daily reckoning: oz banks in bad shape

The Permanent Portfolio

The Daily Reckoning Australia

London, England - Melbourne, Australia

Wednesday, 21 January 2009


From Dan Denning at the Old Hat Factory

--Today's Daily Reckoning begins with an outsider's look at the Australian banking sector. Then we'll take a Prime Ministerial look. And finally, a Gallic technical trader's look. All three perspectives suggest that Australia's banking sector is a lot less insulated from the global crisis than its advocates have suggested. But don't take our word for it...

--First up is Christopher Wood, regular analyst at CLSA Asia-Pacific and writer of handy newsletter called GREED and Fear. "The ban on shorting Australian financial stocks is due to expire on 27 January," he writes. "If it is not extended, this presents a clear opportunity for absolute-return investors. GREED and Fear continues to take the view that Australian financials will be the last area of Anglo-Saxon consumer financing excess to bottom with, as in Britain and America, the seemingly inevitable involvement of taxpayer money before the end of the cycle."

--"GREED and Fear also continues to recommend, as has been recommended since March 2008, that Asia-Pacific relative-return investors maintain a zero weighting in Australian financials. Australian banks, including their New Zealand subsidiaries, are characterised by high loan-deposit ratios and low loan loss provisions."

--"Meanwhile, the household sector is extremely leveraged while the former high flying residential property market is weakening fast. Household debt to disposable income is still running at 156%, compared with 130% in America. While Australian residential building approvals fell by 32% year-over-year in November, with new home sales down 15% year-over-year."

--"GREED and Fear hears from recent visitors to the 'Lucky Country' that there is still a state of denial, which is certainly not the case in Australia or Britain. If so, this mentality will not last. But the good news is that reluctant Australian taxpayers will be able to afford to pick up the tab. Public sector debt is only 15% of GDP."

--So there you have it. From the outside looking in, Aussie banks and investors are in denial about the housing market and the impact of the asset deflation and the credit crunch on bank bottom lines. Does that sound about right to you? Or is Australia's residential property market truly immune from the Credit Depression? Discuss. Or write to us at [email protected].