$1 billion hit to banks from US By Scott Murdoch January 10, 2008 01:00am
AUSTRALIA'S big four banks have a $1 billion direct exposure to the US sub-prime mortgage market, despite months of assurances that they were immune from the deepening financial crisis.
The revelation came as the Commonwealth Bank, Australia's biggest home mortgage lender, raised its variable home loan rate by 10 basis points to 8.67 per cent in response to the global credit crunch and independent of any action by the Reserve Bank. The National Australia Bank last week lifted its rates by 0.12 of a percentage point, and the ANZ followed with a rise of 0.2.
The Commonwealth's move came as the argument for the Reserve Bank to increase official interest rates at its next meeting firmed yesterday, with November retail sales rising by a bigger than expected 0.8 per cent.
The $20 billion pre-Christmas spending spree, coming during an election campaign and just after an interest rate rise, prompted economists to warn that the Reserve Bank could be forced to act to further cool the economy.
The CBA, NAB, ANZ and Westpac's exposure to the US sub-prime market comes through an almost $1billion investment in troubled US mortgage group Countrywide Financial, which appears close to collapse.
The major players were part of a syndicate of 40 banks around the world that threw the embattled lender an $US11.5billion ($13 billion) financial lifeline last year.
The CBA and the NAB invested $300million each, while the ANZ pumped $150 million into the deal and Westpac $100 million.
Countrywide has been one of the biggest victims of the sub-prime credit crunch, and is facing a battle to survive.
The shares in the US's largest independent lender plunged by almost 30 per cent on Tuesday night after rumours emerged on Wall Street the company was seeking bankruptcy protection.
The potential loss by the Australian banks is a further sign the sub-prime crisis has the potential to damage the domestic economy.
The exposure to the sub-prime crisis through the Countrywide investment was confirmed by the banks yesterday.
Analysts have started to question why the banks sought to participate in the deal to rescue Countrywide, given the level of risk involved.
In the US, the lending group denied it was close to bankruptcy, but it has been damaged by the sub-prime crisis.
Sources said the Australian banks would have sought protection on the $850 million investment, but would sustain a major loss if Countrywide collapsed.
"It can easily be absorbed," one analyst said. "But it's an incremental negative and certainly raises other questions, like why are they doing this sort of business at all? Talk is, many of the largest banks in Asia were not on the list of 40, but the Aussie banks are."
The performance of the Australian banks has been one of the major drags on the stock market recently, and the share prices of the majors fell again yesterday.
Wise Owl sharemarket analyst Sven Restel said the Australian banks had to be exposed to the sub-prime problems in the US because of the nature of their business. The retail banks have argued that the fallout from the credit crisis would be limited because only 1 per cent of mortgages in Australia are considered sub-prime.
"The banks have been pretty quiet about their exposure to sub-prime; some have said they have not got that much exposure," Mr Restel said.
"All of the Aussie banks have very high exposure to overseas markets. I think that it would be foolish to think that they would not be affected at all."
The fallout could have ramifications for consumers, as the banks battle to recoup the potential losses.
The banks would not comment on the level of protection taken out on the financing agreements, nor the reasons for the risky investment.
The CBA revealed yesterday it would join the rush of major banks boosting variable lending rates.
The 0.1 percentage point increase to CBA's variable home loan will add $14 a month to the average mortgage and leaves Westpac as the only major not to shift rates in the past fortnight.
CBA chief financial officer David Craig said the global credit crisis had cost the retail bank $100 million and its profit would be hurt if it did not take action.
"The impact of the cost of wholesale funds is something that is impacting all of the Australian banks," Mr Craig said.
Wayne Swan, whose warnings to the major banks have been ignored, said the bank bosses had to justify the increases in mortgage lending rates.
"Banks need to fully explain any increases flowing from the US sub-prime crisis," the Treasurer said.
On Wednesday he singled out the ANZ for criticism.
"The increase in the average cost of funds to the major banks is much more in line with the increase announced by the National Australia Bank than the increase announced by the ANZ," Mr Swan said. "So on the basis of all the evidence that I have received, I do believe that the ANZ's rise is excessive."
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