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Australian Banks Continue To Battle For Deposits By Offering High Introductory Rates
Australia’s largest banks are using high introductory online savings rates to attract retail deposits and expand their deposit bases. Despite the high introductory rates, the lenders later aggressively cut back their deposit rates in order to preserve their profit margins.
The investment bank Macquarie conducted an analysis of the online savings market which found that the big four Australian lenders, as well as some international rivals were offering introductory rates that were as much as 200 basis points higher than the 4.5 per cent official cash rate.
The study found however that those rates were aggressively cut back within four to six months, bringing them in line or just higher than benchmark interest rates.
Virgin Money currently offers the highest savings rate in the market at 6.75 per cent, followed by UBank offering 6.51 per cent, Citbank at 6.45 per cent.
Three of the majors, the CBA, NAB and Westpac, offer 6 per cent, while ANZ lags the field at 5.25 per cent. The headline rates of the majors are 129 basis points above the 90-day bank bill.
The rates which seem quite attractive to begin with are rolled back within the first three months.
According to Craig Turton, an analyst with Macquarie, lenders began the trend of raising their online rates in tandem with official interest rate hikes at the end of 2009.
“In mid 2008, when the cash rate was 3 per cent, term deposits grew much more rapidly than savings account rates because of 200 basis points difference between headline rates. The increased competition in the online market coincided with six increases in the cash rate. The cash rate increases flattened the yield curve, narrowed the difference between online savings and term-deposit headline rates and stemmed the flow to term deposits.” Mr. Turton said.
Headline term deposit rates continue to remain high, with one and three-year deposit accounts still the most expensive source of retail funding for the major banks. The one and three-year term deposit rates are up to 250 basis points above the bank bill rate.
Gail Kelly, chief executive of Westpac last week said that the lender would not engage in an online savings war with her other Big four rivals. Westpac has one of the most aggressively priced term deposits in the market.
The research from Macquarie also suggests that that the margin pressure from higher retail deposit rates would not have as large an impact as expected for the banks with greater residential lending market shares.
Previously the assumption had been that lenders which were weighted more towards institutional lending would be able to offset the costs of higher deposit rates, by raising business lending rates.
“The banks with more term-deposit funding on the liability side and mortgages on the lending side should fare better than those banks with proportionately larger institutional lending books,” he said. “The spreads on new institutional loans are now falling due to two emerging sources of competition.”Mr. Turton said
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Research Firm Says ANZ Offers Best Value For Small Business
Australian banking major ANZ, has been named by a financial research firm as the lender which provided the best value banking service for small business.
Despite the accolade, ANZ has not managed to convince all the decision makers in the business sector, and still lags behind rivals.
Canstar in issuing the award said certain product features that matter a great deal to small business provided by ANZ including credit facilities and loans.
But this has yet to translate into higher customer satisfaction levels with the bank.
On Tuesday, another research firm, DBM Consultants said CBA scored the highest, when ranked for satisfactions amongst business decision makers, who were asked to consider services provided by the big four lenders.
DBM’s conclusions were drawn from a six month rolling survey of 7,126 businesses to July.
ANZ was ranked last behind CBA and National Australia Bank (NAB).
ANZ ranked third for customer satisfaction among decision makers in micro sized businesses that have a turnover of less than $1 million.
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JP Morgan To Cease Proprietary Trading
Global banking giant JP Morgan has apparently decided to close down its proprietary trading operations, sources from within the bank say. According to an unnamed source quoted by Dow Jones, JP Morgan has issued notice to approximately 20 proprietary traders that trade commodities.
JP Morgan has never had a huge focus on proprietary trading, and it’s prop trading desks have tended to be small. Nevertheless those desks have been affected by regulatory reform and in particular the Volcker Rule, which forbids banks from proprietary trading, proprietary investments in hedge funds and private equity.
According to the source, the lender has decided to exit the proprietary trading business altogether, and has given notice to its commodities proprietary trading desk which is based in London, and one of the largest proprietary desks at JP Morgan.
Last year Citigroup divested Phibro, its commodities trading business, which also ran its own proprietary positions.
Other companies including Goldman Sachs are still mulling their options. Goldman in particular has a very large proprietary operation, and is considering a number of options, the most radical of which include transferring them to its asset management business and spinning the entire unit of as a new listed entity.
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Australians Believe Not Enough Competition In Banking
A survey undertaken by Australian wealth manager AMP suggests that nearly 78 per cent of all Australians believe that acquisitions by banks should be restricted.
It is no coincidence that the survey results were released on the eve of the ruling by the competition regulator on National Australia Bank’s proposed acquisition of Axa Asia Pacific Holdings.
According to the AMP survey, an overwhelming majority of 71 per cent of people polled say they believe that there needs to be increased competition within the Australian financial services sector.
AMP is a rival bidder for AXA Asia Pacific Holdings, and is in a holding pattern until the ACCC rules on competition issues regarding NAB’s on September 9th.
AMP said it released the results of the survey this week, despite the survey being conducted in March because it felt the results were timely given the uncertainty surrounding the outcome of the federal election.
“We’re looking at how we can grow AMP Bank, and we’ve issued this now because it’s a tumultuous times in politics,” and AMP spokeswoman said.
The survey results also suggest that many Australians felt that the federal government is too soft on the big four banks. 68 per cent of those polled say they would like to see increased regulation of the industry, whilst half of those polled believe that M&A activity within banking has resulted in less choice for consumers.
Those kind of survey results should come as no surprise given that concentration of market share amongst the big four lenders has increased given the recent spate of mergers and acquisitions. Westpac acquired St George in 2008, whilst CBA acquired Bankwest.
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APRA Issues Stern Warning To Australian Deposit Taking Institutions
The Australian Prudential Regulation Authority, the country’s banking regulator has issued a stern warning to Australian deposit taking institutions.
APRA is unhappy with the way some firms account for and treat subordinated tranches of residential mortgage-backed securities, warning that some firms may have to change the way they do so.
The banking regulator on Thursday re-affirmed the standards used for capital treatment of RMBS, but as it moved to do so warned some mortgage lenders they would have to change their ways.
In the wake of the global financial crisis, some deposit taking institutions in Australia have been able to divest senior tranches of Residential Mortgage Backed Securities at a significantly improved price, but have been forced to hold on to subordinated tranches on their books.
According to APRA, some deposit-taking institutions “have concluded appropriately that such a structure fails to meet the fundamental requirement for significant credit risk transfer and have retained the requisite risk assets and capital requirements on their balance sheets. In other cases, however, . . . regulatory capital relief for credit risk has been claimed inappropriately.”
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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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Suncorp Metway Profits Jump By More Than Double
Banc-assurance group Suncorp Metway, following the lead set by the big four banking groups, posted a full year profit result that grew by more than double from the previous year.
Suncorp says it is making good progress recovering from challenges presented by the global financial crisis.
Net profit for the year ending June 30th leapt to $780 million, more than double the $348 million the company made in the previous year, whilst revenue at the group rose to $15.7 billion, up from $14.2 billion last year.
“Suncorp is making good progress in recovering from the challenges that became apparent during the global financial crisis,” chief executive Patrick Snowball said.
Suncorp’s banking division posted a pre tax net profit of $78 million for the year, clearly benefiting for having delineated its lending portfolios into core and non core lines.
The banc-assurers general insurance division, which runs brands such as GIO and AAMI generated a pre-tax profit of $774 million with gross written premium rising 3.1 per cent for the year to $7 billion. Net claims expenses were stable at $4.6 billion.
Suncorp’s life insurance divisions generated pre-tax profits of $310 million, with underlying profit rising 6.7 per cent at 192 million.
Suncorp-Metway said it would pay a final dividend of 20 cents a share, steady on year.
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Technical Problem Results In ANZ Machine Outage
A technical problem resulted in thousands of in store POS and credit card machines issued by ANZ to stop functioning throughout Australia for several hours.
ANZ’s ability to handle and process credit card and POS transactions came to a halt as a result of the system outage for several hours on Tuesday according to ANZ spokesperson Stephen Ries.
Mr. Ries said a “high percentage” of machines nationwide were affected, but customers could still access funds through ATMs and ANZ branches.
ANZ has apologized for the inconvenience and says it will be looking into the exact cause behind the outage.
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Westpac Delivers Strong Results
Gail Kelly, chief executive of Australian banking major Westpac is the latest banking chief to warn that the sector faces significant revenue head winds, that will slow their growth in earnings.
Westpac, which reported earnings on Monday, posted a $1.4 billion underlying net profit for the quarter ending June, representing a leap of 27 per cent.
The lender, like its peers, benefited from a sharp decline in provisions for bad and doubtful debt, but despite its success, the Sydney based bank followed the larger trend that has emerged amongst its peers, with revenues, and net interest margins under siege.
Westpac’s quarterly revenue fell by 1 per cent, with net interest margins falling by two basis points as a result of higher funding costs, and volatility in financial markets.
“This has been a solid quarter and I’m happy with the way that we are dealing with a challenging environment,” Mrs Kelly said.
Mrs. Kelly joined the chorus of banking chiefs issuing her own warning that there is fresh pressure on revenue as a result of more expensive funding costs, and intense competition for retail deposits.
“We have had a few revenue headwinds — the whole sector has seen some of them flow through. The first one was the reduction in exception fees, but that was a headwind dealt with at the start of 2010. But there are going to be further revenue headwinds as the average cost of funds goes up — there’s a number of moving parts.” Mrs. Kelly said.
The Westpac chief said the declines in revenue may intensify the lower lending and credit growth outlook.
During the quarter, Westpac increased lending to Australian households and small businesses by an additional $7 billion, whilst increasing its deposit base by $4 billion.
Mrs. Kelly added that the lender has experienced a sharp rise in the number of customers taking advantage of the lenders online deposit accounts, instead of traditional term deposits. Mrs. Kelly said that competition between the major lender remained intense.
“There are always waves of particular intensity around pricing,” she said. “We saw a wave of intensity at the start of the calendar year, then it waned mid-year and now it’s starting to pick up. The online pricing out there is very, very competitive and that creates a negative impact for us.”
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ANZ Chief Issues Stark Warning On Interest Rates
Mike Smith, chief executive of Australian banking major ANZ has issued a stark warning, suggesting that world’s bank will be forced to alter their business model in response to the “permanently” higher cost of banking.
Mr. Smith issued the warning whilst unveiling the latest set of ANZ results last week. ANZ’s third quarter underlying profits leapt 37 per cent.
Despite the great performance, Mr. Smith added a note of caution, saying that the costs of wholesale funding were now a permanent feature of banking a result of the global financial crisis.
“We have to face up to the fact that banks now have permanently higher costs of doing business, these include continuing pressures on wholesale funding costs and at the same time rates for deposits have never been higher compared to short-term wholesale rates. We also have to carry significant costs associated with the new international capital and liquidity requirements. The result is we simply to have think differently about our business. We need to change, we need to streamline our structures and do things in new and different ways.” he said.
Mr. Smith’s comments immediately started speculation that Australian lenders would raise their interest rates once the results of the election became clear.
ANZ’s warning followed similar comments from NAB and CBA, both of whom say that debt that have issued which is about to mature will have to be rolled over with more expensive current funding.
Analysts believe that lenders would increasingly try to shift the burden of higher funding costs on to their customers, by increasing mortgage and consumer lending rates, as well as increasing interest rates on business loans.
