Few Buyers For A Quick Nab Sale Of Homeside

Sydney Morning Herald

Saturday July 7, 2001

Anthony Hughes

National Australia Bank is likely to find it difficult to quickly offload its troublesome US mortgages operation HomeSide in the wake of Thursday's $568 million net writedown in the value of the operations.

Broking analysts said yesterday the unexpected writedown would also reduce NAB's surplus capital to less than $3 billion, a sum which it had planned to use either for a massive share buyback or to help bankroll a merger or acquisition in Britain.

NAB's shares rose 30.5c to $31.70 after Thursday's tumultuous fall wiped almost $3 billion from its sharemarket value. It was a much a better day for banks overall, with the Bank index rising 61.9 points to 8,708.6. The banks had softened this week as stronger economic data put upward pressure on bond yields, which traditionally depresses bank share prices.

While HomeSide is a top 10 player in the mortgage origination and servicing market, analysts believe it lacks the scale of larger competitors who are linked to local banks or have strong distribution channels through which to originate loans.

UBS Warburg analyst Mr James Ellis, who retains a ``buy" recommendation on Australia's biggest bank, said: ``Medium term they would be a seller of this asset [HomeSide] but short term there's not much prospect of that because it's not the right time for a seller to exit and there's more sellers in the market than buyers."

Mr Ellis said the writedown had ``brought into sharp relief" the risks of the operations as highly interest rate-sensitive, even though NAB had described the business as an annuity stream earning non-interest income.

ABN Amro retained its ``reduce" recommendation, saying NAB's US diversification would most likely be viewed as having fallen well short of expectations.

``The damage to NAB's stock is...likely to be more psychological than financial, as the market may begin to question management's ability to achieve superior returns from either technically or culturally challenging, offshore businesses," the broker said in a note to clients.

Macquarie Equities, which has a ``hold" on NAB, said NAB continued to have one of the best risk management systems of domestic banks despite the writedown but the reduced possibility of a capital return would not please investors.

Credit Suisse First Boston has a ``hold" on the shares and a target price of $33, saying HomeSide, if disposed of, would not crystallise a major loss or gain.

The writedown reflected the lower value of mortgage servicing rights amid high interest rate volatility, inadequate hedging and high levels of refinancing volumes but analysts don't expect it would impact cash earnings or earnings per share for the bank.

Ratings agency Fitch affirmed its long-term AA ratings on NAB, but said it would ``view a sale of HomeSide as a positive for the bank's credit worthiness, as we expect it to continue to be a drain on NAB's capital resources".

Fitch had warned in 1997 that the US mortgage market was extremely competitive.

© 2001 Sydney Morning Herald

Back to News Index | Back to Home