NAB Not Immune To Credit Crunch

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            [0] => ((NAB))
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            [2] => ((WBC))
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This story features NATIONAL AUSTRALIA BANK LIMITED, and other companies.
For more info SHARE ANALYSIS: NAB
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

National Australia Bank ((NAB)) is a provider of a liquidity facility to RAMS Home Loans ((RHG)). RAMS is now only a mere shadow of its former self, having sold off its brand name and new loan business to Westpac ((WBC)) in desperation when the credit crunch hit home too hard. While Westpac picked up the good bits, RAMS was left with its existing portfolio of mortgages.

RAMS funds its loan book by issuing extendable commercial paper into the credit market – a market that has remained largely frozen ever since July. This is not to say no deals have been done in the world, but any that have been done have tended towards the larger cap, quality names. Non-bank mortgage lenders do not fit into this category, particularly shells of non-bank lenders.

Come February, RAMS will need to go back to the market and attempt to refinance its debt. Will it find any buyers? And if so, at what price? The unfortunate reality is that if this were the US, we’d probably be looking at a portfolio of low quality, even subprime, mortgages, which would send potential buyers packing. But this is Australia, and RAMS’ existing loans are generally of a high quality and fully insured. Depending on how the global credit crunch has played out by February, RAMS may yet struggle to find buyers at a commercial credit spread on a “guilt by association” basis.

As part of its deal, Westpac has offered to assist RAMS in finding buyers, for what that’s worth. It has no intention of picking up the loan book itself.

Were RAMS to fail in its requirements, NAB would be forced to take on $2.7bn of the loans. As they are of reasonable quality, NAB may decide to fund them itself, or alternatively (if its own funding cost keeps rising) may simply park them on its balance sheet. If this transpires, about $100m of NAB’s excess capital would be absorbed, according to JP Morgan.

JP Morgan has been virtually the lone voice among the bank analysts in warning of ongoing credit crunch fallout. JPM has the sole Sell on NAB in a B/H/S ratio of 6/3/1 in the FNArena database, and also has an Underweight on the bank sector. The more positive views are attributed to NAB having been sold off the most among the big four around August, and the fact NAB posted what appeared to be a pretty good result. (On this morning’s trade NAB is down over 6% since the result).

JP Morgan had expected the bank to carry some $1.8bn of excess capital before the FY07 result to fund buybacks. The analysts now have that amount down to $500m. GSJB Were suggests NAB “currently has $2.9bn excess capital beyond the bottom end of its range”, so determining exactly what the capital position is seems less than an exact science.

Whatever your measure, GSJB Were is not at all worried about NAB having to absorb RAMS’ loan book and maintains a Buy. Credit Suisse (Outperform) even believes it might be a positive – given the quality and the lack of upfront costs to acquire it.

JP Morgan further notes that NAB’s sponsored conduit Titan still has $5.5bn outstanding that will likely end up on NAB’s balance sheet as well. This will erode capital by a further $300m. “NAB’s surplus capital position is much diminished”, say the analysts.

Whatever the view, it must be said that if the credit crunch worsens, NAB’s capacity to conduct a share buyback is diminished.

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