Grey-haired rats are deserting

I should never have strayed into Nostradamus territory – I didn’t realise how hard it is to back-pedal while skidding downhill. MR BANKER

Banker of Last Retort

By Mr Banker

A trawl through my archive drove the realisation that I have become distracted by the unprecedented turmoil in the credit market and strayed far from my core competency and stated purpose – carping about corporate incompetence and stupidity – and into the heady world of predictions.

Some of those predictions have been miles off, such as my statement in August that “absent further shocks, however, there is a reasonable case for saying that the liquidity market has hit bottom and is slowly and steadily improving”.

Some predictions continue to require weaselling on an ongoing basis, such as my defence of an earlier suggestion that bank shares might be a good buy, of which said weaselling; more follows.

The prediction that I’m proudest of however is the rats-deserting-a-sinking-ship-like behaviour that I observed in some of the old grey-haired (figuratively, of course, not literally; plenty of Grecian 2000 in evidence) bankers.

Completely ignoring my own analysis and relying on the demonstrated collective wisdom of the timid old timeservers led to the conclusion that we were in for a rough time indeed, which has subsequently been proved to be correct; in spades.

So what does the behaviour of the grey-hairs tell us now?

It’s remarkable to see just how brave and bold the formerly tentative old-timers have become. Credit managers that were seemingly prepared to approve a loan before the lender had finished the sentence have regained their mojo – and now can’t say “no” quickly enough,

So with bankers in new roles having no commitment to keeping bad deals alive (they didn’t write it so they don’t care if it falls over) paired up with newly-brave credit managers, this is my take on the new world.

First, we’ll have a Reserve Bank keeping interest rates high until it is sure that inflation is dead (usually this is six months after everyone else is sure that it is dead), balance sheet pressure forcing lenders to ration credit and crank up interest rates, and freshly-fearless credit managers asking lots of questions before they say yes; so the credit squeeze will worsen and continue.

Second, we’ll see spring cleaning. The combination of bold credit managers flexing their new muscles and continuous disclosure means that we’ll see a flow of write-offs, provisions and earnings downgrades.

At the end of that process we’ll have Australian banks with great margins, strong cashflows, and immaculate balance sheets – but in the meantime we’ll see some ugliness, so those who followed my advice to buy banks might prefer to sell now on strength if they have a weak stomach, because although the market is up 4% today as I write this, it’s hard to see that we are anywhere near the other side just yet.

 

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