Monday, 10 November 2008

More Visits to the Confessional for the Big 4

Back in February I asked the question Time to Buy the Big 4? and concluded that it wasn't. Then in August after even bigger declines I said Still Not Time to Buy Aussie Banks. If you bought the major banks back in August you haven't made any headway, but we have learned a few extra things we didn't know back then.

Firstly we knew Allco and ABC Learning Centres were in trouble but we didn't know they would be insolvent less than 3 months later. Below are the exposures of each bank to both.

It also should be noted that CBA holds 4.456m ABS hybrid notes at a carrying value of $220m whilst NAB has no direct exposure to Allco it does have exposure to entities within the Allco group. NAB also has a $20m exposure to the recently insolvent Rubicon group. In addition NAB made the following announcement today.

NAB to strengthen further its capital position

National Australia Bank (NAB) has launched an institutional placement of shares to raise approximately A$2.0 billion to strengthen its balance sheet and take advantage of organic growth opportunities. The placement has been fully underwritten by Goldman Sachs JBWere, Merrill Lynch and UBS AG, Australia Branch.

I must say I nearly fell off my chair laughing when I read the heading of the announcement. As if raising capital was a sign of strength. The truth is they need the capital to cushion the writeoffs coming down the pike.

I said months ago that the news for Australian banks would get worse before it got better. Now it is getting worse and is not likely to get better for some time and thus there is no reason to go out and buy the major banks with your ears pinned back just yet.