KEY POINTS:
Outside the financial world, another sector doing it tough at present is the automotive industry.
Although it predated the overseas credit crunch, a meltdown in the used car business in New Zealand two or three years back provided the first signs that the credit boom of recent
years was running out of steam.
The first three finance companies to go bust out of the two dozen or so that have now gone under were used car financiers.
Now the canker has spread to the new car industry. Not only is the bleak economic outlook crimping sales, which are down 13.4 per cent over the last year, data yesterday showed, but offshore events are having a direct effect on the industry here via the crucial finance channel.
Stock Takes understands that in most cases, the margin dealers make on sales mostly just covers their overheads, and they actually make their profit on brokerage charged on the finance customers take out to buy the vehicles.
In fact, most auto manufacturers also make most of their money from financing the purchase of their own vehicles. But in the last couple of weeks, General Motors' finance operation GMAC and GE Money have both withdrawn from "floor plan financing" here, accelerating a retreat that has been in place for the last year.
GE's oft cited advantage previously was its ability to raise funds offshore at competitive rates to lend here in New Zealand. It ain't so easy to raise money offshore right now. Meanwhile, GMAC's US parent, as reported, is close to death's door.
While the likes of UDC, Marac, and South Canterbury Finance continue to be active in car financing, credit criteria have tightened up considerably and any blemish on your credit record is likely to see an application for finance turned down.
On top of financing headaches, car dealers are facing higher costs for rent and staff. The falling kiwi dollar is set to increase the price of stock too.
Meanwhile, thanks to high fuel costs, consumers are favouring smaller vehicles rather than the larger ones that are more profitable for dealers.
Stephen Matthews of the Motor Trade Association tells Stock Takes he is aware of several motor vehicle dealer franchises that have gone out of business lately as a result of these pressures.
"We need to be realistic, it's an industry that's going through a very hard time."
CHICKENS COME HOME
Commonwealth Bank of Australia, the lucky country's largest, had for some time looked to be coping with the credit crunch well.
While the likes of National Australia Bank and ANZ owned up to big losses on investments in sub-prime type securities and exposure to some of the big recent corporate failures, CBA looked to have largely dodged the worst of it and as a result its shares generally fared better than those of its rivals.
But it appears the chickens are now coming home to roost for CBA and its chief executive, former ASB Bank and Air NZ boss Ralph Norris.
Norris told the bank's annual meeting this week that its exposure to collapsed groups ABC Learning Centres and Allco Finance Group, along with failed US investment bank Lehman Brothers, "will result in significantly higher first half provisions".
Analysts are now beginning to speculate that CBA, owner of ASB Bank in New Zealand, may have to tap investors or the market to bolster its capital position before too long.
Its Tier 1 capital is currently 7.5 per cent, having been lowered recently by the Australian Prudential Regulation Authority to reflect what Norris said was "a conservative hedging position put in place to protect our earnings against falling interest rates".
CBA's rivals have boosted their capital positions in recent weeks. ANZ and Westpac recently announced underwritten dividend reinvestment plans after recent results, while National Australia Bank this week raised $3 billion in an institutional share placement.
CBA closed down A$2.10 to A$33.
AND NOW THE AXE
As our own Reserve Bank pointed out this week in its Financial Stability Report, New Zealand's major banks and their Australian parents "have sufficient capital to withstand an increase in loan losses associated with an economic downturn".
They could also look to cut costs too, and according to recent reports the Australian financial sector, including the banks, is set to shed up to 10,000 jobs in response to the downturn.
Don't be surprised to see the New Zealand industry do the same.
CBA is reported to be preparing to cut hundreds of jobs as part of a cost-cutting exercise revealed last month and 2000 jobs are tipped to go as a result of the Westpac-St George bank merger.
This week BNZ's owner National Australia Bank cut 179 technology staff on top of the 264 jobs cuts earlier this year. Outside of the majors, struggling ABN AMRO is cutting 150 jobs as part of a review of the business by Royal Bank of Scotland.
ANZ National has already announced significant cuts to its workforce here and what StockTakes finds surprising is, given the major banks' tendency to move in lock step on other matters such as interest rates, that its rivals have not announced similar cuts.
StockTakes understands that following the ANZ National announcement, Westpac provided its New Zealand staff with an assurance it did not plan to follow suit. However, StockTakes understands there may well be potential for downsizing bank workforces simply by adopting a policy of attrition.
GO WITH THE FLOW
Biofuel from sewage company Aquaflow has just registered a prospectus for its capital raising.
The company is seeking to raise $20 million through the issue of 50c shares and will accept oversubscriptions up to a further $10 million. The cash raised will be used to help develop the Marlborough based company's technology which turns algae grown in sewage oxidation ponds into biofuel, producing large volumes of clean water in the process.
"We have a dual-edged opportunity here which is very significant and almost overwhelming in its scale," says chairman Barrie Leay, who is also a director of local wind turbine maker Windflow.
Aquaflow's shares will not be listed on any secondary market.
SHORT ... AND SWEET?
Destructive market manipulation method or super efficient price discovery mechanism? Whatever its pros and cons, short selling will once again be allowed on the ASX from Tuesday onwards for non financial stocks. The ban remains in place for financial stocks until late January.
Short selling hasn't been much of problem in New Zealand except for causing something of a headache for Craig Norgate and PGG Wrightson ahead of the abortive tilt at Silver Fern Farms.
It did, however, get a lot of folks' backs up on the other side of the Tasman over the past few months and arguably contributed to some of the steepest share price routs seen in a long time which helped precipitate the demise of a number of companies including Allco and ABC Learning.
Yesterday, it was reported the Australian Government is looking to legislate against "naked" short selling where the seller doesn't have an agreement in place to borrow the shares that it has sold.
Hedge fund dealers, who were regarded as some of the main culprits during the frenzy of short selling that led to the ban, are backing the move against naked shorts, but are urging the Government not to extend the bank on covered shorts. Assuming the ban is not extended, things could again get very interesting on the ASX next week.
PIZZA PROBLEMS HARD TO SWALLOW FOR RESTAURANT BRANDS
Restaurant Brands' half-year result last month showed Pizza Hut remains a problem for the company.
The company's net profit of $4.6 million was down 14.7 per cent on the previous period and was hit by an impairment charge of $2.5 million to the carrying value of goodwill for Pizza Hut.
A month before that the company released second-quarter data showing Pizza Hut sales in what is a very crowded market were down 15.9 per cent on the previous year.
"Sales for the brand remain of some concern and, as a result, there have been recent significant changes to the menu, marketing strategies and advertising agencies," the company said at the time.
In June, chairman Ted van Arkel described Pizza Hut as his company's "Achilles' heel" and the board would consider any actions that might end the drain by Pizza Hut on company profits including a sale.
Restaurant Brands is built on its franchise rights to three brands - KFC, Pizza Hut and Starbucks Coffee, owned by Yum! Brands in the United States, which takes a royalty on sales. It faces strict obligations to Yum! Foods and has to negotiate for the renewal of rights.
Restaurant Brands' agreement with Yum! on Pizza Hut runs out in 2010 but Stock Takes hears negotiations around the business have begun. KFC is the jewel in Restaurant Brands' crown and Stock Takes understands Yum! has used this fact as leverage in previous negotiations.
Restaurant Brands shares closed unchanged at 62c yesterday.
