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ANZ Reported To Seek Acquisition In Japan
After US Private equity player Lone Star funds put up its distressed Japanese lender Tokyo Star Bank for sale last month, Australian banking major ANZ is reportedly interested in acquiring a strategic stake in the troubled lender.
Market watchers believe that it is more likely that ANZ will seek to acquire a stake in TSB as opposed to healthier rival Aozora Bank, which according to a report in The Australian Financial Review is also a target for Melbourne based ANZ.
ANZ remains eager to raise its profile after it failed to acquire a controlling interest in another Lone Star Funds portfolio company Korea Exchange Bank last year.
Earlier in the year ANZ chief Mike Smith said that the “massive liquidity pools” in Japan, made acquiring a lender in that market an attractive option.
ANZ sought to acquire a 51 per cent stake in KEB, however the lender was outbid by Hana Financial Group, another Korean financial services firm, it is thought that its attempt to acquire a strategic stake in a Japanese lender may be more fruitful.
In July, Lone Star began preparing to divest its stake in TSB, and asked a number of investment banks to put forward proposals for a potential sale.
TSB is a mid-sized lender with a 31 strong branch network in the country and has reported two consecutive full year losses. In its most recent full year the lender reported a loss of $55.3 million for the year ending 31 March 2011.
The mid-sized commercial bank has 31 branches in Japan and has notched up two years of annual losses which widened to 4.5 billion yen ($55.3 million) in the 12 months to March 31, 2011.
Creditors of TSB, which include Lone Star, Credit Agricole, Aozora and Shinsei Bank’s took control of the lender when TSB defaulted on an interest obligation.
Analysts do not believe that ANZ will aggressively bid for the stake that is put up for sale, unless the asset is priced cheaply, nor do they expect ANZ to seek 100 per cent control of the lender. ANZ is more likely to seek to obtain a strategic stake in the lender, which is in line with its previous acquisitions in Asia.
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IAG Buys Stake In Chinese Insurer
Australian insurance major IAG is diversifying its earnings base by taking a strategic stake in Chinese general insurance company Bohai Property Insurance. IAG will pay $100 million for a 20 per cent stake in the property and casualty insurer.
The company is seeking to increase the proportion of revenue that is generated from Asia according to chief executive Mike Wilkins.
“Bohai Insurance is an attractive partner and provides an exciting opportunity for us to meet our long-held ambition of entering China’s general insurance market,” Mr Wilkins said.
“Once the partnership is complete, IAG will have a foothold in the two fastest-growing economies in Asia and most populous countries in the world – China and India.
“Together with our established businesses in Malaysia and Thailand, this puts the group’s Asia division well on track to meet its target of contributing 10 per cent of IAG’s gross written premium by 2016, on a proportional basis.”
Bohai is mainly an insurer of motor vehicles and sell is products through a direct branch network that is 265 strong based in cities and provinces, as well as through a network of agents.
The company was established as recently as 2005 and does a gross written premium on an annual basis of $200 million. The deal values the business at $500 million.
Craig Emerson, Minister for Federal Trade says the transaction represents the future of the commercial relationship between Australia and China.
“Australia has been a reliable supplier of China’s huge mineral and energy needs for decades now,” Dr Emerson said. “This will not change. But as China transforms its economy towards domestic consumption, Australian companies are being offered a panoply of new investment opportunities.
“Today’s agreement between IAG and Bohai is a pioneer of this diversifying economy,” he said.
NAB Index Reveals Broader Australian Economy Merely Limping Along
The results of the most recent monthly business survey conducted by Australian banking major NAB makes it clear that the economy is operating at two speeds, with the mining sector leaving the rest of the economy in its wake.
Overall, though, the economy is merely limping by.
Apart from a dip during the first couple of months, due to natural disasters hitting eastern Australia, the NAB index of business conditions hit its lowest level in May since early 2009, when the economy was still dealing with the aftermath of the global financial crisis.
The index is produced based on a number of measures including employment, profitability and trading conditions.
During May, all three were either at or very near their lowest levels for the last couple of years, excluding the period at the start of the year. However it would be inaccurate to describe the performance of various sectors as being far from even.
But the performance between sectors is far from even.
“Conditions in retail, manufacturing, wholesale and construction are still very poor, while mining conditions outperformed all other industries” said NAB.
The economy is being weighed down by a number of factors including historically higher than average interest rates, property and equity markets which are stagnant, a fiscal policy which is tight, the strong domestic currency, caution being expressed by both households and businesses, tighter lending criteria being imposed by banks, rising energy prices, the Japanese Tsunami and a round of tightening taking place in Asia.
Bubbling underneath all of that. is fears that the property market in China is overextended and may cause a crash in that country’s economy, and worries over whether the debt crisis in Europe will continue to worsen before it gets any better.
Economists believe however that many of those factors will be mitigated by the effects of the long and protracted boom in mining, though economists fail to agree on the actual timing of any recovery in the broader economy.
Most economists expect at least one rise this year. The NAB’s economists reiterated their forecast of two increases in the cash rate by the end of 2011 in a note attached to the results of the index.
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Lack Of Arrears At NAB Make Investors Comfortable
Lisa Gray, the boss of personal banking at Australian banking major NAB says that despite offering the lowest standard variable home loan rate in the industry, the lender remains immune to rising level of arrears that seems to be affecting the mortgage books of its big four rivals.
Ms Gray said she was still “very comfortable” with arrears rates in the 2009 and 2010 mortgage vintages.
“They’re still performing where we’d expect them to be, and I put that down to a few things,” she said. “First, we have risk-based pricing, so applications with a loan-to-valuation (LVR) of less than 75 are well priced and applications above 85 per cent attract a slightly higher price, which means we get a higher proportion of lower-risk business.”
NAB also benefits from the application of a consistent approach to how it prices its home loans, whilst other banks tend to adjust their rates depending on the customer.
“We’re finding that many customers are asking why they had to threaten to leave before they were offered a better deal,” Ms Gray said.
During last month’s profit reporting season of the big four bank, NAB was the only lender who said it had not experience a rising level of delinquencies.
One of the reasons behind this is NAB was still nursing itself back to health at a time when its rivals were benefiting from strong demand driven by the government assisted first home buyer market which existed in 2008, as part of the response to the financial crisis. Arrears tend to culminate in a peak roughly a couple of years after the loan is drawn down.
In its assessment of the first half year result UBS said that NAB was widely regarded as the banking industry’s strongest, and investors were exceedingly comfortable holding the bank’s shares.
Analyst Jonathan Mott said weakening housing finance approvals, and the “psychological dampener” of falling house prices, could not only lift arrears levels, but also provisioning and losses.
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Big Banks Need To Do More For Green Energy Project Finance
There is a simple logic that underpins investment. Risk versus reward. Nobody will invest in something if they do not see the potential for a return and they expect a greater return for a greater risk. Simple. So how does this relate to coal power stations in the current climate?
Investment in infrastructure seems to be a safe and long-term bet – this has long been the case for power infrastructure. Small risk but consistent reward. It’s not anymore. Despite the noise in the public sphere doubting climate change science, there is little doubt among the scientific community and most governments know that it’s only a matter of time before they need to act on this issue. This, on top of the awareness that fossil fuels are finite resources, has led to most investors clocking on to the reality that investment in non-renewable power sources is a relatively short term bet. Whichever way you think, there is a foreseeable point at which a coal burning power plant becomes worthless. If we can’t burn coal anymore or if there’s no coal to burn, that multi-billion dollar investment is worth only the sum of its scrap value. The end of coal is still down the road but it is signposted and it’s coming up.
Energy costs are rising and the decisions being made about Australia’s energy future have more resonance today than they have in the past. While climate policies in Australia remain unresolved, there is uncertainty about the future of the Australian energy industry and investment has been stifled. What is clear around the world, however, is that investing in renewable energy projects has become a better investment than traditional high pollutant power sources.
Yet in Australia, plans still exist to build 11 new coal power stations around the nation. The recent approval of the new brown coal station in the Latrobe valley is controversial for a number of reasons – but not least for the admission of Australia’s big four banks that they won’t finance the project. Greenpeace’s 2010 Pillars of Pollution report brought substantive focus onto this issue and the banks’ role in the climate crisis.
Westpac responded quickly to the issue and have since released a new policy on “financing sustainable energy” last year. The reform of their lending policy aims to address public concerns that its sustainability rhetoric doesn’t match its lending practices. ANZ has also committed to an increased level of funding of renewable projects.
Despite their policy shifts and their welcomed refusal to fund the Latrobe station, none of the big four have ruled out future funding of new coal power projects.
ANZ, Westpac and the NAB have been intent on marketing their sustainability efforts. But ANZ in particular has been singled out as the worst of the major banks by Greenpeace and are the target of a sustained campaign by a coalition of groups who share those concerns. Over the last five years, ANZ has poured $1.6 billion into the coal industry – more than six times greater than its renewable energy investments.
If ANZ and the other big four made a commitment not to finance new coal power stations and instead put those finances into supporting large-scale renewable energy projects, they would be avoiding the economic uncertainty of backing polluting coal power and guiding the much needed transition to a low carbon economy.
The author of this piece is Sam Rooke, an activist with the organisation Greenpeace, and the opinions expressed are his own, and do not reflect those of money-au.
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ANZ Warned IT Systems Could Buckle
Australian banking major was warned over a year ago that its IT systems were under intense pressure and could buckle.
The bank was warned by consultancy firm Ernst & Young, which had been hired to analyse the company’s operations, and who then spent many months studying the lenders Information Technology systems, concluding that ANZ could save as much as $70 million by consolidating its platforms onto Oracle.
Instead of complying with all the recommendations, chose to adopt only some of them, and ordered a second internal review.
The results of the second review were revealed in April by the Australian, which suggested that ANZ’s ERP systems face operational risks, data inconsistency and business continuity problems.
The report in The Australian quoted sources who said that
The report authored by E&Y and also revealed by The Australian provides details on the entire ANZ corporate system, including modules for human resources, finance and risk.
“Oracle has a wide range of mature solutions that cover the majority of ANZ corporate centre functional requirements.
“The good functional fit, product maturity and strong integration capability of Oracle’s solutions indicates ANZ’s corporate centre requirements can be met quicker and with lower risk,” Ernst &Young says.
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ASIC Requires Additional Compliance From Credit Ratings Agencies
Market regulator ASIC is requiring that credit ratings agencies operating in the country will now be forced to issue compliance reports which detail their obligations relating to the integrity and quality of their ratings process, and how they are managing any potential conflicts of interest that may exist.
The Australian Securities & Investments Commission on Wednesday released a consultative paper designed to boost the integrity of the financial system by requiring credit ratings agencies to lodge annual compliance reports with it every year. ASIC has given market participants until July 13th to respond to the paper, after which it will begin the process of implementing an annual compliance reporting schedule.
ASIC chairman Greg Medcraft said that credit ratings agencies such as Moody’s and S&P will be forced to detail exactly how they have met the conditions of their license.
“ASIC sees establishing reporting standards, together with setting Australian Financial Services Licence conditions and ongoing industry-wide surveillance, as its core regulatory tools in supervising CRAs,” Mr Medcraft said.
“Reporting by CRAs helps give ASIC, and therefore the broader market, insight into the operations of CRAs and, as such, it gives some degree of reassurance to investors in the integrity of issued credit ratings.”
Ratings agencies are held by many as being responsible for the global financial crisis, after falsely rating some of the most toxic subprime securities with their highest investment rating.
Kevin Rudd who was prime minister in 2009 said back then that the ratings agencies were “hopelessly conflicted” since under their business model, it is the issuer who pays for the rating as opposed to the investor.
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Ratings Downgrade May Result In Big Four Lenders Becoming Target Of Short Sellers
After being downgraded by credit ratings agency Moody’s Investor Services last week, the major Australia banks may find themselves the target of short selling by global hedge fund managers.
Influential analyst Charlie Aitken of Southern Cross Equities said “While just about everyone, including the banks themselves, dismissed Moody’s downgrade, I would suggest it is significant and may well trigger global hedge funds shorting the big four banks, particularly now that all but NAB are ex-dividend.”
Last week Moody’s downgraded the long term senior unsecured debt of the big four Australian lenders from Aa1 to Aa2 on concerns by the ratings agency of the lenders dependence on wholesale funding markets.
As the Australian economy becomes increasingly skewed around the commodity boom that have produced favourable terms of trade and high asset prices “there is a potential for confidence shocks to impact the banks’ access to funding”, Moody’s said.
Of the major lenders, according to Mr. Aitken Westpac was most vulnerable.
“My gut feel is the stock the hedge funds will target from the short side is Westpac, with the highest percentage of domestic earnings and the highest exposure to east coast Australian property, small and medium enterprises and households,” he wrote. Westpac also had the highest wholesale funding requirements, he said.
Despite the warning, many analysts remain unperturbed by the downgrade. In a note to clients Macquarie said that the big four banks were amongst the highest rated lenders in the world in spite of a downgrade by the credit ratings agency.
“In addition, given that asset growth is largely being funded by deposit growth now (which is likely to be the case in the future), the downgrade would seem a moot point anyway,” the analysts said.
“We believe this is likely to seal the low asset growth outlook for the sector as the banks steadily move to lower loan-to-deposit ratios and a more balanced funding structure.” NAB appeared most exposed to issues highlighted by Moody’s, it said.
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Chief Executives Warn Australian Central Bank Against Further Rate Hikes
Over the next few months the Australian central bank will tighten interest rates despite concern by executives who run some of the country’s largest companies that the economy faces problems that are not being reflected or accounted for properly, due to the impact of the booming mining sector.
During the Reserve Bank of Australia’s May board meeting, the minutes of which were published on Tuesday, the RBA confirmed it was leaning towards pushing interest rates higher as it seeks to wrest back control of inflation, and harness the future growth of the Australian economy.
The RBA did not indicate the timing of any future interest rate rise, but financial markets are pricing in a rate rise within the next three months, which would take the official cash rate from its current 4.75 per cent to at least 5 per cent.
Such a move will anger chief executives of Australia’s largest companies, who are aggressively lobbying the RBA to maintain rates at their current level, rather than risk further deterioration of consumer sentiment as a result of higher interest rates.
Fairfax chairman Roger Corbett who is also on the RBA board said that the Australian economy outside of the mining sector remained remarkably weak.
“The average Australian could quite rightly ask: ‘How is it we are going through the biggest resources boom in the nation’s history and at the same time I am finding it quite hard to make ends meet?’
“This ongoing debate about the economy, and the obvious implication that if things continue there will be further increases in interest rates, is very sobering for most Australians.”
Mr. Corbett’s warning came just a day after Kerry stokes, chairman of Seven Group, Gail Kelly chief executive of Westpac, and Westfield managing director Steven Lowy all said that the economy was not strong enough to cope with tighter interest rates.
Mrs. Kelly in particular said that Australian consumers at best could only cope with a single rate hike this year, whilst Mr. Stokes said that when the Reserve Bank lifted rates in November of last year, the economy effectively ground to a halt.
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Housing Continues Slump As Home Loans Dive To Ten Month Low
Flooding in Queensland and higher interest have taken their toll on the market for housing in Australia which saw finance for home loans in March fall to a 10 month low, suggesting that the property market will remain flat throughout the rest of the year, particularly since the prospect of even higher interest rates loom.
Seasonally adjusted, the number of approvals for housing finance declined by 1.5 per cent during March from February according to the Australian Bureau of Statistics.
Queensland has so far failed to recover from the impact of natural disasters it experienced during the first quarter, which included some of the worst flooding ever recorded in history as well as a huge cyclone which hit the state in February.
In March, home loans declined by 2.4 per cent in Queensland, adding to the 0.5 per cent decline felt in February and the whopping 15.7 per cent drop in January the ABS said.
Wayne Swan, Federal Treasurer last week said that the natural disasters in Queensland could cost the economy as much as $9 billion, two thirds of which as a result of lost coal production in Queensland which saw open cut mines filled with floodwater.
Tourism in the state, which drives much of the economy has also been hit hard as a result of the strong Australian dollar.
Sharp rate hikes have also sent the housing industry reeling as banks reacted to higher funding costs by hiking mortgage lending rates.
The Australian central bank has signalled that it will lift interest rates further during the coming months, as it seeks to counter inflationary pressures that are being felt throughout the economy.
The Reserve Bank of Australia has hike interest rates seven times since the end of 2009, with the cash rate currently standing at 4.75 per cent.
Earlier in the month, the central bank revised its forecast for inflation upward over the medium term, suggesting that it now feel there is urgency in countering price rise pressure now building in the economy.
The resource sector or mining boom has engulfed the entire Australian economy, bringing with it both full employment and upward pressure on wages. Higher interest rates represent a significant headwind for house prices, which are already high by historical standards, and have been moving sideways or lower over the course of the last year.
The data however has not been all bad. Loans to property investors rose 2.1 per cent in March while the proportion of first-home buyers in the market rose to 16 per cent from 14.9 per cent in February.
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