Photographer: Brendon Thorne/Bloomberg

Aussie Hazards From Mortgages to Mines Lift Macquarie Bond Risk

  • Cost of insuring bank unit debt near highest since June 2013
  • Unease about exposure to home loans, commodity market downturn

Those Australians struggling with mortgage payments and the possibility of damage from the global commodity price slump are helping to inflate bond risk for Macquarie Group Ltd.’s banking unit.

The cost of insuring Macquarie Bank notes against non-payment climbed to as much as 172 basis points last month, the highest since June 2013, after the lender flagged a rise in overdue home loans. The Sydney-based bank’s credit-default swaps have increased 39 basis points in 2016, the second most in the benchmark Markit iTraxx Australia index, and were at 155 basis points April 8.

While Macquarie Group is predicted to post a record full-year profit, there’s increasing speculation about how well Australia’s lenders will cope with a mining downturn that’s already causing some resource-related firms to default on loans. Large gyrations in global markets in the first quarter helped drive out credit spreads for banks, and there’s concern that home-loan books will be hurt by a stuttering Australian housing market.

“Macquarie’s CDS was caught up in the February selloff with the big four banks and whilst the latter have regained ground in March, Macquarie remains at wides,”  said Simon Fletcher, a senior credit analyst at National Australia Bank Ltd. in Sydney. “This is likely to be in part due to some market nerves” after Macquarie revealed an increase in overdue loans in one of its recent regulatory filings, he said.

While Macquarie’s total impaired mortgages fell in the final three months of 2015 compared with the previous quarter, the lender on Feb. 19 flagged an increase in overdue loans over the same timeframe. The bank’s 90-days-plus overdue residential mortgages almost doubled to A$476 million ($360 million) in the quarter ended Dec. 31. The main “driver” of the increase was due to the acquisition of defaulted debt at a discount, the lender said in a statement on its website last month.

Macquarie’s Sydney-based spokeswoman Navleen Prasad declined to comment on CDS movements.

A report on Monday from Moody’s Investors Service underscored the risks posed by record low rental yields in Sydney and Melbourne. The deteriorating affordability of servicing investment properties makes residential property investors more vulnerable to risks and increases their probability of default, the credit assessor said.

Bond Sales

While the cost of insuring Macquarie debt with CDS has risen, that hasn’t deterred investors from participating in new bond issues from the lender this year. The bank has sold the equivalent of $3.43 billion in bonds in offshore markets since Dec. 31, along with A$100 million of notes in its home market, according to data compiled by Bloomberg.

Macquarie in February cut its full-year forecast for the commodities and financial-markets business as falling oil prices and a selloff in U.S. credit markets take a toll on client activity. That was the first time since July 2014 that the lender reduced the profit outlook for a business group.

While resource prices have rebounded partly from their first-quarter lows, the Bloomberg Commodity Index is still down more than 20 percent over the past year. That weakness in resource prices threatens to take the steam out of Macquarie’s profit run, during which net income is estimated to have more than doubled in three years.

“If we compare Macquarie to the major Australian banks, then they do have more exposure in commodities,” said Brendon Cooper, a credit strategist at Westpac Banking Corp. “That doesn’t appear to have had an overwhelming impact on their outcome at the moment, but the microscope is firmly on that commodity space for everyone who’s got exposure.”

Too Far?

The firm is expected to post a record profit of A$2.03 billion for the year ended March 31, compared with A$1.6 billion a year earlier, according to the mean estimate of eight analysts surveyed by Bloomberg. It is benefiting from higher fees in its funds management business, although it also faces the prospect of increased capital requirements as global regulators implement stricter rules to prevent a repeat of the 2008 crisis.

Macquarie is scheduled to report full-year financial results on May 6. The bank’s earnings were less than half of present expectations when its bond risk was last near current levels in 2013. The spike back then came amid a global bout of risk aversion after then-Federal Reserve Chairman Ben S. Bernanke signaled the U.S. central bank might slow its bond-buying program, an episode dubbed the “taper tantrum.”

“Although Macquarie is exposed to segments such as commodities and trade flows, I do feel the CDS widening has gone a little too far and we should see tightening from here,” NAB’s Fletcher said. “This will particularly be the case after the results come out in one month’s time if the group shows relatively stable bad-debt levels and delivers a A$2 billion profit.”

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