Following on from our brief look at the UK banking sector yesterday, specifically the Royal Bank of Scotland, it would be a good idea to look closer to home.
What you want to know is whether Australian banks are in any danger of either collapsing or in need of a government bail out?
But first a quick recap of RBSs numbers. According to the 2007 annual report, RBS had shareholder equity of GBP53 billion. That was just 2.7% of the banks’ total liabilities. On top of that it had GBP40 billion of goodwill on the books and nearly GBP700 billion of derivatives as combined assets and liabilities.
Doubtless they would have claimed that the derivatives classed as assets were offset by the derivatives classed as liabilities. Of course that only works when a market exists for them to be traded.
How do the Australian banks stack up against these numbers? We’ve all been told endlessly that our banks are in tip-top shape. We were told that both before and after the federal government introduced the bank guarantee – “Just to be on the safe side.”
Maybe that’s how it is with all industries though. Maybe they all carry a low level of shareholder equity and high levels of goodwill and derivatives.
So let’s take a quick look at a random selection of companies in other industries before we crack on to the Aussie banks.
| Company | Market Cap | Shareholders Equity (SE) | SE as % of liabilities | Goodwill | Derivatives |
| RBS | GBP4bn | GBP53bn | 2.7% | GBP40 | GBP670bn |
| Brambles | USD$5.9bn | USD$1.5bn | 36% | USD$676m | USD$4.4m |
| CSR | AUD$2bn | AUD$1.4bn | 56% | AUD$585m | AUD$350m |
| Wesfarmers | AUD$11bn | AUD$19bn | 110% | AUD$16.3bn | AUD$430m |
These are all taken at random. But at face value at least it’s telling you that the margin between a banks’ assets and liabilities is a lot thinner than industrial companies.
And also – by the nature of their business – a bank is bound to have a much larger derivatives book. After all, who are Brambles, CSR and Wesfarmers going to enter into derivatives agreement with if it isn’t the banks.
What about the Aussie banks? How do they shape up? Well, let’s look at a comparison on the same terms…
| Company | Market Cap | Shareholders Equity (SE) | SE as % of liabilities | Goodwill | Derivatives |
| RBS | GBP4bn | GBP53bn | 2.7% | GBP40 | GBP670bn |
| ANZ | $29bn | $26bn | 5.9% | $3.7bn | $68bn |
| Commonwealth | $39bn | $26bn | 5.6% | $8bn | $37bn |
| NAB | $35bn | $32.8bn | 5.2% | $5.2bn | $68bn |
| Westpac | $44bn | $17.8bn | 4.2% | $2.4bn | $59bn |
| Bendigo/Adelaide | $3bn | $3.2bn | 7.1% | $1.4bn | $383m |
As per the difference between RBS and industrials you can see that RBS has spread itself significantly thinner than the Australian banks. Its shareholders equity as a proportion of liabilities is more than double in some instances. And its derivatives book is over twenty times the size of the average Australian bank.
Bearing in mind that in terms of assets and liabilities held, RBS is larger than ANZ, CBA, NAB and Westpac combined!
So to put things in perspective, can you imagine the scenario where the Big 4 Aussie banks are nationalized?
Well, something that doesn’t help is the potential loan funding shortfall. According to today’s Australian Financial Review (AFR), there is a “looming $75 billion gap in finance available to Australian businesses.”
What does that mean? Well, it means that businesses have bought stuff on credit – for instance a new bit of machinery in a factory – thanks to a loan from a bank. The bank has been able to lend the money based on deposits from savers and increasingly by relying on international markets.
Alternatively, businesses have shopped around for the best deal, ending up taking a loan out with international invaders such as Citigroup, RBS and Lloyds/HBOS.
The problem arises if/when the business needs to refinance the loan. The bank that initially offered the loan may no longer have the appetite or indeed the ability to relend the money.
That means the business has to go elsewhere. And if they still can’t get the financing? Well, they still have to repay the loan to the bank, so they need to raise cash some other way, perhaps through asset sales. That’s exactly what we’ve seen with the likes of Babcock & Brown and Centro Properties.
If the banks have already built their loan book up to the hilt – which it appears they have – and other banks are withdrawing from the market – which it seems they are – then it can only mean a couple of things.
Asset sales aplenty resulting in a continued drop in asset prices.
That’s probably the worst case. The big unknown is how much of this is already built into share prices. Our chat with Swarm Trader Gabriel Andre below will give you some idea of his thoughts on that subject.
But it looks as though Super Kev is going to come to the rescue of the banking system by offering to guarantee bank debt written against business loans. As per usual, it creates another distortion of the markets and provides more of what got us in this mess in the first place – Credit.
Cheers.
Kris.