Banks Sap Dejected Market

The Age

Saturday March 8, 2008

Vanessa Burrow, Markets Reporter

AUSTRALIAN banks quashed any market positivity, acting as a millstone around investors' necks, as more than $7.5 billion was erased from the Big Four alone.

National Australia Bank lost 5.4%, its biggest one-day fall since the market's record-breaking 7.1% plunge on January 22.

Even before the market opened, the mood was sombre, with US markets sinking rapidly on news that Thornburg Mortgage and another bond fund were defaulting on their debt.

More Americans are also defaulting on their home loans, with delinquencies on subprime mortgages rising from 16.3% to 17.3% and overall delinquencies jumping from 5.59% to 5.82%.

Wall Street's S&P 500 Index fell 2.2%, and before opening last night, was teetering at its lowest level in more than a year.

In Australia, National Australia Bank and Bank of Scotland seized 52.8 million Allco Finance Group shares, signalling the demise of Allco Principals Investments.

NAB, which has lent about $110 million to API, will make a provision for a loss, and said it would "pursue all avenues of recovery".

The news, combined with a "sell' rating that Citi analysts put on the stock, sent NAB shares spinning $1.53 lower to $26.93.

"API now appears to be walking away from the agreed deal and leaving NAB 'holding the baby'," wrote Citi analyst Craig Williams, who has placed a 12-month target price of $26 on the stock.

"The apparent failure to manage this exposure will result in a likely (estimated) $90 million loss and hence has again caused us to question NAB's risk culture and judgement."

Goldman Sachs JBWere has a "hold" rating on NAB and a "sell" rating on Commonwealth Bank. And JPMorgan has an "underweight" rating on NAB and "overweight" rating on Commonwealth Bank.

The combination of factors caused an ugly slide that affected almost every financial stock in the S&P/ASX 200 Index.

The index retreated, losing 171.5 points, or 3.2%, to 5264. It is now at its lowest for six weeks.

ANZ lost 4.4% to $20.26 while Westpac fell 4.5% $21.14 and Commonwealth Bank lost 3%, to $39.35.

Their market capitalisations have been drastically affected. Commonwealth Bank's market cap has fallen from more than $80 billion to about $54 billion in just six months.

Macquarie Group's head of economics, Richard Gibbs, said that because of the tightness in credit markets worldwide, there might come a time when only the very top-rated borrowers could obtain credit.

"If these conditions continue, and are added to on the corporate side by the Allcos of this world, (we may see) a situation where banks are actually going to be rationing capital even on the mortgage side."

ABC Learning traded for a second day after founder Eddy Groves announced he would sell 60% of the company's US child-care business to Morgan Stanley Private Equity.

The shares fell a further 28?, or 16%, to $1.47 after Thursday's 18% fall (see graph, showing falls since the market's peak on November 1).

The dramatic share price falls of companies such as Allco Finance and ABC Learning pushed the topic of short-selling to the top of the agenda.

And this week regulators warned market participants of their responsibilities when it comes to reporting short-selling and securities lending.

But Baker Young Stockbrokers managed profile analyst Toby Grimm said investors - and company heads - were looking for a scapegoat.

"Certainly there are some stocks out there that have been sold down extremely heavily . . . and invariably there has been short-selling involved in those positions.

"But I think it's wrong to blame short-selling. The stocks have fallen because of fundamental aspects of those companies, predominantly debt."

In contrast, commodities were strong this week, with gold reaching a record $US992.05 an ounce and oil hitting $US105.47 a barrel.

The dollar was buying US93.15? last night.

Suncorp-Metway group treasury strategist Peter Pontikis said he expected the dollar to trade between US85? and US90? for most of the year.

"I'm caught in a quandary, mainly because we do have a fundamentally good news story for the currency, as a commodity story," he said. "But it is possible to pay too much for a good story."

There were also some gains made in the market, with Oxiana rising 6? to $3.62. Magellan Petroleum gained an amazing 118.2%, rising 65? to $1.20, while adult entertainment company Planet Platinum was up 7.4?, or 104.2%, to 14.5?.

Deloitte partner Steven Shirtliff said all major markets posted losses this week, with the Nikkei down 3.3% while the Hang Seng fell 6.3%. For the week to Thursday the Dow Jones lost 4.3% and London's FTSE Index was down 3.3%.

"The Vic Index was down 4.9% this week, slightly outperforming the broader market thanks to a gain in Newcrest Mining, and smaller declines in BHP Billiton and Rio Tinto," he said.

theage.com.au

? To hear the latest report on the Deloitte Victorian Index, go to theage.com.au/businessday

© 2008 The Age

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