Thursday, May 22, 2008

Australia really is another country

St George Bank is the number 5 bank in my home country (Australia). It is currently subject to an all-stock offer by Westpac - but if you were an American you might wonder why you would want it.

After all - St George is probably the only bank in the English speaking world which still advertises zero-downpayment mortgages on TV. Here is the description from their website.

I suspect the description will disappear sometime - so below is a snip preserved for posterity:

Note that St George will "sell" you a zero-down mortgage to buy vacant land. I do not think Indy Mac or Countrywide allowed that.

But why stop at zero down loans. The company will also do limited documentation loans - but with an 80% LTV restriction. This is the page from their website - but again I wish to preserve a snapshot:

Again you should read the small print. This is not a normal amortizing low-doc. Its a low doc line of credit.

Hopefully of course you should get a big-fat-margin for lending low-doc line of credit. But you would be wrong. St George is so keen for volume that they offer the low-doc line of credit at a discount to the standard rate in Australia. Below is an extract:

So can someone please explain to me again why Westpac is so keen to buy this bank? I don't get it. There is no big problem in the Australian mortgage market - so maybe this is just June 2006 redux. But Westpac buying St George smells awfully like Wachovia buying Golden West.

John Hempton

Full disclosure: No position in any stock mentioned.

1 comment:

SP said...

Hi John, any idea what was the size of the St. George's non-conforming loan book (in AUD$) at the time of the Westpac acquisition. Maybe Westpac has curtailed this form of lending and has since securitized this loan book and sold it off so its now someone else's problem.

I'm not an expert in the Australian mortgage market or the banking system for that matter but is it really that far fetched for Australia to face stress in its mortgage/MBS market? I do understand that the risks from the mortgage market to Australian financial institutions is mainly credit risk as oppose to interest rate risk because of the skew towards floating rate and short term fixed mortgages but why is there an almost religious consensus amongst pundits that the Australian mortgage market cannot crack. Housing prices in Australia (like Canada) are inordinately high relative to household incomes as per the OECD.

If the monetization of fiscal deficits we are seeing around the world today eventually results in substantially higher levels of global interest rates then I think Australia (and Canada) have a very serious problem on their hands. There are other triggers as well such as a sharp reduction in Chinese demand for copper/iron-ore/coal etc.

One would think mortgage/MBS losses would mount (especially since the borrow is exposed to rate risk) and banks could see wholesale funding flee. I'm not sure if Canadian banks are dependent on wholesale funding but I recall reading in one of your other posts that the Australian banking system is highly dependent on foreign sources of wholesale funding, which is hot money.

This has got me thinking - there must be a way to structure an asymmetric trade to profit from this outcome (as unfortunate as it might be).

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