Competition Regulator To Examine Joint Venture Credit Agency
The competition regulator is considering market concerns over the creation of a credit agency that will be part owned by the major Australian banks.
The major lenders will each own a four per cent stake in a joint venture to be called Experian Australia Credit Services, the remaining 76 per cent of the venture will be held by Britain’s Experian group.
Other shareholders, with 4 per cent stakes include Citigroup and GE.
The venture was announced by Experian in April, which will seek to provide business and consumer credit information to banks.
The fact that major lenders will own equity stakes in the proposed venture has raised concerns within the industry from rivals such as Veda Advantage and Dun & Bradstreet.
The Australian Competition & Consumer Commission says it will now look closely at the extent to which the joint venture may affect competition within the industry by reducing or even refusing rivals access to credit data.
The competition regulator has noted however, that under the terms of the agreement signed by joint venture partners, the investor banks will continue to supply credit data to rival agencies. The ACCC says it will focus on the issues related to continued access by rival agencies to their customers, with the participant banks continuing to have an incentive to use rival agencies in order to provide competition.
The lenders might value the large, historical databases of the other agencies.
Finally, the ACCC said the terms of the joint venture allowed the investors to use the rival agencies.
Market participants worry whether rival agencies would get the same credit information as Experian, and whether the joint venture would offer the same terms to other banks and credit unions who are not shareholders in the venture.
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CBA Says At Least To Further Rate Rises In Next Six Months
Australian banking major CBA says it expects at least one if not two more official interest rate hikes over the next half year, which the lender says it will pass on to its mortgage borrowers.
CBA chief executive Ralph Norris made the comments whilst announcing a $1.7 billion unaudited quarterly profit. Mr. Norris described the federal budget as being “reasonable” adding that its “bark was probably worse than the bite” though the “The trajectory of the budget is very much in the right direction,” he said.
CBA completes the earnings reporting season of the major lenders with March quarter trading update, after rivals Westpac, ANZ and NAB all made interim profits announcements last week.
Like its rivals CBA said that demand for credit remains subdued as a result of poor consumer and business confidence, though the lender did say there were signs of a rebound.
Like the other banks, CBA said credit demand was subdued due to fragile business and consumer confidence, despite early signs of a rebound in business credit.
“Notwithstanding present challenges, we continue to expect a gradual improvement in operating conditions through calendar 2011, as the economy recovery strengthens and system credit growth rebounds,” Mr Norris said.
Like rivals Westpac and ANZ, CBA also reported a rise in home loan arrears, though that has been attributed to the impact of natural disasters, and normal seasonal factors post Christmas, rather than anything which could be considered systemic.
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Senate Committee Recommends Overturning Mortgage Exit Fee Ban
A Senate committee has rejected a key banking reform proposed by Federal Treasurer Wayne Swan, saying that the government must reconsider its proposal seeking to ban mortgage exit fees.
The Senate economics committee inquiry into competition in the banking sector said that the ban on exit fees may well result in less competition and higher upfront fees.
“The committee recommends that the government reconsider its decision to ban exit fees, before the amended regulations come into effect, with a view to allowing enough time for the effectiveness of the existing ban on unfair and unconscionable exit fees … to be assessed If it proceeds with the ban, it should only apply to authorised deposit-taking institutions.” The committee, which is primarily made up of opposition lawmakers said.
The proposal to ban exit fees is set to be implemented by July 1st.
The exit fee ban has been enacted by regulation and is due to take effect from July 1 this year.
A minority report authored by a separate group of government senators said it was surprised by the committee’s findings.
“The government senators cannot support the Coalition’s majority report recommendation to keep exit fees in place. Exit fees for new customers only reinforce the barrier to switching, and weaken the power of customers.” it said.
As part of its much hyped set of banking reforms, the government announced a ban on mortgage exit fees in December of last year, which was immediately challenged by the Australian Banker’s Association, which said such a ban would result in either higher interest rates or higher establishment fees.
Banking majors NAB and ANZ have both voluntarily ceased charging mortgage exit fees, pre-empting the introduction of legislation.
“An outright ban will reduce competition from this sector. The committee believes that banning exit fees may lead to higher upfront fees, including for borrowers who never incur exit fees. It is notable that the only financial intermediaries that openly welcomed the abolition of exit fees were the major banks.” the majority report noted.
Wayne Swan said he was disappointing by the fact that the Coalition believes Australian families should be locked into uncompetitive mortgages.
“The Liberals need to stop standing up for the big banks and start standing up for Australian families,” Mr. Swan said.
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Australian Banks Not To Be Impacted By Growing Mortgage Arrears
Noted banking analysts James Ellis and Jarrod Martin of Credit Suisse say that the trend of rising arrears in mortgages reported by the major Australian banks during earnings season is unlikely to have a significant impact or result in losses.
In its review of half year results Credit Suisse said that the overall asset quality for the major lender had suffered from “modest” deterioration, with all lenders suffering from increased impairment with the exception of ANZ.
“But it’s difficult to see substantial losses (in home lending),” Mr Ellis said.
Unemployment remained low, he said, and the price of houses was stable.
Despite the cautious optimism with regard to mortgage losses, Credit Suisse says the key risk faced by major lenders in a dual speed economy is the re-emergence of bad debt charges. Last week banking chieftains said that the strong Australian dollar was taking its toll on the tourism, retail and manufacturing sectors.
Credit Suisse rates NAB as “outperform” and rates its rivals Westpac, ANZ and CBA as “neutral”.
According to the investment bank, NAB has momentum in lending which will last well into the second half of the year. NAB’s return on equity also appears to be improving, and Credit Suisse expects NAB to benefit from a potential recovery in earnings from its British banking assert, and a possible capital release from winding down non core assets.
Mr Martin said NAB’s rising share of the mortgage market had so far been achieved without any cost to the net interest margin, despite the bank having the lowest variable interest rate.
“If they can maintain market share growth without compromising the margin, then the strategy will be a winner,” he said.
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Westpac Chairman To Step Down In December
Ted Evans, chairman of Australian banking major Westpac will retire after the lender’s annual general meeting which is scheduled for December, and is set to be replaced by Lindsay Maxsted, the current chairman of the board’s audit committee.
Mr. Evans assumed the chairman’s role in 2007, having joined Westpac in 2001. He successfully helped guide the bank through its transformative acquisition of St George, as well the global financial crisis.
“With the success of the St George merger now assured, and the group performing very strongly under our talented and stable management team, I judged the time right to announce my retirement,” said Mr Evans in a statement. “Lindsay is an enormously experienced and capable director, and I know I will leave the chair of this great company in the very best of hands.”
“Ted’s wisdom and guidance as chairman have been invaluable as Westpac successfully navigated the global financial crisis and the worst of its aftermath, while at the same time bedding down the biggest financial services merger in this country’s history,” Mr Maxsted said.
“It has been a privilege to serve under Ted’s leadership and I am acutely aware that he leaves very large shoes to fill.”
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ANZ Chief Worried By Rising Defaults
Mike Smith, chief executive of Australian banking major ANZ says he is increasingly concerned that consumers will start to struggle to repay their loans against a backdrop of ever higher interest rates.
Mr. Smith said that he was worried about the quality of credit since people had stopped making payments on their credit card debt. The ANZ chief added that the trend was strange since poor credit quality usually only occurred during periods of high and rising unemployment.
Mr. Smith said it appears that the trend is seasonal, and that it is occurring at a time when people were taking annual leave, and as a result not repaying their monthly credit card bill whilst away.
“But I think that interest rates are beginning to hurt a little bit now, so the recent rises are beginning to bite,” he said, adding that the Queensland floods had contributed to the issue.
Mr. Smith went on to say that he did not believe that credit growth would ever return to the levels seen prior to the onset of the global financial crisis, and that credit growth had slowed as a result of businesses and consumers having become more cautious or wishing to save more.
The ANZ boss said that the manufacturing industry as well as tourism and retail had all been negatively impacted by the strong Australian dollar, and would have to modify their business models so that they could compete against cheaper imports.
Mr. Smith said the Aussie dollar would continue to rise.
“I think we will see it move through $1.10 and get even stronger than that. I can’t see anything that will knock it off the perch because it’s not only the strong Australian dollar, it’s also the weak US dollar. When you think about what is happening in the States, I can’t see them increasing rates for at least 18 months.” he said.
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New Australian Credit Bureau Set To Be Launched
Experian a global information services company is set to launch a joint venture with ANZ, CBA, GE Capital, NAB and Westpac.
The venture will be called Experian Australia Credit Services and will function as an Australian credit bureau that will offer business and consumer credit information to credit providers.
Experian says the new joint venture would provide services that will enable lenders to asses risk and therefore provide credit more consistently and efficiently.
The venture will face competition from rival credit companies such as Dun & Bradstreet and Veda Advantage.
“We believe Australia is ripe for healthy competition. Our global experience shows that increased bureau competition drives innovation and delivers better services for clients and consumers.The prospect of an inclusive bureau in Australia, accessible to all industry sectors, will strengthen standards in credit reporting, data quality and governance — which is particularly important in a changing regulatory environment,” said Experian’s newly appointed managing director, Kim Jenkins.
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NAB Delivers Strong First Half Results
Australian banking major National Australia Bank reported better than expected earnings on Thursday, announcing that first half profits rose by 22 per cent, driven by lower charges for bad debt and increased market share.
NAB has made a concerted effort to attract more customers by offering lower interest rates on loans made to businesses and consumers, than those offered by its big four rivals.
Cameron Clyne, the lender’s chief executive says the bank’s decision to aggressively compete on price is starting to be vindicated.
“I think this result is a sign that there is some momentum in this strategy,” Mr. Clyne said.
NAB’s strategy of offering lower interest rates has taken a toll on profit margins at its consumer banking unit which fell by 12 basis points. However the lender has achieved some level of success, having attracted increased customer volumes and increasing its market share by a full percentage point from a year earlier which had the effect of contributing towards a 36 per cent increase in from that business unit.
The improved performance from its consumer banking unit helped drive NAB’s 16 per cent increase in first half net profit to $2.43 billion, from $2.10 billion a year earlier.
In business banking, where NAB has traditionally been strong, the lender also grew its market share from 20.8 per cent to 23.8 per cent.
“Broadly we still see quite a few positives in the economy,” Clyne said, “But there is still some fundamental strength to the economy. Unemployment is relatively low and there is an early sign that businesses are looking to invest again.”
The 22% gain in NAB’s cash profit compares to a 7% gain reported by Westpac on Wednesday and a 19% gain reported by ANZ on Tuesday. CBA which has a June 30th balance sheet reported a 13% increase in cash profit in February.
Profits at NAB’s UK units rose by 14 per cent, however the lender re-iterated its warning that the economic environment in Britain is more challenging than that of Australia.
“Overall this result reaffirms NAB as our top pick in the sector, with above peer pre-provision profit growth, a more rapid improvement in returns and more attractive valuation,” Goldman Sachs analysts said.
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ANZ Chief Says Australian Business Remains Unprepared For Structural Shift In Economy
Mike Smith, chief executive of Australian banking major ANZ is warning that Australia remains unprepared for a structural shift in the economy that will exacerbate its dual speed which will have damaging consequences for industries that are already struggling.
ANZ kicked off earnings season for the major lenders after reporting a first half profit of $2.8 billion, which met market estimates and rose 23 per cent. ANZ will raise its dividend from 52 cents a share to 64 cents a share.
The latest set of results show that the vast majority of growth came from the lenders growing operations in Asia, in particular benefiting from its acquisition of the banking assets of RBS in the region, vindicating Mr. Smith’s stated ambition of transforming ANZ into a super regional lender.
ANZ’s domestic profits rose by just 2 per cent the reasons for which according to Mr. Smith were slower credit growth from cautious businesses and consumers.
Whilst stating that ANZ was well positioned going forward, but pointed out that economic conditions of Australia continued to remain volatile.
“The environment is a little bit more difficult,” Mr. Smith said. “Parts of the Australian economy have clearly hit a flat spot, with consumers and businesses being more conservative now, after the financial crisis. They are more reluctant to spend in an uncertain economy.
“The bigger picture is that we are starting to see the effects of a major structural change that’s under way as the economy continues the shift towards being much more based around hard and soft commodities.
“I don’t think the magnitude of this shift is fully understood, nor are the implications for industries such as manufacturing, tourism and retail, where business models are clearly going to have to adapt to a lower-margin, lower-growth environment.”
Mr. Smith says whilst the natural resource industry was both positive and important for the Australian economy, there could be some negative consequences for other industries who may suffer as a result of the strong Australian dollar that has risen on the back of robust demand for natural resource exports.
Mr. Smith says the strong dollar is a structural shift, and Australia’s lack of preparedness to adapt cannot be blamed on the government, but rather on lack of motivation by business to change.
“I think that it is an issue for businesses to adjust themselves. We ask for government help too often. Businesses should be looking for opportunities, and I’m not leaving banks out of that.The business models of banks have been driven by bull market condition sentiment, and that run is over. The banks have to change as well.” he said.
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Australian Banks Reach Detente In War For Retail Depositors
The major Australian banks are trying to cool down the red hot war for retail deposits as they seek to mitigate slowing demand for credit which analysts forecast will remain “lower for longer”.
According to the JPMorgan-Fujitsu annual Australian Mortgage Industry Report, growth in mortgage lending will hit high single digits during the next year, and well below the 15 per cent peak growth rate achieved prior to the financial crisis.
Demand for credit by both households and business is expected to remain flat and will force the major lenders to reconfigure their business models in order to maintain profitability and growth.
Scott Manning, banking analyst with JP Morgan says that the major lender face constraints in repricing their mortgage portfolio through raising interest rates outside official tightening by the central bank
“The move that we saw in November last year was quite politically charged and quite transparent. One of the ways that the banks can also move in is to manage the liability side of their balance sheets. The household deposits are quite expensive for the banks and in the second half of last year we saw Commonwealth Bank grew significantly below system in deposits and sit outside the market in terms of price to maintain their margins.” Mr. Manning said.
The results of the study suggest that Westpac and CBA have both ceded deposit market share to rivals ANZ and NAB, as they beat a retreat in the aggressive pricing war for depositors.
In its most recent set of results CBA said it would refuse to enter into a war for “hot money”, worth some $7 billion in deposits which switched between banks as it seeks the highest rate of interest.
“The focus of the banks is going to remain on improving profitability at lower levels of [lending] growth,” the report said. “The current lower mortgage growth is taking pressure off funding requirements. Commonwealth and Westpac have substantially pulled back on deposit growth in the first half, which has had a favourable impact on net interest margins. But in our view this is not sustainable.”
Both Westpac and CBA have also ceded market share in mortgage lending to their two other big four rivals after consciously slowing down their mortgage lending growth.
Both lenders were expanding mortgage lending by 25 per cent on a quarterly annualized rate immediately after the financial crisis, but since then have cut that to just 5 per cent.