Daily Wisdom: Mr.William White Edition

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1.Global Banking Economist Warned of Coming Crisis
William White predicted the approaching financial crisis years before 2007’s subprime meltdown. But central bankers preferred to listen to his great rival Alan Greenspan instead, with devastating consequences for the global economy.

2.Obama Jobless Safety Net Torn by New Normal’s 48-Year-Old Rebecca Alvarez
Rebecca Alvarez says she’s “barely hanging on.”

Without a job for seven months, the 48-year-old computer- network administrator said she’s stopped dining out, cut back cable-television services and put off paying a photography class bill from her 14-year-old son’s school in Monrovia, California. She is among more than 4 million Americans who have been looking for work for more than 26 weeks, representing 29 percent of the unemployed, the most since records began in 1948.

3.The global economy is beginning to pull out of a recession unprecedented in the post–World War II era and risks to the global financial system have moderated, but stabilization is uneven and the recovery is expected to be sluggish, according to the IMF’s latest forecast.Recession Loosens Grip But Weak Recovery Ahead

4.South Africa’s banking sector has so far proved resilient to the country’s worst recession in 17 years, but faced with soaring unemployment and high levels of consumer debt, the biggest challenges lie ahead.Leaning against the wind

5.The US government may attempt to substitute for household spending but it never quite works, no matter how many public works projects the government sponsors. The fundamentals point to deflation, not inflation.Down – not up

ADRs in the OTC market with Dividend Yields > 5%

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The OTC market is often overlooked by investors. Some of the large foreign companies are listed in the OTC markets.

When I ran my screen with the conditions:
Market Cap >= $25B
Dividend yield >=5%

the following five stocks stocks appeared in the result.

E.On AG (EONGY)
Market Cap = $63.4 B
Dividend Yield = 5.84%

RWE AG (RWEOY)
Market Cap = $40.7 B
Dividend Yield = 7.20%

BASF SE (BASFY)
Market Cap = $37.7 B
Dividend Yield = 6.03%

Telstra Corporation (TLSYY)
Market Cap = $33.0 B
Dividend Yield = 7.48%

National Australia Bank (NABZY)
Market Cap = $32.4 B
Dividend Yield = 6.17%

It is interesting to see that the top 3 companies the above list are German companies and the other two are Australian.EON and RWE are two of the largest utilities there. Of course BASF is one of the largest and well-known global chemical giant. Australia-based Telstra is a telecom services provider. National Australia Bank is one of the largest banking groups in Australia.

Time to Invest in South African Banks?

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The South African equity market is considered as one of the frontier markets. Most investors consider South African as an investment destination related to  natural resources such as  gold, silver, etc.  However some banks in South Africa may offer good opportunities for investors looking to gain exposure to the banking sector in that country.

The  recently released Annual Report 2008 by the Registrar of Banks provides a detailed analysis on the status of South African banks. Some of the takeaways from this report are:

  •  In 2008 South African banks remained stable and were well capitalized
  • The capital-adequacy ratio of the sector rose to 13.0% at the end of the year from 11.8% in January,2008
  • The Tier 1 capital ratio  stood at 10.2% at the end of 2008
  • Banking sector assets grew by 24.5% last year
  • Despite the  turmoil in the international financial markets, banks remained profitable with return on equity at 28.7%
  • Liquid assets held by banks exceeded well above the regulatory requirements
  • Impaired assets as a percentage of total assets grew to 3.8% by the end of December,2008
  • South Africa implemented the Basel II requirements successfully in 2008
  • On Basel II implementation, the IMF  commented “Overall, the Basel II implementation process in South Africa has been of high quality, backed by professional and competent supervisory staff and  strong buy-in from the industry, and reflects a high degree of compliance with the criteria in the methodology.”
  • Securitization in South Africa was less complicated than in the USA and European countries
  • Assets held by South African banks tend to have high level of transparency
  • South Africa’s sophisticated financial system is fundamentally sound and banks did not take unwarranted risks
  • Foreign shareholders hold 46% of all bank stocks at the end of December, 2008
  • The financial leverage ratio of banks  stood at 17.% compared with ratios of 30% or even 60% in developed countries

Source:  South African Reserve Bank

For US investors, none of the South African banks are listed in the organized exchanges.But some of them trade on the OTC markets. NedBank (OTC:  NDBKY) had a profit margin of about 25% last year and it currently pays a dividend of 5.38%. The stock has more than doubled from its March lows in the $12 range.Absa Group Ltd. (OTC: AGRPY) offers 1 4.76% yield. Both Absa and NedBank are sponsored ADRs with Bank of New York Mellon as the depository.

Two unsponsored  ADRs for Investec and Standard Bank are also available. Investec (OTC: ITCFY) seems to be rarely traded. Standard Bank (OTC: SBGOY) is the largest bank by assets and earnings in South Africa with operations in 17 other African countries and 16 other countries outside of Africa. SBGOY is also rarely traded. As of December,2008 Industrial and Commercial Bank of China(ICBC) holds 20% of the equity. Standard concentrates on expanding in emerging markets of the world.

Another way to invest in South African banks is via the iShares MSCI South Africa ETF (EZA) which holds South African banks in the portfolio. Standard bank is  one of the top 10 holdings with 6.5% weightage. Absa, Nedbank, Investec are also represented in the fund.Overall as of the end of May, 22% of the fund’s assets are invested in the financial sector.

Housing Mortgage Markets: Canada Vs. USA Comparison

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The housing market in U.S. and Canada have taken different paths since the credit crisis began. In the U.S. it continues to get worse since the crash that started last year. In 2008, more than 3 millions foreclosures were filed setting a record. Foreclosures in 2008 was up 71% from 2007. This year foreclosures have been in excess of 250K each month reaching 342K in April but backing down to 321K in May according to Realtytrac. A recent New York Times editorial mentioned that rising unemployment numbers and falling home prices are causing new foreclosures with no end in sight.

Unlike the U.S. housing market crash, home foreclosures have not yet become a serious problem in Canada. Other than losses sustained due to their sub-prime exposure in the U.S., the five major Canadian banks – Bank of Montreal (BMO), Bank of Novo Scotia (BNS), Toronto-Dominion Bank  (TD), Canadian Imperial Bank of Commerce  (CM) and Royal Bank of Canada (RY) are staying strong and their earnings have not take a huge hit due to mortgage defaults. This is not the case with American banks such as Bank of America (BAC), Citibank (C), US Bank (USB), Wells Fargo (WFC) and many others who have been forced to seek government aid to prevent complete meltdown.

This brings us to the following questions: What are the primary causes of the housing market collapse  in the U.S?. Why is the housing mortgage market so strong in Canada? What are the real differences between the Canadian and American mortgage systems? Why didn’t Canadian banks suffer huge losses due to mortgage loan losses?

Some of the answers to the above questions can be found in the following table which lists the differences between the housing markets in Canada and US.

[TABLE=169]

Source: Canadian Residential Mortgage Markets: Boring But Effective?, By  John Kiff, June 2009, IMF Working Paper

In summary, in Canada lending standards are much more strict and banks are not as innovative and aggressive as their peers south of the border but perform their main function as deposit takers and housing loan providers. American banks on the other hand have deviated from their primary functions over the years  in order to generate higher above-average returns year after year. Relaxation of regulations by the government and creating favorable environment promoting home ownership by all added fuel to the fire.