End of bear market rally draws nigh

End of bear market rally draws nigh, says Ambrose

KUALA LUMPUR: The food and beverage (F&B) and consumer product sectors have shown no signs of slowing down and will lend support to the local stock market at the end of a bear market rally, said Aberdeen Asset Management Sdn Bhd managing director Gerald Ambrose.

“Companies like Nestle, F&N, Guinness and BAT have an export angle but we are not seeing a slowdown in sales for these companies,” Ambrose told The Edge Financial Daily on the sidelines of the 23rd Asia-Pacific roundtable organised by Asean ISIS and ISIS Malaysia here on Tuesday.

“Spending within the domestic consumer market will hold banks up,” he said, adding that Malaysian banks had not been affected by the toxic debts in US and European banks. “Banks appear to be still willing to lend and Bank Negara has made it its priority to ensure that credit is still available.”

Ambrose added that if consumers were willing to face risks or suffer temporary losses, investments in the property development sector also held promise for further improvement.

“We’ve come this far without facing massive asset price appreciation, so we’re doing all right,” he said.

Ambrose said while Malaysia was experiencing a decline in exports, the economic conditions could have been worse. For instance, he said an increase in petrol and diesel prices would have a greater impact on the broader Malaysian society.

“The economy may have contracted 6.2% in 1Q09 but traffic along the North-South Expressway was up 3.5%, so I don’t think Malaysians are feeling that bad,” he said.

“My personal view is that we are nearer to the end of a bear market rally than the beginning and it won’t go on for much longer,” Ambrose said, reflecting on his stance in defensive sectors such as the F&B and consumer product.

http://www.theedgemalaysia.com/business-news/15643-end-of-bear-market-rally-draws-nigh-says-ambrose.html

Credit Card Write-Offs

Banks Brace for Credit Card Write-Offs

It used to be easy to guess how many Americans would have problems paying their credit card bills. Banks just looked at unemployment: Fewer jobs meant more trouble ahead.

The unemployment rate has long mirrored banks’ loss rates on card balances. But Eddie Ward, 32 and jobless, may be one reason that rule of thumb no longer holds. For many lenders, losses are now starting to outpace layoffs.

Mr. Ward, of Arkansas, lost his job at a retail warehouse in April and so far has managed to make minimum payments on his credit card debt, which he estimates at $15,000 to $20,000. Asked whether he thinks he will be able to pay off his balance, he said, “Not unless I win the lottery.”

In the meantime, he said, “I’m just doing what I can.”

Experts predict that millions of Americans will not be able to pay off their debts, leaving a gaping hole at ailing banks still trying to recover from the housing bust.

The bank stress test results, released Thursday, suggested that the nation’s 19 biggest banks could expect nearly $82.4 billion in credit card losses by the end of 2010 under what federal regulators called a “worst case” economic situation.

But if unemployment breaches 10 percent, as many economists predict, the rate of uncollectible balances at some banks could far exceed that level. At American Express and Capital One Financial, around 20 percent of the credit card balances are expected to go bad over this year and next, according to stress test results. At Bank of America, Citigroup and JPMorgan Chase, about 23 percent of card loans are expected to sour.

Even the government’s grim projections may vastly understate the size of the banks’ credit card troubles. According to estimates by Oliver Wyman, a management consulting firm, card losses at the nation’s biggest banks could reach $141.5 billion by 2010 if the regulators’ loss rate was applied to their entire credit card business. It could top $186 billion for the entire credit card industry.

In the official stress test results, regulators published losses only on credit cards held on bank balance sheets. The $82.4 billion figure did not reflect another element in their analysis: tens of billions of dollars in losses tied to credit card loans that the banks packaged into bonds and held off their balance sheets. A portion of those losses, however, will be absorbed by outside investors.

What is more, the peak unemployment level that regulators used to drive their loss estimates is roughly what current rates are on track to reach. That suggests that if the unemployment rate gets much worse, credit card losses could be worse than what regulators projected.

And many economists expect the number of job losses to climb even higher. On Friday, the unemployment rate reached 8.9 percent as the economy shed 539,000 jobs. The unemployment rate and the rate of credit card charge-offs, or uncollectible balances, have been aligned because consumers who lose their jobs are more likely to miss payments.

Banks wrote off an average of 5.5 percent of their credit card balances in 2008, while the average unemployment rate was 5.8 percent. By the end of the year, the rate of credit-card write-offs was 6.3 percent; more recent data was not available.

Experts predict that the rate of credit-card losses could eventually surpass the jobless rate because of the compounding effects of the housing crisis and lackluster consumer confidence. Shortly after the technology bubble burst in 2001, credit card loss rates peaked at 7.9 percent.

“We will blow right through it,” said Inderpreet Batra, a consultant at Oliver Wyman, which specializes in financial services.

Unlike in prior recessions, cardholders who recently lost their jobs are unlikely to be able to extract equity from their homes or draw down retirement accounts to help pay off their debts.

That means borrowers who fall behind on their bills are more likely to default, leading to higher losses.

After writing off about $45 billion in bad debts during 2008, credit card lenders are bracing for the worst year in the industry’s history. Not only are losses spiraling, but also lawmakers are on the verge of passing a set of tough new consumer protections that could have a devastating effect on profits. This week, the Senate is expected to take up the Credit Cardholders Bill of Rights after the measure passed in the House with a strong bipartisan vote of 357 to 70.

Over the weekend, President Obama pressed lawmakers to approve the new rules, which would curb the ability of card issuers to raise interest rates retroactively on consumers and would require them to reduce hidden fees and penalties. He hopes to sign the legislation by Memorial Day.

For the banks, the economics of the credit card business are increasingly troubling. As the recession has dragged on, cardholders have sharply reduced spending. New customers with strong credit histories are increasingly hard to find.

And the most troubled borrowers are so deeply mired in debt that card companies are willing to strike deals to remove late fees and reduce card loan balances. The average American household is saddled with nearly $8,400 of credit card and other revolving debt, according to Moody’s Economy.com.

Every major credit card issuer has been approving fewer new applicants, reining in credit lines and canceling unused accounts. And Meredith A. Whitney, a prominent banking analyst, expects credit card lenders to cut the lines of credit they extend to borrowers by a total of $2.7 trillion through 2010. That is equivalent to a 57 percent reduction in the credit they made available two years ago at the height of the boom.

Within the card industry, all eyes are now focused on the sharp increase in unemployment. At Citigroup, executives noted that the company’s 10.2 percent credit card charge-off rate for the first quarter had broken its “historic correlation with unemployment” and showed no sign of letting up.

American Express, Bank of America and Capital One Financial showed first-quarter loss rates that hovered around 8.5 percent, roughly tracking the unemployment rate. All three said they expected higher losses in the coming months. Even Chase Card Services, which charged off just 7.7 percent of its card loans in the first quarter, expects its loss levels to surpass unemployment by the end of the year.

Card executives say there will little improvement until the economy stabilizes and consumers are more optimistic.

Cindy Schneider of Connecticut, 53, is a long way from being confident about her finances.

She is not making any money from her job as a real estate agent and cannot find work elsewhere. Her husband’s pay was just cut 10 percent. And she worries about how they will pay off a $5,000 balance on their credit card.

When her credit card company recently raised her interest rates, saying she was three days late with a payment, Ms. Schneider transferred the balance to another card with a lower rate.
“We are borrowing from Peter to pay Paul,” she said.

http://www.cnbc.com/id/30682607

Other Article:

I Would Not Own Bank Stocks: Meredith Whitney
Watch the video here:http://www.cnbc.com/id/30687770

The Next Selldown To Begin??

Bank of America needs additional US$34b in capital !!!!!!!!!!

WASHINGTON: Bank of America has been deemed to need an additional US$34 billion in capital, according to the results of a government stress test, a source familiar with the results said on May 5, according to Reuters.

A Bank of America spokesman declined comment.

The amount is far higher than published reports had speculated the largest bank might need. It is certain to increase the pressure on Chief Executive Kenneth Lewis, whom shareholders ousted as chairman last week.

It may also unnerve investors who had hoped the results of the stress tests on Bank of America and 18 other banks might show the industry was in less dire condition than had been feared. Shares of major U.S. banks have nearly doubled since bottoming out in early March.

The government has spent the last three months conducting stress tests on the 19 largest U.S. banks to determine their revenue, losses and capital needs, should economic conditions deteriorate even further than many economists' estimates.

Officials plan to release results of the tests on late May 7, and are expected to reveal both aggregate figures and the results of the examinations on the 19 institutions' holding companies.

Bank of America has been at the top of the list of banks believed to need more capital, as it is facing significant credit losses and a challenging combination with Merrill Lynch & Co.
The US$34 billion figure more than triples previously published reports of Bank of America's capital needs.

The bank's shareholders voted to oust Lewis last week as chairman of the board, possibly laying the groundwork for his eventual departure from the company.

The bank has already received US$45 billion in capital from the federal government.

The Federal Reserve and Treasury declined comment.

Most of the 19 U.S. banks being stress-tested intend to hold press conferences on May 8 to explain the results of the government's assessments, the source said, adding that many of the banks are in the process of crafting capital recovery plans. - Reuters

http://www.theedgemalaysia.com/business-news/13506-bank-of-america-needs-additional-us34b-in-capital.html

Is Now The Right Time To Buy Property?

House buyers cautious due to fears of income security

PETALING JAYA: Potential house buyers are still wary about making property purchases despite lower mortgage rates as the economic outlook remains uncertain, analysts said.

Average mortgage rates have fallen to about 3.5%, but at the same time banks have been more stringent on the approval of loans. The average mortgage rate is obtained from base lending rate (BLR) of 5.55% minus 1.5% to 2.4% for housing loans (or effective annual rates between 3.15% and 4.05%), depending on the amount and tenure of loans, and the package customers sign up for.

OSK Research said the attraction of lower mortgage rates had been superseded by fears of income security amid a deteriorating economic outlook.

“For those who are still financially sound, most would rather wait a while longer to snatch up better bargains a few more months down the road. Some are hoping for developers to come up with more creative and attractive perks and some are also waiting for prices to drop further, if any, before they are convinced to buy,” the OSK analyst told StarBiz.

The research house said downside risk for landed properties appeared limited compared to luxury condominiums, with the demand for landed properties expected to return by year-end.

“Most of the homebuyers in this segment are cash-rich and not highly leveraged. Given the accommodative interest rates today, any forced-selling or foreclosures of properties like the one we saw during the 1997/98 Asian Financial Crisis will be limited in this downcycle,” it said.

OSK Research expects the demand for luxury condominiums to decline by 30% to 40% in 2010 from 2008, with luxury condo prices already currently down by 15% to 20%. (OSK is always overbearish or overbullish!!)

An analyst from Kenanga Research agrees that the bearish economic outlook is making potential buyers hesitant about buying properties now.

“What if this (sign of market recovery) is just one-off data? What we need is for the sentiment to improve,” she said, noting that only 60% of bookings had been translated to actual sales compared to almost 100% previously due to more stringent loan requirements.

Jupiter Securities Sdn Bhd head of research Pong Teng Siew said that with the mortgage rates of 3.5% and effective cost of funds of 1.5%, banks net interest margin should be about 2% now.

“But cost of funds for smaller banks such as EON Capital Bhd, RHB Capital Bhd, AMMB Holdings Bhd are higher (slightly over 2%) because of higher interest bearing liabilities,” he told StarBiz.

A house buyer contacted by StarBiz said his current mortgage loan interest rate was 3.15% for the first two years and 3.45% for the remaining tenure.

He recently signed up for a 20-year conventional home loan from Alliance Bank Malaysia Bhd for the purchase of a double-storey house. He is paying about RM1,700 per month for his RM300,000 loan.

His loan package included a one-time payment of RM2,500 for mortgage reducing term assurance, legal fees and stamp duty.

Other banks are offering similar mortgage rates.

For example, RHB Bank is charging BLR minus 2.1% for housing loans that range from RM250,001 to RM500,000, while Hong Leong Bank Bhd is offering BLR minus 2.2% for a RM300,000 mortgage loan. (the most efficient banks always offer the best rates!)

Malayan Banking Bhd uses a property’s location as one of the criteria to determine interest rate, but is still offering rates in the region of BLR minus 2%.

All these banks have BLR of 5.55%.

Source: http://biz.thestar.com.my/news/story.asp?file=/2009/4/29/business/3793031&sec=business