Monday, May 23, 2011

NAB In the Middle of a U.S. Property Bubble

In agricultural land, that is. Prime wheat land in Australia goes from $1000-$2000 an acre. Similar land in the wheat belt of the U.S. is trading for $10,000 an acre.

Way out west, another bubble is forming
But regulators there are warning that a new real estate bubble may be forming across the US grain belt - and National Australia Bank is right in the middle.
A little over three years ago, NAB made a triumphant return to the US market, paying about $900 million for Great Western Bank, a tiny South Dakota lender.
At the same time, loans now stand at $US5.3 billion ($A4.98 billion) from $US2.6 billion when NAB took over. Profit from the bank has also been on the up. This year it is expected to top $US90 million from $US35 million when NAB moved in.
Lending to farmers and related businesses has increased to just over 17 per cent of Great Western's book, from a little over 10 per cent. Today, Great Western is the seventh-biggest agribusiness lender in the US.
That's quite an aggressive bank you've got there.

A reminder that Moody's cut NAB's rating (along with the 3 other major Australia lenders).
Moody's Cuts Ratings of Top Four Australian Banks
This really only put Moody's in line with the other rating's agency, so the timing is probably incidental.
he downgrade to Aa2 from their previous rating of Aa1—one notch below Moody's top rating—comes as ratings firms world-wide step up reviews of the global banking system following the 2008 subprime-mortgage crisis and a subsequent backlash against the ratings industry.

. . . Earlier this year, Moody's said its review would focus on the Australian industry's dependence on the global wholesale lending market, in which big banks lend to each other. That market can tighten during times of uncertainty, such as during heightened worries about finances of European Union nations.

Added:NAB does seem to be in an aggressive growth phase.
Cheap loans as bank war hots up
(I was tempted to put [sic] on that title for the North American readers, but it's not Friday. I'll behave.)
NAB's UBank arm will offer standard variable-rate mortgages until the end of next month at 6.59 per cent, although the discounted rate is available only on mortgages sold online. The rate is more than one full percentage point below the current standard variable rate of most banks.
. . .
NAB's strategy over the past 18 months of discounting mortgages has been starting to pay off. It is notching up sales at more than three times the rate of growth of the broader mortgage market. Much of this growth is coming from Commonwealth and Westpac.
Expanding your loan book at a smaller margin into the teeth of higher risk is what kind of strategy, exactly?

NAB fired the first shot in February, when it offered to pay the $700 mortgage exit fee of CBA and Westpac customers. This was followed by the ''break-up'' advertising campaign against the other big banks.
CBA quickly hit back by offering up to $1200 in cash to NAB customers looking to switch loans. At the same time CBA also targeted NAB business banking customers, while Westpac offered a range of discounts across new mortgages.
I love a good race to the bottom.

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