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Banks - more downside to come...

  1. fortius

    187 Posts.

    Here is a articel from todays AFR....
    Any ideas as how much more downside to come
    .....4-5% ?......


    A rum bit of timing from Morgan
    Sep 27
    Brett Clegg

    Westpac Banking Corporation has sadly failed the spirit of the push for greater corporate disclosure.

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    Only days after AMP's Paul Batchelor was made a sacrificial lamb for repeated bungling over disclosure, Westpac managing director David Morgan could not have chosen a more inopportune time to reveal the bank had suffered $150 million in trading losses on American high-yield debt securities.

    Putting the risk management issues to one side (how did a financial institution come to lose such an amount trading bonds only a notch above junk status?), it was the way in which the bombshell was snuck in at the back end of the presentation that angered investors.

    As AMP has learned to its cost, attempting to bury negative information is a dangerous game. Investors, rightly or wrongly, feel as if they are being played for fools.

    In the case of the embattled life insurer and funds management group, AMP, its bit of reticence came when it casually noted in a prospectus for its $750 million hybrid equity offering that its Pearl Assurance unit in the United Kingdom was presently not meeting minimum capital requirements.

    Yesterday's Financial Reporting Workshop presentation was ostensibly on Westpac's accounting for its purchases of BT Financial Group and Rothschild Australia Asset Management. That part of it was a sideshow.

    Towards the latter part of the briefing, Westpac said it was changing its accounting treatment of its "portfolio of overseas debt securities".

    Westpac has to make a decision: hold the poor quality instruments to maturity and pray that it can still recoup their face value, or cut its losses from the bad investment decisions.



    Acknowledging the $150 million in losses is an indication it will try to do the latter.

    "In our view, the appropriate accounting treatment would be to book these through the P & L as trading losses," says Goldman Sachs analyst Nick Selvaratnam.

    "In effect, this would arguably amount to a profit warning.

    "Instead, Westpac intends to set this loss off against the gain made on the sale of AGC, and treat both as significant items."

    As a significant item, the $150 million in losses are "below the line" and not part of its operating profit and therefore can be netted out with the $750 million gain on the sale of its AGC credit finance unit to GE Capital.

    The reason why Westpac suffered its biggest fall in 1 years yesterday was because $150 million represents three-quarters of its expected profit growth in fiscal 2002.

    When a group is leveraged 20 times to 1, as is the case roughly for banking institutions, even small balance sheet changes - in this case marking the debt securities to market - can have massive impacts on the profit and loss statement.

    Westpac is not alone among the banks in the clever use of accounting techniques, be it the writeback of provisions, as in the case of ANZ and its Grindlay's profits, or the capitalisation of costs as deferred expenditure, something St George Bank has made an art of.

    Yesterday brought into focus the fact that banks are trading at all-time high relative price-earning multiples for earnings growth of questionable quality.

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