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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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QBE Denies Chief Executive To Step Down
Australian insurance major QBE has moved to end speculation that its chief executive is poised to step down. QBE chief Frank O’Halloran has run the company for the last twelve years, and the insurer says that he would continue in that role “for the foreseeable future”.
Rumours of Mr. O’Halloran’s departure ricocheted around the insurance industry this week, when speculation began to emerge that Mr. O’Halloran would hand over the reigns of the company to Peter Harmer, a senior executive at insurance broker AON.
Mr. Harmer’s apparent ascension was flagged in a British trade publication, Insurance Investor.
The story was quickly rebutted by new QBE Chairman Belinda Hutchinson, who branded the report as “completely false” adding that the board had still not appointed a headhunter or developed a succession plan for the 64 year old Mr. O’Halloran.
“QBE has a longstanding and successful succession planning process due to the depth of its high-quality management team. This team is ably led by Frank, who will remain the CEO for the foreseeable future. Frank has publicly stated his interest and willingness to continue as CEO.” said Ms Hutchinson.
QBE which is facing pressure from investors unimpressed by poor investment returns is thought to have received a commitment from Mr. O’Halloran for a further two years.
The Australian, which quoted an unnamed source suggested that the rumour may have started by a head hunter who was pitching their candidate. The source also added that the insurer preferred internal candidates as opposed to those from outside.
The source also questioned whether a broker was the right person to lead an insurance company, saying it was a bit like “trying to mix oil and water”.
Investors, disappointed with the most recent set of earnings, which saw poor investment returns producing a 39 per cent fall in first half profit, have also been voicing concerns over the insurers extraordinary appetite for inorganic growth through acquisition, despite the fact that QBE says that 90 per cent of its growth during the last half decade was inorganic.
Mr O’Halloran and his predecessor John Cloney have snared up to 130 acquisitions over a 25-year period, with 42 coming in the period 2005-09.
One analyst said poor investment returns were only partially to blame, and they did not tell the whole story.
“What you saw was a window into QBE when the acquisition music stops — not much top-line growth due to expansion into countries that are either deflating or not inflating, and that’s a critical issue for insurers,” he 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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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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IAG Full Year Profits Slump
Australian insurance major IAG has had its bottom line severely hit by storms that have raged in Melbourne and Perth, as well as losses incurred at its UK division.
Australia’s largest general insurance company as measured by written premiums said its net profit for the year ending June 30th fell precipitously year on year. Net profit dropped from $181 million last year, to just under half, or $91 million this year, after the insurer’s UK unit generated a substantial loss, and unprecedented weather in Melbourne and Perth drove up natural peril claim costs.
IAG had previously issued guidance warning of the poor result late last month, when it said it expected its full year insurance margin, a closely watched measure of the profitability of its underwriting business was expected to fall to 7 per cent.
The insurer absorbed a pre tax charged $367 million incurred by its UK unit, after a profound rise in claims at its UK motor insurance business, in line with previous guidance.
Revenue at the insurer fell to $9.38 billion, and the company says it will pay a final dividend of 4.5 cents a share, down from 6 cents a share in the previous year, which was in line with guidance.
The insurer is now forecasting gross written premium growth of 3 to 5 per cent in the current financial, and is maintaining its guidance for insurance margin during the 2011 financial year of between 10.5 to 12.5 per cent.
“Our focus for FY11 is to build on the strong performance we have seen from our largest businesses in Australia and New Zealand and to restore profitability in the UK, while continuing to pursue growth opportunities in our chosen markets, particularly Asia,” the group’s chief executive Michael Wilkins said.
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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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Mortgage Choice Sounds Warning
Mortgage Choice, a leading Australian mortgage broker has reported a fall in annual profit, signalling the impact on the economy of the effects of a housing under-supply on the housing market.
Mortgage Choice reported a net profit after tax of $23.479 million in 2009/10, down 12.5 per cent from $26.849 million in the prior year.
The company declared a final dividend of 6.5 cents, which the broker says represents a 17 per cent increase from its 5.5 cent payout in the previous year.
Mortgage Choice says that its decline in net profit was as a result of an adjustment made to its 2008/09 future loan book cash flow estimates.
The broker said it was not concerned by lacklustre growth in demand for housing finance; however the company did issue a warning for the future market.
“Housing under supply continues to remain a problem that places strain on housing affordability for a large number of property buyers as well as renters,” Mortgage Choice chief executive officer Michael Russell said.
“Australia has serious blockages in its land and dwellings supply pipeline. This must be cleared if we are to tackle the under supply problem that continues to stress housing affordability,” he said.
“While under supply is good news for many investors, with tight rental vacancy rates seeing rental price rises, it is bad news for others. Our three tiers of government need to work together on effective and immediate action.”
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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.
