Good news or bad news?, page-34

Rivella

I was curious to know what a typical Australian bank's debt/equity ratio is, so I poked around the Internet this morning to see what I could find. It seems to be about 7.5 for the sector, or expressed as a percentage, 750%.

Going on ratios given by the Westpac broking facility, one finds the following ratios for firms that are financial services providers (for banks, I have used the reciprocal of the Capital Adequacy Ratio to approximate the P/E Ratio). These percentages do not have to be accurate, because the idea is to get a feel for what ratios one finds within the financial services sector. Firms like MOC (Mortgage Brokers) and OFX (OFX Group) have very low debt because they do not fund their customers – I do not list them below.

CCP – Credit Corp ..................... 66.4%
CLH – Collection House ............ 68.0%
PNC – Pioneer Credit ................. 82.5%
TGA – Thorn Group ................. 100.2%
SIV – Silver Chef ...................... 223.6%
FLX – Flexigroup ..................... 318.2%
BEN – Bendigo Bank ............... 819.0% (1 ÷ 12.21%)
CBA – Commonwealth Bank ... 943.4% (1 ÷ 10.6%)
NAB. .........................................706.7% (1 ÷ 14.15%)
WBC – Westpac ....................... 751.8% (1 ÷ 13.3%)

The first three above are debt collectors. Their assets are distressed debt purchased, substantially from banks and utilities, so they do not have the type of debt assets that can be used as borrowing collateral. Insofar as they collect debt as a service, that sliver of their business does not need funding.  They borrow money to take up opportunistic tranches of PDLs (purchased debtors ledgers), then run borrowings down when PDLs are expensive – or that is what the best of them, CCP, does.

TGA substantially self-funds consumer leases for the same lack-of-quality reasons, but it borrows from banks (Westpac to be specific) to help fund its commercial leasing business. SIV is substantially a commercial leasing business, so it can and does borrow more than TGA. I am unsure why FLX borrows more than SIV, and my initial unresearched reaction is one of concern.

This is what Investopedia states on the topic of debt leverage. “Typically, a debt/equity ratio of 1.5 or lower is considered good, and ratios higher than 2 are considered less favourably, but average debt/equity ratios vary significantly between industries. Therefore, when examining a company's debt/equity situation, investors should compare it with that of similar companies in the same industry. A relatively high debt/equity ratio is commonplace in the banking industry and in the financial services sector as a whole. Banks carry greater debt amounts because the money they borrow is also the money they lend. To put it another way, the major product that banks sell is debt. Therefore, it is logical that they have more of that product on hand than is common in other industries.”