As the AMP board met to decide the fate of its chairwoman, around Australia it was a weekend of fear and apprehension in many sectors of the business and investment communities.
Nowhere was that fear and apprehension greater than in the AMP boardroom, but it extended to the big four bank boards, the top levels of the global investment house UBS, bank auditors, self-managed funds and private investors, and even to journalists.
Those AMP directors must now live with that mistake. Even more worrying than the role of the chairwoman was the prospect every director of a bank or superannuation fund manager fears — a major exodus of deposits or members. A superannuation fund is not the same as a bank (AMP also has a bank) but those AMP directors with a nose to the market know there are many members thinking about an exit.
All the directors at yesterday’s meeting would have asked themselves whether Catherine Brenner’s departure would delay an AMP member exodus. Because of the danger, there was not much time to find a new chairman and a chief executive who could combine to create a “new AMP” and promote a new set of values. AMP is fortunate to have ex-IAG chief executive Michael Wilkins on the board as acting CEO.
Wilkins is not tarnished by the removal of former chairman Simon McKeon in 2016, having joined the AMP board four months later.
He knows how to run a public company, but it will require a very special person to steer AMP out of this mess, particularly as criminal prosecutions of AMP and AMP people are on the agenda.
Among the directors of the big four banks there is fear of a different sort. Their chief executives are telling them that the mortgage loan portfolios are in good shape and can be stress-tested — in other words UBS is just plain wrong and creating false market mischief.
Westpac shares during the week plunged to a two-year low after UBS banking analyst Jon Mott cut the stock to a “sell” rating on concerns over the quality of the lender’s $400 billion mortgage book. The UBS analysis was based on a cache of documents released to the royal commission.
But what if UBS is right and bank housing loans start performing badly?
Different banks have made different denial statements but at the weekend Westpac took UBS head on and denied it has a problem. If Westpac is wrong and UBS is right then the damages claims from shareholders will be big.
To make matters worse there is pressure on banks to divest wealth management activities. Many of these investments have a high book value and their sale value may be depressed if AMP problems worsen.
Any bank auditor worth their salt will not just take management’s word but will demand their people be able to undertake an extensive and detailed audit of the loan book and the levels of income, borrowing and expenses of each bank’s mortgage borrowers.
Those auditors will be required to report to shareholders. They need to be right. If the auditors give bank loan books a clean bill of health and problems later emerge (if UBS is right) then the auditors will also be in the courts.
UBS or not UBS
There are plenty of precedents for a global investment house issuing bulletins saying particular stocks are overpriced or perhaps questioning the affairs of an entrepreneur.
But what is happening in Australia has few precedents for the global investment house. In Australia, four of our top five companies are banks and they dominate most portfolios. UBS is saying these dominant companies have not undertaken sufficient personal income and expense research in making mortgage loans to customers.
The repercussions of these boom actions will damage bank fortunes. UBS is really saying that, at least, some of the big banks are making false statements about the quality of their loan book.
All major bank shares have been hit hard by the UBS claims. If UBS is right and the banks are wrong then being a bank director will be nearly as unpleasant as being an AMP director. Many bank board heads will roll.
But if the banks are right and UBS is wrong it will be a huge setback for the investment house. UBS will, of course, blame a couple of analysts but it branded the research material and heavily promoted it.
The market believed UBS and bank shares fell heavily. Again the legal damages cases may be precedent-setting. But the ramifications go further. If UBS is right about the banks, we are going to see a setback in many residential dwelling markets. On reading the material, people may decide to sell their dwelling or not to buy.
I am sure the top people at UBS believe their analysts but there are big stakes. So this weekend UBS top brass were apprehensive.
On Saturday, I spent time addressing self-managed fund investors at the SMSF Association conference in Melbourne.
When I started to talk about bank shares they were on the edge of their seats. Like everyone else they do not know who to believe. But for many their ability to live at current standards depends on bank dividends, so they are apprehensive.
And there is open fury at the ALP’s franking credit plans although I explained that an ALP government is unlikely to raise large amounts of money this way. But many of the self-managed funds at the conference were in the crucial area — they had superannuation assets of between $800,000 and $1.6 million.
Do we support UBS or the bank chief executives? Journalists have no way of looking closely at the bank loans, so those auditor reports will be important.
I was able to detect one weakness in the UBS case but it certainly does not knock it out.
UBS revealed that when you compare the population statistics and the bank customer details in relation to income it looks like there is massive overstatements of income because there are not enough people in the higher income brackets to make the banks’ revelations accurate.
I have discovered at least some of the banks regard each loan as a “customer”. Therefore, if I buy six dwellings with six different loans from a bank that does this, I am listed as six customers. So if I have a high income and “go for the doctor” and claim that I earn $500,000 a year, I could be listed as many customers. This explains why the banks have huge numbers of customers in the high-income levels.
But of course these scenarios raise a whole new area of risk because if something goes wrong with my finances and/or there is a dip in the housing market, a multi dwelling investment strategy can he a disaster. To make matters worse, banks have not been swapping information and the only ways the banks can pick up what my theoretical customer has borrowed from another bank is if that customer is honest or does a direct debit on the base income source banking account.
It may take a year or two to discover who is right.
By Robert Gottliebsen
The Australian Business Review
30 April 2018