Australians hate a tall poppy, which means the country's richly-valued banks are liable to get cut down at the first hint of bad news.
So when Australia & New Zealand Banking Group admitted last week that it would have to take higher bad-debt charges due to the slump in commodity prices the shares fell as much as 6 percent, the biggest drop in more than seven months. Overvalued banks, rising defaults, troubled mining companies: what's not to dislike about that picture?
Sadly for the dwindling band still shorting the country's big four banks, there's little evidence such problems will pose more than a temporary speed-bump to their earnings. For ANZ, the deteriorating environment will probably add about A$100 million ($75 million) to a total first-half credit charge forecast at A$800 million, it said Thursday. Next to net income that analysts expect to be about A$3.7 billion, that's nothing to lose sleep about.
While Australia's economy may be unusually dependent on mining, its banks (like those elsewhere in the world) have far greater exposure to more conventional stuff like mortgages and government bonds.
Among the big four -- ANZ, Commonwealth Bank, National Australia Bank, and Westpac -- ANZ is the only one that derives more than 2 percent of its loans from the sector. Its A$20.2 billion in mining-related loans sounds a lot until you consider it in the context of a balance sheet with exposures that weigh in at more than a trillion dollars.
If you're looking for a reason to worry about Australian banks, you'd be far better off fretting over the fact that home prices in Sydney recorded their biggest quarterly drop in more than seven years in December. Suppose that some commodities armageddon wiped out every cent of the A$65.6 billion in mining exposures on the big four banks' books. That would still be less serious than a 4 percent decline in the value of their A$1.68 trillion in residential mortgages. Commonwealth Bank, with the second-biggest exposure, lends less money to miners than to farmers.
Thanks to a housing market that failed to seriously deflate in the wake of the 2008 financial crisis and the ongoing existence of exotic stuff like securitized low-doc loans that have gone the way of the dinosaurs in most other developed countries, Australia remains a popular target for those looking to bet on banking collapses. Right now, there's little evidence to cheer the bears: While arrears in prime residential mortgage-backed securities rose in January, they reached only 1.07 percent, according to Standard & Poor's. Low-doc loan arrears were 4.36 percent, but comprise only 1.35 percent of the total RMBS portfolio, the ratings company says.
It's not all bad news for short-sellers: Those who got their bets in a year ago would have done rather well. The S&P/ASX 200 Banks index has dropped 24.5 percent over the period, leaving ANZ and National Australia at some of their lowest valuations relative to net assets since the financial crisis.
For those who've not already made their move, those depressed condition spell risky business. Betting against Australian banks is a ``widow-maker trade", according to JPMorgan, and at present none of the four have more than 3 percent of their stock sold short . The smart money has already packed up and gone home.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Genworth, which is in the rather AIG-like business of insuring against mortgage defaults, looks a more interesting prospect with short interest of 11 percent.
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David Fickling in Sydney at firstname.lastname@example.org
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