rates in an attempt to offset the high cost of funds brought on by the global liquidity crunch. The other majors are set to follow next week.
NAB was forced to make the disclosure as part of its underwriting agreement for the dividend reinvestment scheme. It also contradicts a reassurance from former federal treasurer Peter Costello last year that no Australian banks had exposures to the the CDO market in the US.
NAB's warning weighed down the banking sector yesterday, in particular ANZ, which also has an exposure to US CDOs.
ANZ's shares shed 42c to $17.95, while NAB stock finished 16c lower at $27.45, but was down more than $1 when the news first hit the market. In February, ANZ made a $226million provision related to embattled US monoline insurer ACA Capital.
A banking analyst said: "If NAB is feeling like it needs to flag to the market that it might be needing to raise additional provisions, then possibly the same thing applies to ANZ."
An ANZ spokesman said the bank had already made disclosure about its monoline exposure and that "the market is fully up to date with that issue". A CBA spokesman said: "The bank has no exposure to sub-prime or US mortgage-backed CDOs."
NAB is estimated to have about $15 billion worth of conduit assets, with about $10 billion originated by the bank. Conduit assets are a type of structured investment that sits within the commercial paper market.
About $5 billion worth of assets were purchased to start the conduits, of which the bulk are AA or AAA-rated. But the biggest risk within the $5 billion portfolio is around the $1.1 billion worth of CDO assets, which contain some $360 million in US sub-prime.
A total write-down of the $1.1 billion low-rated portfolio is unexpected, but NAB might end up writing off the sub-prime exposure and possibly some CDO assets.
The $1.1 billion portfolio is made up of 10 assets that are CDOs, which were downgraded by credit agency Standard & Poor's in January and led to the initial $181 million.
In its statement, NAB emphasised that "these exposures are being actively managed to minimise the potential for loss".
Deutsche Bank analyst Ross Brown told clients: "NAB stated that given economic deterioration since March 31, additional provisioning may be required on its $US1.1 billion CDO portfolio, but the amount has not been determined.
"The 1H08 CDO provision number was $181 million out of a bad debt expense of $726 million.
"Our 2H08 bad debt expense forecast is $631 million and we believe this should be sufficient to absorb further provisioning on the CDO exposure, especially as CDO spreads since March 31 have not deteriorated further."
Mr Brown also noted that the absence of any commentary regarding consensus forecasts implied NAB remained comfortable with current market estimates.