RBA Says Australia Has Enough Policy Flexibility To Deal With European Sovereign Default Crisis
Phillip Lowe, assistant governor at the Australian central bank says that the country has enough policy flexibility to be able to deal with any changes that occur to the global economy, but did warn that international investor concern over the state of public finances may start building.
Mr. Lowe made his remarks at an investor forum organized by Colonial First State, and added that he felt fairly optimistic about the Australian economy, since its major trading partners were experiencing strong growth.
Mr. Lowe went on to say that the main challenge was to increase supply within the economy “so that demand can grow solidly without adding to inflation”.
“At the same time, we need to be aware that circumstances can change quickly. If they do, Australia is in the fortunate position, as are a number of countries in Asia, of having the policy flexibility to be able to respond,” he said.
Mr. Lowe pointed out that risk from the European sovereign default crisis continues, and there remains the possibility that the problems faced by Greece which has gripped financial markets globally, may flare up again.
“Despite the recent announcements (by the International Monetary Fund and European Central Bank) having stabilised confidence in Europe, concerns about public finances could build again. If they did, it would weigh on growth prospects for the countries directly concerned, and it could also weigh on prospects in Asia, particularly if it were associated with a marked increase in risk-aversion globally,” he said.
“The Reserve Bank will be watching carefully over the weeks and months ahead to assess how the balance of these risks is evolving,” he added.
Mr. Lowe’s comments were the first made by a Reserve Bank of Australia official since the European sovereign default crisis reached its peak last weekend, at which point the stabilization fund measures undertaken to deal with the crisis by the European Central Bank and The International Monetary Fund came into effect.
Prior to the remarks by Mr. Lowe, the RBA’s official stance, was that contagion from the European sovereign default crisis, was mainly confined to Europe.
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Big Four Banks To Face Stiffer Competition
In its response to growing criticism that the Big Four Australian banks wield too much market power, the Federal Government has introduced new regulations which will encourage the development of the corporate bond market, as well as proposed new tax cuts for smaller lenders, that will enable them to raise money on wholesale international markets more easily.
The government has also said it wants to introduce a 40 per cent discount on taxes on interest earned by deposits held in banks, credit unions or building societies. Such a cut would provide more incentives for retail investors to hold their cash in a wider range of financial institutions.
Federal Treasurer Wayne Swan says he believes that the proposals would help to “put more competitive pressure on the big banks over time”.
As part of its response to the Henry Review, the government said it would move to make it easier for listed companies to undertake bond issues aimed at retail investors in Australia.
The Australian Securities & Investments Commission (ASIC) will oversee the new regulations, which will enable companies whose shares are listed on the Australian Securities Exchange to engage in bond issuance aimed at both retail and institutional investors using a more streamlined process, which will do away with the need for lengthy prospectus.
The Treasurer said the measures would “boost competition in business lending” by making it “easier for businesses to borrow directly from retail investors and reduce their reliance on borrowing from banks”.
Mr Swan said he expected the measures to allow local operations of foreign banks to “continue their active lending to Australian businesses at even more competitive interest rates”.
The government has become increasingly concerned at the criticism which suggests that Australian banking lacks competition, and is dominated by the Big Four lenders, who used the impact of the financial crisis to increase their market share, at the expense of smaller regional Australian lenders.
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Australian Lenders To Escape Worst Of European Sovereign Default Crisis
The Big Four Australian lenders are widely expected to be able to weather the storm caused in wholesale funding markets as a result of the European sovereign debt crisis, since most of them are fully funded for the rest of the year.
Most analysts are predicting that the cost of obtaining funding is set to rise, as markets once again reverberated in fear at the prospect of a possible Greek default, despite the European Union approving a US$1.08 trillion stabilization package for the Euro.
The announcement of the bailout prompted a rally on global financial markets on Monday. In Australia, the yields on 10-year government bonds rose by nine basis points to 5.56 per cent.
The cost of insurance against default on European corporate bonds declined during London trading hours on Monday, as the market assimilated the implications of the European Union’s stabilization package.
According to Deutsche Bank, the Big Four Australian lenders are already fully funded for the calendar year, which means that they should be able to time future issuance, when funding costs decline and markets recover confidence.
James Freeman, Deutsche Bank banking analyst said that the fact that the Big Four Australian lenders were amongst the highest rated in the world, would mean they would not find their access to funding restricted.
“Given the recent market concerns around the escalating Greek debt crisis and the speculation of a contagion effect throughout the EU, we don’t see this as a key concern for the Australian banks and their access to wholesale funding. The crisis has the potential to translate into increased funding costs, but given the major banks have raised more than half of their 2010 funding task, we believe the banks will be able to continue to raise wholesale funding in the international markets.” he said.
Deutsche Bank reckons that Westpac still requires about $16 billion in funding this year, whilst rival ANZ still needed to raise $8 billion.
Gail Kelly, chief executive of Australian banking major Westpac, once again resumed her warnings that the lender continues to face pressure on funding costs, but assessed that Westpac had extended the term of its funding, to minimize the number of times it needed to tap the markets.
Mr Freeman said: “We think the key risk around the deterioration in debt markets will be around the price rather than access to funding and we continue to believe Australian banks will be able to meet their international financing requirements.
“If credit markets were to become implicated by Greece or the EU sovereign concerns, then any significant threat to the availability of funding is likely to see the government reintroduce the government guarantee.”
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Major Australian Lenders Renew Push To Issue Covered Bonds
Australia’s major lenders want the ability to sell covered bonds to investors, but will probably find it hard to convince a sceptical government to give them permission to do so, since the government believes that in doing so, it would simply further entrench their dominance of the mortgage lending market.
The government is not keen on taking any steps that might further reduce competition in mortgage lending, which is currently dominated by the four major lenders.
Covered bonds typically favour the types of issuers who have strong credit ratings and large depositor’s bases”. Covered bonds would only add to non-competition in the marketplace,” said an official at a regional bank.
Under Australian law, banks are required to hold depositor’s claims on their assets above all other creditors in the event of a bankruptcy. As a result, under current law, Australian financial institutions cannot issue covered bonds, because those bonds subordinate the depositor. The bond holder has the right of recourse to the assets that have been used to cover the bond, usually a pool of mortgages, or other secured collateral, which the bank maintains on its books, and “covers” the bond.
The larger lenders want the law to change, so that they can issue covered bonds, which are very common in Europe, but still unusual in the Asia Pacific region. The lenders claim that issuing this type of debt would enable them to diversify their funding sources, increase their average debt maturity, and therefore increase competition in lending.
Australia’s smaller lenders worry however that they would face a disadvantage, since most of the issues would first be pitched to international investors who are only really familiar with the major Australian banks.
Covered bonds were not a “panacea”, said David Liddy, chief executive of the Bank of Queensland. They would not “help us in terms of the pricing disadvantage that we currently have against the majors”, he said.
Two years ago a move to introduce covered bonds was killed by the prudential regulator.
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Macquarie Full Year Profits Jump 21 Per Cent
Australian investment banking major Macquarie Group, saw its full year profit jump 21 per cent and says it expects even better performance across all its operations during 2010-2011.
Macquarie Group posted a net profit of 1.05 billion for the year ending March 31st. Last year the investment bank reported a full year profit of $871 million.
The results were largely in line with a poll of seven analysts by Dow Jones Newswires.
“Each of our operating businesses delivered improved results on the prior year,” chief executive Nicholas Moore said. “Operating conditions continued to improve during the year, leading to greater activity across many of our businesses.”
Macquarie has made some significant investments in its securities division globally, which paid of this year, as income from the unit more than doubled, with net trading income rising 17 per cent as a result of gains from Taiwanese, Indian, and Korean exchange traded instruments.
Macquarie also saw trading gains in its fixed income, currency and commodities division which leapt a whopping 63 per cent.
The group declared a final dividend of $1 a share, up from last year’s 40 cents per share.
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CBA Chief Says Era Of Cheap Money Over
Ralph Norris, chief executive of Australia’s largest mortgage lender, Commonwealth Bank of Australia, says that he expects the sovereign debt crisis of which Greece is at the centre, will affect the pricing and availability of wholesale credit for Australian banks.
Mr. Norris added that CBA however would largely be unaffected this year, because it had already fulfilled most of this year’s funding requirement.
As the sovereign debt crisis in Europe continues to deteriorate, with the downgrades of both Portugal and Greece, fears have begun to emerge that the problem may become big enough to threaten the still fragile global economic recovery.
“Obviously, volatility in markets is something that has happened on a regular basis over the last two to three years, and this is another incident. So certainly it will have a potential impact on pricing and availability in the short term, but we don’t see it impacting us at this point.” Mr. Norris said.
He added that CBA did not have any direct exposure to Greece or its banks.
Mr. Norris says he believes that the cost of wholesale funding will continue to rise over the next year, as long term funding continues to roll over.
“So the days of paying 13 to 15 basis points over the swap rate to borrow funds internationally are gone, I don’t think we are going to get back to those levels any time soon. On the retail side, deposits were still growing at a reasonable rate and he viewed pricing as still “quite competitive”. Mr. Norris said.
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RBA Says Smaller Lenders Slowly Increasing Share Of Mortgage Lending
Guy Debelle, an Assistant governor of the Australian central bank the RBA, says that smaller regional lenders are increasingly returning to the mortgage lending market, prompted by a recovery in the domestic securitisation market.
Mr. Debelle told a conference in Sydney on Tuesday that the market share held by smaller lenders had risen over the last few months, though it was unlikely that their market share would return to the levels seen prior to the onset of the global financial crisis any time soon, hampered by the fact that the majors had managed to significantly increased their market share at the expense of regional lenders during the crisis.
Mr Debelle said smaller lenders have become more competitive because securitisation was becoming “a more viable source for lenders”.
Spreads on the most recently issued RMBS have narrowed to between 130 to 135 basis points over the swap rate, down from nearly 400 basis points quoted in the secondary market during the height of the global financial crisis.
Yield spreads on newly issued residential mortgage-backed securities have narrowed to around 130 to 135 basis points over swap, from over 400 basis points in the secondary market at the height of the global financial crisis.
Since October 2008, the Federal Government has provided support to the RMBS market, injecting nearly $16 billion. The Australian Office of Financial Management which was responsible for the operation is not interested however in the riskiest tranches, and neither would it seem are investors just yet.
As further evidence of recovery in the financial sector, Mr. Debelle pointed to the proportion of on balance sheet home loans that were either overdue or impaired as being stable in the last few months.
In December 2009, that level was 0.6 per cent of all loans, up from the low levels of 2002 to 2003, but low in absolute terms, said Mr Debelle.
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RBA Lifts Rates For Second Time In 2010
On Tuesday, the Australian central bank, the Reserve Bank of Australia delivered its second interest rate hike in 2010 and warned Australians that further rate hikes were likely as the economic recovery gains momentum following the global financial crisis.
The decision to lift interest rates by 25 basis points for the second time this year, from 4 to 4.25 per cent means the RBA is one of the few central banks across the developed world to actively begin tightening monetary policy.
The increase in lending rates will add about $50 a month to the average $300,000 mortgage in Australia.
CBA was the first big four lender to respond to the rate hike, lifting its key lending rates on Tuesday afternoon shortly after the central bank’s announcement.
CBA said it would increase its standard variable rate by 25 basis points, whilst also raising deposit rates on selected savings accounts also by 25 basis points.
On Monday, Australia’s fourth largest lender NAB vowed it would not lift rates by more than the central bank.
RBA governor Glenn Stevens in his statement accompanying the decision said the world economy was experiencing growth, and was widely expected to expand at close to its trend level this year and next, following two years of stagnations.
Mr. Stevens said that Australian inflation would be consistent with the central bank’s target inflation rate of 2-3 per cent in 2010.
“Interest rates to most borrowers have been somewhat lower than average, the board judges that with growth likely to be around trend and inflation close to target over the coming year it is appropriate for interest rates to be closer to average. Today’s decision is a step closer in that process.” Mr. Stevens said.
Some economists are now predicting the official cash rate will rise to between 5 to 5.5 per cent by the end of year, with financial markets predicting a 60 per cent chance that the RBA would raise rates on Tuesday, down from 80 per cent in the previous week, following soft retail sales data.
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Fund Managers Bullish On Equities According To HSBC
A new survey by global banking giant HSBC suggests that fund managers are more bullish on equities today, than they were three months ago, and are maintaining their holdings of Australian equities steady.
The HSBC survey says that a large proportion of fund managers (nearly 75 per cent) are optimistic about Chinese equities, up 16 per cent from the final quarter of 2009.
13 global fund managers were polled and nearly half of them have increased their exposure to US equities to 50 per cent overweight, compared with just 22 per cent in the final quarter of 2009.
The fund managers that were polled expressed little change in sentiment toward Asia Pacific equities including Australia, with 70 per cent of managers maintaining an overweight position.
The growth in funds under management (FUM) declined in the fourth quarter 2009 as equity markets lost some of their froth following a remarkable recovery in valuations that begun to occur in March that year.
Asia Pacific equities grew by 9.9 per cent during the quarter ending December 31st 2009, having leapt by 30.7 per cent in the previous quarter.
Chinese equities were the only stocks that defied the trend having grown 12.8 per cent in the final quarter, compared with 9.5 per cent in the preceding quarter.
Global equity markets have made a stunning recovery however, with the ASX 200 having risen from 4500 in January to 4850 on Friday.
Illustrating the growing shift in power, the Asia Pacific region has now overtaken Europe as the second largest region for equity funds behind the US, according to the survey.
Fund managers in the survey included BlackRock, JP Morgan Asset Management, Schroders Investment Management and Societe Generale.
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Bankwest Enters RMBS Market For First Time Since Being Acquired By CBA
Bankwest has waded into the residential mortgage backed securities market for the first time since it was acquired by Commonwealth Bank for $2 billion. The lender launched a $620 million deal with three different classes of securities.
Global credit ratings agency Standard & Poor’s gave the $586 million in A-class notes a triple A and assigned the same rating to AB notes valued at $23.4 million.
S&P gave Bankwest’s B notes valued at $10.6 million a double A negative rating.
In assigning the ratings, the ratings agency says that there is sufficient credit support in each class of notes.
Structured finance analyst Fiona Otway said: “Our expectation is that the various mechanisms to support liquidity within the transaction are sufficient under our stress assumptions to ensure timely payment of interest.”
S&P expects payment of interest and principal by April 2041 for all classes of notes.