Ghost Of Homeside Rises To Rattle Nab's Nerve
The Age
Tuesday August 13, 2002
Having apparently closed merger talks with Abbey National, National Australia Bank is faced with investor nerves about the value of its mortgage servicing rights as United States bond yields decline.
The MSRs are a remnant of NAB's HomeSide mortgage business in the US, the platform of which NAB sold to Washington Mutual in December.
NAB still owns 92 per cent of the rights, having sold $23 billion out of a home-loan portfolio worth $284 billion in June.
MSRs are the rights to future income from servicing home-loan repayments. Their value falls as refinancing activity rises - which is precisely what is happening in the US, where Treasury bond yields have been falling as investors seek safety from turbulent sharemarkets.
While most US economists believe that the US Federal Reserve will not cut official interest rates at its meeting tonight, fixed mortgage rates have declined ``and consumers are now rushing to take advantage of low rates to refinance existing mortgages", says the Mortgage Bankers Association of America.
US refinancing activity is reportedly at levels experienced last September when NAB was forced to write down the value of its MSRs by $3.6 billion.
Although Australian banking analysts were divided yesterday on how likely NAB was to make another writedown, they agreed that the US economic climate could make the MSRs more difficult to sell.
NAB relies on hedging to offset the losses in its MSRs. The rights will not suffer further value deterioration if the hedges work as they were designed to.
Another negative of mortgage refinancing is that it may stunt the short-term earnings potential of NAB's retained MSRs. But it means the rights will run off more quickly.
Investors were more focused yesterday on the closure of merger talks with British bank Abbey National.
NAB's share price closed 54 cents, or 1.6 per cent, lower at $34.21 as investors erased the premium association with merger benefits.
Investors' disappointment was offset by analysts who pointed out that the bank would have been unlikely to make a $30 billion hostile takeover bid for Abbey National. A hostile bid would be unlikely to draw support because it would be difficult and, if it did succeed, would cause massive share dilution as NAB issued scrip to fund the transaction.
British newspaper The Independent on Sunday reported that merger talks had broken down, quoting an unnamed source close to discussions.
© 2002 The Age