Life is getting tougher and rougher for the world’s banks.
It’s not 2008, but it’s the toughest conditions for the world’s banks for a year or more.
European banks are cashed up and fearful that one or more may be dragged under by a sovereign debtor like Greece or Spain having problems; American banks are cutting lending and starting to hoard cash and Government securities and in Asia they are falling short of raising new capital, especially in China.
Cash rates and other market indicators for bank funding are rising as banks hoard more cash and cut back on interbank lending and sink tens of billions of dollars into sovereign debt in Japan, Germany, Australia, the US and UK.
In contrast, Australian banks are still well positioned; they have funded their 2010 needs and some of 2011 and have enough capital and liquidity to ride out any problems off shore.
Indeed the head of APRA, the bank regulator, last week told a Senate Committee that the Australian banks were in a stronger position than they were before the credit crunch started in 2007.
They don’t have any off balance sheet holdings like the ANZ, Commonwealth and especially the NAB had, the bad debts from the slowdown are now falling and capital has been raised to strengthen balance sheets.
Thanks to their loan splurge in 2009, China’s banks are lining up to raise tens of billions of dollars in new capital, but they look like falling short of their targets.
Based on reports at the weekend and yesterday, two banks, the Agricultural Bank of China and Bank of Communications, are expected to be forced to cut back the amounts they want because of the growing instability in markets, especially in China.
China’s sharemarket is down more than 20% so far this year and banks with property exposure, as they all have, are not in favour.
The Agricultural Bank of China was looking to raise $US30 billion in new capital in a share issue through the Shanghai and Hong Kong markets.
Now there are reports the initial public offering is now likely to raise much less than the $US 30 billion it had hoped for.
Asian reports yesterday suggest it could be around $US20 billion at most.
And the Bank of Communications (around 20% owned by HSBC) announced a $US4.8 billion rights issue on Sunday that was more than 20% less than what was first suggested.
HSBC will finance its share of the Hong Kong portion of the rights issue, which is priced at a 37% discount to the bank’s closing price on Friday, another sign of the pressures the banks are under in the market place at the moment.
The shares fell yesterday in trading, partly in reaction to the news of the scaled back rights issue, but also due to the sell-off on markets across the region.
Data released at the end of March shows the Bank of Communications needs a top up: its capital adequacy ratio was 11.73%, only slightly higher than the regulatory requirement of 11.5%.
Agricultural Bank will sell up to 56.3bn new shares, or nearly 17% of its enlarged capital base, in Shanghai and Hong Kong, if over-allotment options are exercised in both markets.
Agricultural Bank is the last of China’s large state-controlled banks to seek a public listing and is regarded the weakest. It received a $US19 billion capital injection from CIC, China’s wealth fund two years ago.
In Europe banks had over 300 billion euros on deposit with the European Central Bank, plus the ECB is buying billions of euros of sovereign bonds from the same banks every week to help support the eurozone, while the same banks have borrowed hundreds of billions of euros from the bank in six and 12 month loans.
Domestic savings banks in Spain are weak and being encouraged to merge as quickly as possible: two have been taken over by the state when they took too long to strengthen their capital.
In New York, Bloomberg said that the 18 primary dealers which deal day- to-day with the Fed have gone from a normal "short position" holding in US Government securities (which is a natural hedge against parts of their portfolios) to a long position in US securities because of the growing fear and loathing in markets.
Short term rates like the US dollar and euro London Interbank Offered Rates (or Libor) have risen sharply in the last six weeks to their highest levels for a year: not as high as in the back end of 2008 after Lehman Brothers fell over, but high enough to trigger more fears among some of the world’s biggest banks about each other.
Bloomberg reported that Goldman Sachs, JPMorgan Chase and the other 16 primary dealers have moved from a $US23.2 billion bet against Treasuries to holding more than $37 billion as at May 26.
Bloomberg said the non-treasury holdings of fixed interest securities fell 17% to $211 billion as they sold off higher risk (and yielding) corporate bonds and bought the lower yielding, but safer Government debt.
Bloomberg said, "The combination of growing concern about potential defaults in Europe and the lowest inflation rate in four decades is boosting demand for U.S. fixed-income assets.
"While bond dealers predicted in December that yields would rise for a second consecutive year, Treasuries have returned 4.55 percent, including reinvested interest, the most at this point in 15 years, Bank of American Merrill Lynch indexes
