Monday, 4 August 2008

There Should be No Surprises

There should be no surprises about the recent writedowns, profit warnings and rising bad debts from Australian financial institutions. For those paying attention to events in both the U.S and Europe it was really only a matter of time until Australian financial companies started to own up to problems of their own.

However, Australian financials, particularly the major banks, have weathered the storm relatively better than their US and European counterparts. Have our financial institutions been more prudent and better managed? Or are we just playing catch-up?

If the U.S was the starting point for the current problems we inhabit it may be instructive to look there for some answers to the questions posed above. Over the past 12 months we have seen roughly the following sequence of events.

  • A flat out denial of any problems by major financial institutions.
  • Then an admission of some problems, writedowns were taken, assurances that dividends would not be cut and that balance sheets were adequately capitalised
  • Then more writedowns, CEO's sacked, rising bad debts, dividend cuts, job losses and capital raising but assurances that further capital raisings would not be necessary.
  • Then surprise surprise, more writedons, more dividend cuts and in some cases completely eliminated, further capital raisings, asset sales, government bailouts and bankruptices.

Of course, the above sequence hasn't been the same for all financials, some have moved through various stages at different times, some skipped over some stages whilst others will never enter some stages (e.g bankruptcy). However, investors by now should have picked up on some general themes. Companies won't announce bad news until they absolutely have to and assurances from management that everything will be fine, cannot be believed.

What have we seen to date in Australia? Rising provisions for bad debts from major banks, writedowns from NAB and provisions for CDS exposure from ANZ. Profit warnings from both companies, just last week SUN announced a tripling of bad debts and a significant fall in earnings whilst NAB's CEO was forced to walk away from the top job along with plenty of assurances that things will be OK.

So does that mean we can expect dividend cuts, capital raisings, bankruptices and government bailouts in the coming months for Australian financial institutions? Not necessarily but it pays to be cognizant of what we have seen overseas in the past 12 months and as investors, plot a course of action accordingly.

Remember that during the rollercoaster ride of the last 12 months analysts have continually been calling for a bottom in financial company stock prices only to see them put in new lows each time.

Rather than ask, is it time to buy Australian financial companies? A better question might be, Given the relatively small amount of bad news from Australian financial companies, what is the likelihood that all the bad news is out there and that stock prices have fully relected it?