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Moody’s Says Outlook For Australian Mortgage Backed Securities Stable
The collateral used to construct Australian residential and commercial mortgage backed securities has a stable outlook according to a credit ratings agency which made its assessment following Australian investment banking major Macquarie pricing a $750 million offer.
Global credit ratings agency Moody’s on Thursday said it would maintain its stable outlook for the performance of collateral used to construct Australian asset backed securities over the next 12 to 18 months.
The ratings agency also said that the surge in house prices would slow down, after data released by the Australian Bureau of Statistics suggested that house prices had spiked a stunning 18.4 per cent for the year ending June.
“We expect that the up-to-now strong appreciation in housing prices will slow down a bit, but undersupply — as well as net migration — will continue to support prices,” said Moody’s senior credit officer Richard Lorenzo.
Mr. Lorenzo added that the trend would more than likely limit actions on rating for RMBS.The uncertainties plaguing commercial real estate have declined over the past year, Moody’s said.
The ratings agencies outlook report came as Macquarie Securitisation today priced a $750m RMBS offer.
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CBA Widely Expected To Raise Interest Rates Independently
Australian banking major, CBA may become the first lender to raise its interest rates independently of the Reserve Bank of Australia.
In justifying its decision, the lender said that its net interest margin was under pressure from higher costs.
CBA, which this week reported the highest ever profits for an Australian bank was downgraded by many analysts after its $5.66 billion half year net profit was dissected by financial markets.
UBS downgraded the rating on CBA from a buy to neutral, while cuts to the earnings forecasts for the next two years were made by up to 4 per cent.
Speculation has also grown that the Australia’s largest lender by market capitalisation would be the first bank to raise its interest rates out of synch with that of the Australian central bank.
It is unlikely that any of Australia’s lenders will make any changes to interest rates prior to the Federal election which is scheduled to take place on August 21st.
Ralph Norris CBA’s chief executive says that the lenders cost of funding an average mortgage is likely to increase by at least 40 basis points over the next year, which in turn would increase the pressure on the lenders profit margin.
The pressure intensified in the second half of CBA’s previous financial years when margins fell from 2.18 to 2.08 per cent primarily because of higher funding costs and retail deposit rates.
Craig Williams, banking analyst with Citigroup Financial Markets says that whilst a rate hike not in synch with the central bank would be unpopular with the public, he believes that the lenders with the largest mortgage portfolios would feel the most pressure to raise rates as their margins were squeezed.
Westpac has a $250 billion mortgage book, including St George, while CBA’s is worth about $290 billion.
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Australian Business Leaders Increasingly Less Confident
Australian business leaders are less optimistic about the country being able to meet the challenge of an ageing population and in particular superannuation according to the results of a survey.
The survey results suggest that less than half of all business leaders were less confident, and that only 44 per cent of chief executives expressed confidence in the Australian government’s policy, with many of those worried that the negative effects may be greater than expected.
The 2010 CEO Survey was conducted by the Financial Services Council and PricewaterhouseCoopers (PWC).
Andrew Wilson of PWC says that by the year 2050, nearly one out of every five Australians would be over 65 and many would have to begin drawing on retirement savings.
“This may have far-reaching implications on the economy as the amount of money flowing out of super funds begins to exceed the amount of money flowing into them,” he said.
According to Mr. Wilson, the beginnings of a draw down on retirement savings may have a marked impact on equity markets and economic growth, as it would signal the start of a trend which would see investors shift their assets from higher risk long term investments, into shorter term more conservative ones.
Many business leaders surveyed said that an increase in the mandatory superannuation guarantee, and a widening of the availability of advice would be the best way to improve the adequacy of retirement savings.
Nearly 95 per cent of those polled felt a lack of confidence in Australia’s approach to infrastructure, saying they worried over the challenge that would exist in funding large scale infrastructure projects.
“It is clear that if Australia continues with its current approach to funding we will fall well short of meeting our infrastructure needs both now and into the future,” Financial Services Council chief executive John Brogden said.
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War of Words Erupts Between CBA and NAB
A war of words has erupted between two of the big four lenders, with Ralph Norris chief executive of CBA, lashing out at NAB’s claims that the lender is making super profits in mortgage lending.
The banking oligopoly in Australia is normally a cozy affair, and Mr. Norris criticizing a rival is indeed surprising.
Mr. Norris said that NAB arguing that CBA was hurting the economy because it was neglecting the business sector preferring to concentrate on less risky mortgage lending was “rubbish”
“I think the real issue is that we have a bank (NAB) that has performed poorly for many years and missed out on an opportunity when the mortgage market opened up,” Mr Norris said in an exclusive interview with The Australian. “Now they’re blaming everyone but themselves.”
CBA and rival Westpac took advantage of the historic opportunity that the financial crisis presented to establish their dominance in mortgage lending.
The two lenders grew their mortgage books organically by specifically targeting the influx of first time home buyers, which was brought about by the governments fiscal stimulus.
The two lenders increased their market share through acquisition, with CBA acquiring Bankwest and Westpac swallowing St. George.
Mr. Norris’s comments suggest that the industry has now become openly hostile towards NAB, as it seeks to establish itself as a trusted community minded lender.
The war of words erupted in June, when Mark Joiner, NAB’s finance director suggested that the banking industry was earning super profits on its mortgage book.
The allegation came at a very sensitive moment, when the resource industry was under pressure by former Prime Minister Kevin Rudd’s proposal that it be charged a super profits tax, leaving other industries feeling vulnerable and wondering whether they too would be targeted with such a tax.
Mr. Joiner said that the Basel II agreement which governs banking capital adequacy, meant that the amount required to be held against a mortgage halved, meaning that the return on equity for such a loan doubled to 45 per cent.
Mr. Joiner then drew attention to CBA and Westpac and their bias towards mortgage lending, with home loans accounting for more than 60 per cent of their balance sheet, compared to less than 50 per cent for NAB.
“Australia should have a balanced economy; not a big skew to mortgage or business lending,” Mr. Joiner told The Australian.
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Australian Economy Experiencing Robust Growth
No matter who ends up winning the upcoming Australian general election, the winner will undoubtedly have to take control of an economy growing at an above trend rate of 3.5 per cent.
According to the Westpac-Melbourne Institute leading index of economic activity which was released on Wednesday, the annualized growth rate during may was 6.7 per cent, much higher than the long term trend rate of 3.0 per cent.
The index is an indicator of the likely rate of economic activity for between three to nine months into the future.
Bill Evans chief economist of Westpac says that though there have been signs that the index has peaked, the index still suggests that there is a stronger outlook for growth during the near term than he was expecting.
Westpac is expecting an annualised growth pace of 3.5 per cent during the second half of 2010, slightly above trend of 3.25 per cent.
Despite the strong indicator, May was the second consecutive month where the rate of growth in the index had slowed.
“In absolute terms the growth rate remains remarkably high but it appears that growth in the index has peaked,” Mr Evans said.
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RBA Undecided On Further Interest Rate Hikes
The Australian central bank has signalled that interest rates may be held steady over the next few months, if inflation data which is to be released next week is in line with forecasts.
“The important question for the board at its next meeting would be whether the new information materially changed the medium-term outlook for inflation,” Australia’s Reserve Bank said in the minutes of its policy meeting of July 6, when it left rates unchanged.
The Reserve Bank of Australia (RBA) believes that the latest inflation data which is due to be released next Wednesday is likely to exhibit further moderation, but the RBA remains hawkish due to the fact that it expects the inflation rate was likely to remain at the upper end of its preferred 2-3 per cent target range.
The central bank at its most recent policy meeting held on July 6th left interest rates unchanged at 4.5 per cent, which was the second consecutive month of leaving them unchanged, after six consecutive rate hikes between October 2009 and May 2010.
The central bank cited previous hefty rate hikes had “afforded flexibility to maintain steady settings in the face of increased international uncertainty”.
The RBA increasingly appears to be in a quandary over the direction of monetary policy, as volatile financial markets make a strong case against further monetary tightening, whilst the Australian economies continues to appear robust, commodity prices are strong, and spare capacity is scarce.
The board minutes said some recent moderation in Asian growth was desirable but there is likely to be some uncertainty in the near term about the extent of the cooling.
The prospect for Australia’s largest trading partner is largely centred around growth for the next few years the RBA said, whilst the labour market continues to maintain its strength, though according to the central bank, according to its data, the housing market has cooled.
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CBA Says Australian Consumer Spending Weak
A new report authored by Commonwealth Bank suggests that whilst the job market is stronger, consumer spending is at its weakest level since the height of the global financial crisis.
The Commonwealth Bank Business Sales Indicator (BSI) fell by 0.3 per cent in trend terms in June after a similar decline in May. The decline over the last quarter is the worst result since the start of 2008.
Craig James, chief economist at CommSec, who wrote the BSI report, suggests that the chief reasons behind the decline were higher interest, doubts over the state of the global economy, rising utility charges and council rates, all of which were weighing on consumer minds.
“While we are hopeful about a lift in spending later in the year, future Reserve Bank (of Australia) rate decisions will be pivotal. Consumers feel as (if) they are under siege at present and they need a period of interest rate stability so they can focus on both the positive and negative influences on the household budget.” Mr. James wrote in the report on Tuesday.
During the last year in trend terms, the BSI has risen just 0.7 per cent, registering its slowest growth in 17 months.
The trend pace of growth has consistently slowed over the past seven months, exactly tracking the slowdown in the Australian Bureau of Statistics retail trade series, Mr James said.
In trend terms, the weakest sectors during June were telephone order providers, mail order, retail stores, and automobiles and vehicles.
The strongest gains registered in June in annual terms were personal service providers, amusement and entertainment.
The Commonwealth BSI is obtained by tracking the value of credit and debit card transactions processed through CBA merchant facilities.
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GE Capital Say Smaller Australian Lenders Still Find Funding Difficult
Non bank financial company GE Capital says raising finance for smaller lenders continues to remain difficult for smaller lenders when compared to the major banks.
Skander Malcolm who runs GE Capital in Australia says that because the banks have large depositor bases they were able to fund raise more effectively than smaller lenders such as GE Money.
“We’re trying to access capital markets, they are accessing capital markets as well. Certainly, it’s a lot easier for them because they have a whole lot of deposits on hand.” Mr. Malcolm told Sky Business News.
Mr. Malcolm added that the European Sovereign Debt Crisis had had an impact on the cost of funding.
“But from our perspective, we’re well funded through this year and into next (year), so we’re pretty comfortable with where we are. But for some of the organisations out there trying to raise funds, it’s not exactly a liquid market, so there are certainly challenges still out there.”
Mr. Malcolm stressed that GE Capital was not aiming to compete with the major lenders, preferring instead to maintain a specialist position.
“When we target specialist segments, particularly in the retail side but also in the commercial side, then we compete successfully. We generate returns that are anywhere between 20 and 40 per cent better than major banks, and that’s because we stick to segments that we know and understand.” he said.
During the global financial crisis GE Capital exited the home and car loan segments, because it was felt that the company would find it tough to fund those loans.
“Our funding requirements are a lot easier now, having made those decisions, We have no plans to move back into mortgage or auto.” Mr. Malcolm said.
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CBA Says Bank Funding Costs To Head Higher
New regulations and poor sentiment could well push borrowing costs for banks even higher in the next few months. However according to CBA treasurer Lyn Cobley, the outcome would depend on the results of European bank stress tests.
Ms. Cobley who acts as treasurer for the largest bank in Australia, as measured by market capitalisation holds views that are largely similar to wider sentiments felt by her peers and investors, many of whom also believe that wholesale borrowing costs are likely to head higher to begin with, before receding.
Global investors of late have made demands for higher risk premia in response to the European sovereign default crisis, and almost everyone including Australia’s highest rated lenders have been affected, despite their AA ratings.
CBA says it is well placed to handle volatility in funding costs since it was well ahead of its funding requirements, but added that a heavy fund raising schedule for both governments and corporations expected to take place during the third and fourth quarters would also take its toll on the market Ms. Cobley said.
Ms. Cobley declined to comment on the possibility that higher borrowing costs would mean that lenders would be forced to raise their interest rates outside official moves by the central bank.
The problems affecting the European Union are likely to negatively impact pricing on local bank debt, despite the lack of exposure and solid fundamentals.
“We think there is a possibility spreads will go wider than they are now. Australian banks have been caught up by perceived increased risk in the market generally. Do I think it’s fair pricing? I don’t,” Ms Cobley said.
New global rules on the capital requirements and holding of liquid assets were also another area banks were feeling pressure. Lenders will be required to hold more liquid assets on their balance sheet whilst boosting capital buffers.
“It’s inevitable our liquid assets holdings will get larger and our costs will go up as a result of that,” Ms Cobley said. Australia’s four largest banks have a collective annual funding task of $140 billion, with CBA’s share $40bn to $45bn. About half is sourced from deposits.
Because of a limited domestic investor base, Australia’s banks borrow heavily offshore.
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Half Of All Australian Households Worry About Interest Rate Rises
Nearly half of all Australian households say they worry over the threat of looming interest rate rises, but only 20 per cent say they expect to have to carry increased debt levels in the next few months.
According to the results of the latest survey by Dun & Bradstreet, which polled consumer expectations across 1,205 individuals in Australia, nearly half or 49 per cent said they believed that interest rates would rise further, and the hikes would dent their finances.
The credit reporting agency completed the survey in June, one month after the Reserve Bank of Australia (RBA) lifted the official cash rate to 4.5 per cent, its sixth rise in eight months.
Households that include dependent children will feel more financial stress, with 55 per cent of respondents who have children, saying that the impact of rate rises would negatively affect their finances, compared with 43 per cent of households that do not have children.
The survey suggested that the stress from rate hikes would only translate into additional debt for just 20 per cent of households.
According to the survey, which examined future spending in September, nearly half of all individuals polled aged under 50 planned to use credit to pay for expenses over the period, whilst only a quarter of all Australians aged over 50 said they intended to do the same.
The RBA’s credit and charge card statistics for May 2010 showed the average credit card balance reached $3,248 in May, an increase of five per cent in 12 months.
