money-au.com.au » Australian Economy

War of Words Erupts Between CBA and NAB

Sharat — Fri, 23 Jul 2010 04:13:50 +0000

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

Sharat — Wed, 21 Jul 2010 02:48:40 +0000

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

Sharat — Tue, 20 Jul 2010 05:28:33 +0000

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

Sharat — Tue, 20 Jul 2010 05:27:17 +0000

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

Sharat — Tue, 20 Jul 2010 05:06:19 +0000

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

Sharat — Thu, 15 Jul 2010 05:25:04 +0000

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

Sharat — Wed, 14 Jul 2010 06:26:13 +0000

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.

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NAB Strategy Of Low Mortgage Interest Rates Paying Off

Sharat — Wed, 14 Jul 2010 06:20:22 +0000

Australian banking major National Australia Bank (NAB) embarked on a strategy this year of discounting its standard variable rate, is now starting to reap the rewards of the move, as it acquires a larger share of the home loan market.

The number of home loans underwritten by Australia’s fourth largest lender in the last four months rose at its fastest pace in the last half decade. The bank adopted an ambitious plan in 2010 to keep its standard variable rate, now 7.24 per cent, significantly below the levels of its major rivals.

The lenders mortgage book is now estimated at $144.39 billion, and is now the third largest loan portfolio amongst the big four lenders, ahead of rival ANZ and is by far the fastest growing portfolio amongst the big four.

According to data from the Australian Prudential and Regulatory Authority (APRA), NAB managed to increase its market share of the mortgage lending market by six basis points at the expense of larger rivals Westpac and CBA.

The most recent data available is from the month of May, which shows that CBA, Australia’s largest mortgage lender lost four basis points of market share, whilst Westpac’s share fell by 2 basis points.

Over the last quarter, NAB’s mortgage book grew by 14 basis points, whilst CBA’s fell by nine basis points.

NAB also managed to outpace its two larger competitors in the total number of home loans written in May and during the preceding quarter.

NAB’s volume of mortgages rose by 1.3 per cent in May and 3.5 per cent over the quarter.

Lisa Gray, NAB’s group executive responsible for personal banking attributed the robust growth figures to the lender offering the lowest standard variable rate in the market over the last year.

“We started 12 months ago to ensure that our customers received a fair exchange of value,” “For the last four months we outgrew financial system in home lending. It’s the first time we’ve had four consecutive months of growth above system since the middle of 2005.” Ms Gray told The Australian.

NAB attracted headlines in December last year when it was the only major to pass on just the RBA’s official increase of 25 basis points whilst its rivals all increased their rates by between 35 to 45 basis points.

Ms Gray hailed her bank’s low-rate strategy: “We’re seeing more home loan customers join NAB than we’ve seen in years. Our focus on providing a better deal has not only resulted in customer retention and growth; we’re also attracting a higher quality customer portfolio.”

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Pimco Says Australia Is A Top Investment Destination

Sharat — Tue, 13 Jul 2010 04:14:43 +0000

One of the largest global managers of fixed income securities, Pimco, says that Australia now offers the most investment opportunities in the developed world.

During one of its regular updates to the global bond markets, David Fisher who runs global product management for Pimco also said there was a “new normal environment”, which looked much different to that of previous decades.

Despite the volatility in Australia caused by former Prime Minister Kevin Rudd’s proposal to tax mining companies, a cooling China and debt concerns in Europe, Australia remains one of the top investment destinations of Pimco.

“Starting with a ladder, we would say those countries with solid fundamentals include in the developed world places like Canada and Australia, not only because they came into the crisis with better conditions … but also because they’re very well exposed to the growth dynamics in the emerging world and particularly through the channel of commodity prices,” Mr. Fisher.

Mr. Fisher also warned that there were risks posed by unrealistic expectations and over priced companies as both America and Australia both enter into critical reporting periods.

Pimco chief Bill Gross surprised global markets when he announced the asset manager had begun investing in equities.

“While we think bonds are priced for a depression, we think that equities are still priced for something more akin to the ‘old normal’ than the ‘new normal’, he said. We think that there’s still some scope for compression in PE ratios and we think that optimism over profit recovery is probably a little bit exaggerated in this environment of very, very weak growth, outside of a few countries such as Australia and Canada and the emerging world. So, on a relative basis, we would say that the returns in global bonds, while not spectacular, are certainly attractive.”

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NAB Likely To Be First Lender To Raise Rates After Election

Sharat — Tue, 13 Jul 2010 04:06:57 +0000

A research analyst with Macquarie Equities Research says he believes that Australian banking major National Australia Bank will be the first lender to raise its rates after the election.

According to The Australian, banks will likely raise their interest rates prior to the Federal election, but according to Macquarie’s Michael Wiblin, once the election is over, interest rates will be fair game.

“The sensitivity around mortgage repricing over the last six months is due to the [forthcoming] election,” Mr. Wiblin said.

Mr. Wiblin says he thinks that NAB would be the first of the four major lenders to raise its rates, because its current standard variable rate of 7.24 per cent was currently the lowest amongst the Big Four by 12 basis points

Wiblin predicted that the NAB might the first of the big four banks to lift rates because its 7.24 percent standard variable rate was the lowest of its major competitors by 12 basis points.

“We do not comment on speculation by others about interest rates. What we would do is ask people to consider our track record. NAB was the only bank not to lift its rates above the [Reserve Bank of Australia] move in December 2009.” an NAB spokeswoman was quoted by the Australian.

The Macquarie report also said that lenders felt quite justified in any decision to reprice their mortgages, in the wake of continuously rising funding costs, and expanding mortgage books.

“An ability to reprice mortgages is set to continue for at least another six weeks, given the election,” Wiblin told the Sydney Morning Herald.

“However the unintended consequences of this situation will only get worse, with no repricing and increasing funding costs.”

In June home owners were granted a break from rising mortgage payments after the RBA left interest rates on hold at 4.5 percent.

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