Friday, December 14, 2007/
Our banks are suffering, poor things, from balance sheet pressure. But the resulting careful ‘rationing’ of credit looks like having a profitable side-effect. Phew!
The cynical view of share tipsters is that their modus operandi is as follows:
- Buy shares in a target company.
- Tell their readers to buy the target.
- Sell as their readers buy.
- Bank their profits.
Unfortunately, the hectic merry-go-round of Christmas parties has left me without sufficient time to execute step one prior to publication and thus your correspondent is able to offer the following – unexpectedly completely unsullied by crass commercial considerations.
I have explained in earlier blogs that the credit squeeze has exerted balance sheet pressure on Australian banks. I have over-simplified this situation by describing it as “rationing”, but it is certainly true that the banks are managing their balance sheets very carefully, and don’t want to take on big licks of debt except at the right price. Effectively, they are pricing high to lose business at the big end.
The last few months suggest to me that each of the big four has the same pressures, because (with some exceptions for top-tier borrowers in niche markets) they are all stepping around what would otherwise be a golden opportunity to grow market share.
Undoubtedly the banks face an offsetting higher cost of funds, but at this stage it looks like there will be a very nice improvement in net margin. As things stand, the informal credit rationing will have the very happy side-effect of quite significant growth in profits.
I am a conservative investor and believe that share investments are only appropriate for investors whose overall position means that they can comfortably hold the shares for five years, if they must, to ride out aberrations. Within that framework, I suggest that the big four banks should report strong profits next year and that their shares represent a good buying opportunity.
With that gift, your correspondent wishes his readers the very best for Christmas and apologises for his occasional overuse of the third person. If any readers wonder what to send your correspondent for Christmas – well, a short note with some observations about articles and topics of most interest would be much appreciated. Merry Christmas!
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Courtney writes: What is the right price of a big lick in your opinion? If you had a venture that needed asset funding in todays market who would you approach and what would be your pitch?
Mr Banker replies: First things first. I’m assuming that you are talking about growing an established business that has a track record of growing the top and bottom line. If you are looking at a start up then this is a question for Gail Geronimos.
Secondly, a big lick is anything over $100 million. If you can get that at a margin under 75 points I would grab it.
If the credit squeeze continues, debt will be more expensive – that’s obvious. But the banks will also be more careful and impose more conditions, so the process of borrowing will become slower and more cumbersome. Banks will look to exit under-priced loans because they’ll be able to do so much better with their money; we will effectively see borrowers compete rather than lenders compete. Some businesses will miss opportunities to grow because they can’t get funding organised in time. Some businesses will fail.
If access to increased funding is business-critical then I’d work to lock it in. Think about two and three year arrangements rather than facilities capable of termination at annual review. If you have staged funding arrangements in place, negotiate hard on “conditions precedent” to make it harder for the bank to bail-out part way through your project.
Who would I approach? Australian banks will feel the squeeze less than their overseas competitors. Bankers take confidence from a customer’s history and a track record, so it’s not the time to jump ship to shave a few points. Stay where you are unless there is a good reason to change.
My pitch? At the small end, sales driven lenders still love customers who want to borrow more (a repeat sale with little extra work) so the growth story is a good one if it is profitable growth.
The closer you get to “big-lick” territory, the more that growth needs to be managed, planned, and predictable. At that size, lenders will be looking for annual budgets; monthly actuals available and analysed to budget within 30 days of month-end, and financials statements that are audited. Budgets definitely need to be achievable: under-achieving will leave your banker very nervous. A credible and effective financial controller will be worth her or his weight in gold.