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BANKSTRAGEDY OF GROWTH
Growth & Banks
When analyzing the business growth for Banking companies , one has to be wary of growth concentrated in some asset class or industry.
Rapid credit growth flowing to a particular ‘asset class’ results in: Surge of bad loans
Bank failures in different formsWrite offs
Large equity dilutionsBail outs
Bankruptcies
EXAMPLE ONE: Indian Banks
During the period between 2005 and 2008, loan growth was well above historical norm
Source: RBI
Growth Of Indian Banks
As can be seen NPAs have started rising.
Also, “Restructured Loans” increased from 1% of Mar ’08 loans to 6% of loans as of Mar ’13.
NPAs have started rising
Source: RBI
Indian banks: NPA picture
2005-08: Overall GDP growth was
high and Infrastructure
saw large amount of
investment.
NPAs were trending lower,
but, loan growth was
concentrated in infrastructure.
Post 2010-11, the overall GDP
slowed down and
infrastructure projects started facing hurdles.
NPAs are gradually
increasing since then.
Example two: Australian Banks
Australian banks are facing a possible risk from fast growth in Housing prices and a Mining
sector boom. Australian-owned banks’ mounting claims in New Zealand is a rather
daunting figure too.
Australian Banks: Analysis
The Australian banking sector is extremely consolidated with four large banks holding the majority of loans issued.
High LTV (loan to value over 90%) approvals have been more or less stable but interest-only type loan approvals are quite high at around 40%
Post 2008-09 crisis, NPAs in the Commercial property segment increased and started declining by 2013. The housing space has witnessed a boom with high debt to income.
Long Term Total Asset Growth and NPA Picture
Total asset growth (YoY) has been trending below average
Source: RBA reports
Long Term Total Asset Growth and NPA Picture
NPAs and Impaired loans as “Printed on paper” still don’t depict full cycle impact as:(a) Loans will get
seasoned and (b) Underlying collateral
prices will revert to mean
Commercial Property Segment
Commercial real estate exposure
stayed constant at major banks.
Commercial Property Segment
Around 2013, commercial realty loans as a part of
total share of loans have declined
Commercial Property Segment
Increase in banks' impaired assets was mainly driven by their exposure to commercial property
Banks' impaired commercial property exposures continued to fall markedly over the second half of 2013.
Housing Segment
Period 2000 to 2010 saw a
sudden boom in housing prices
Housing Segment
Interest paid as percent of household
disposable incomehave remained low and
there has been an increase in household
debt-to-income
Housing Segment
Aggregate share of banks' housing loan approvals with high LVRs is around 13% and has remained fairly steady.
Source: RBA financial stability report Mar 2014
Housing Segment
Interest-only share of new lending has been trending above its peak.
Fixed rate Interest only OtherLow doc
Source: RBA financial stability report Mar 2014
Mining
Australian banks are facing a possible risk from the mining sector
boom.
As can be seen, with rapid growth in capital expenditure, an abrupt
disruption in demand may cause a spike in commercial & industrial
sector NPAs
New Zealand
Of Which: Banks
New Zealand
Given that New Zealand is witnessing its own housing boom and a rise in debt-to-income ratio, Australian-owned banks’ mounting
claims in the nation is a rather daunting figure.
Example Three: Japanese BanksIn 2009-12, major banks accumulated Japanese sovereign debt at the rate of 25% CAGR, which reached a level of near-5x or more against their tangible net worth.
In recent years, 50%+ pre-tax earnings came from trading on these bonds as interest rates kept declining.
In 2013, as the central bank started hoarding government bonds, there was a move towards overseas loans.
Japanese government bonds still constitute a high leverage when measured against the net worth of banks.
Growth In Japanese Government Debt
Japanese government bonds pose several interest-rate and credit risks (in the event of a downgrade or default)
Conclusion
• Most of the things in life & especially in markets are cyclical: growth is not always value additive and in majority of the cases its based on optimistic funding with unsustainable assumptions.
• Many a times valuations will also be optimistic during such ebullient period of history- not leaving any Margin of Safety
• So an investor should be wary of putting value on growth, especially in finance business.
TerminologyRestructured loan: New loan that replaces the outstanding balance on an older loan, and is paid over a longer period, usually with a lower installment amount.
NPA: Non-performing asset (NPA). According to Investopedia, NPA is a classification used by financial institutions that refer to loans that are in jeopardy of default. Once the borrower has failed to make interest or principal payments for 90 days the loan is considered to be a non-performing asset.
Interest-only loan: According to Wikipedia, an interest-only loan is a loan in which, for a set term, the borrower pays only the interest on the principal balance, with the principal balance unchanged.
LTV (Loan to value): A ratio of the outstanding debt on a property to the market value of that property
Impaired loans: A loan is impaired when, based on current information and events, it is probable that an institution will be unable to collect all amounts due according to the contractual terms of the loan agreement.
Sovereign debt: According to Investopedia, sovereign debt is bonds issued by a national government in a foreign currency, in order to finance the issuing country's growth.
Shinkin banks: According to Wikipedia, Shinkin banks are Japan’s cooperative regional financial institutions serving small and medium enterprises and local residents.
Thank You
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