E*Trade Australia Securities did manage to make a dividend payment to its parent, but according to a filing with the Australian Securities and Investments Commission recorded a lower level of turnover for the year ending September 30th 2010, which resulted in reduced profits.

According to the filing, the slowdown in the market dented profits by as much as 23 per cent, coming in at $24.1 million whilst total revenue fell 6 per cent to $98.3 million. Brokerage income declined from $85.7 million to $78.2 million during the same period, while fees and commissions rose 8 per cent to $20.2 million.

Dividends totalling $17m were paid on August 20. No distribution was paid the previous financial year.

“The company continues to diversify its customer base and develop relationships with other licensed financial services providers,” E*Trade said in its accounts.

Following the global financial crisis, the level of competition between online stock brokers intensified as they all sought to get a larger share of the market, estimated to be 2 million Australians with internet trading accounts.

E*Trade was compelled to cut its brokerage rates in response to aggressive pricing from rival Commsec, the stock broker jointly owned by CBA and CMC.

This followed E*Trade chief executive Stuart Sayers declaring his company would offer more aggressive pricing on fees for international trade.

“On the 17th of November (E*Trade) altered its pricing on certain equity products and services,” the accounts say. “The directors believe that, together with continuing development of functionality, this pricing change delivers the optimal value proposition to our clients and will position the company for the future.” E*Trade chief executive Stuart Sayers said.

The outlook for the online share trading market seems optimistic, with trading volumes during the 2010 calendar trending higher. According to data from the ASX monthly trades have risen from 9.3 million in December 2009 to 12 million last month.

Commsec controls about half the market for online share trading, with E*Trade accounting for 20 per cent. As well has aggressively competing on price, E*Trade has sought to better integrate ANZ’s online banking platform with the E*Trade website as it seeks to increase traffic.

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On Friday, Bell Financial Group, which is listed on the Australian stock exchange announced its intention to merge its two wholly owned subsidiary’s Southern Cross Equities and Bell Potter in a deal which would created a full service independent stock broker which provides services for both institutional and retail clients, as well as offer investment banking and research.

Southern Cross would fold into Bell Potter under its name.

Bell Potter has approximately 300 private client advisers as well as a financial planning operation, and the deal would combine that capability with the corporate and institutional expertise of Southern Cross.

Integration of the two companies is expected to occur from July 1st 2011, and signals a further consolidation of the equity broking industry.

The deal would catapult the merged broker above smaller rivals Euroz, Wilson HTM and Hartleys to sit alongside Patersons.

Charlie Aitken a Southern Cross director, and who is widely expected to run the institutional business of the merged entity says the deal positions the new company to better compete against second tier global investment banks “who we believe are people you can compete against”.

Mr. Aitken says he believes that the new company will eventually acquire to ten broker status, a list currently dominated by global investment banks such as Deutsche Bank and UBS.

“We think that there’s three or four very good global investment banks in Australia and then below that there’s a competitive space that we intend to fill.”

Colin Bell, chairman of BFG and founder of Bell Potter says that a combination of the two companies would boost revenue synergies in “a one plus one equals three” situation.

Southern Cross executives are expected to run the merged group’s institutional, research, ECM and corporate divisions, with Bell Potter people to head the private client and other businesses.

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The Basel III banking reforms, which will gradually be implemented over time, requires lenders to maintain a 6 per cent minimum tier one capital ratio, up from 4 per cent.

Craig Turton, banking analyst at Macquarie said that it was likely that CBA would have the lowest tier one capital ratio amongst the big four banks, which in a worst case scenario could fall to as low as 5.42 per cent.

Mr. Turton added that ANZ’s potential acquisition of a 57 per cent stake in Korea Exchange Bank and Basel III requirements, meant that there was strong evidence of weaker credit growth and increased pressure on margins.

“In the event ANZ were to acquire 57 per cent of KEB as well as get to a respectable post Basel III core tier 1 ratio, the bank would need to raise somewhere between $1.4 billion to $5.3bn,” he said.

Macquarie downgraded Commonwealth to ‘neutral’ and ANZ to ‘underperform’.

“We continue to prefer the retail banks (Commonwealth and Westpac) over the business banks (ANZ and NAB),” said Turton.

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Earlier in the week, Macquarie downgraded NAB to “neutral”, whilst on Thursday UBS followed suit and also downgraded the lender to neutral from “buy”.

Jonathan Mott UBS banking analyst said that NAB’s stock price now traded in line with UBS’s valuation, following the competition regulators decision to deny permission for the lenders proposed acquisition of APH.

Mr. Mott added that NAB faced many challenges catching up to its big four rivals despite the relative strength of its business banking unit which produces 50 per cent of the lenders profit.

“This active M&A agenda has often been blamed for the underperformance of its domestic banking and wealth management operations, which perhaps have not seen the same level of management focus as their peers. While we were encouraged by statements by the new management team in its early 2009 strategic update that NAB would focus on its Australian operations and re-invest in higher return on equity businesses, its active M&A agenda has again brought this into question. We believe that recent share price movements around the proposed Axa APH acquisition illustrate both shareholder-dissatisfaction for that transaction and ongoing frustration with NAB’s M&A agenda.” Mr. Mott said

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Macquarie estimates first half profits of approximately$360 million, compared with $479 million in the same time period in the previous year.

Macquarie’s profits warning should not have surprised the market, given they had earlier warned that first half profits would not meet estimates, however the stock dropped as much 8 per cent.

CLSA and Citigroup had both already cut their ratings last week, but based on consensus full year profit estimates of $1.3 billion, , compared to the $1.1billion indicated by the bank today.

The profit downgrade by Macquarie was its third in the last three months, and the investment bank does not expect that this is the last of them.

In order for the investment banking group to return to previous levels of profitability, its chief executive Nicholas Moore will have to depend on a dramatic change in financial market sentiment, which looks unlikely at this stage.

Failure of trading conditions to return to normal will mean Mr. Moore will have to aggressively wring out costs, and staff cuts look increasingly likely.

In 2008 and the 14,600 Macquarie employees generated $137,000 each in profits. Flash forward to 2009 and each employee on average now generates just half that at around $72,000 in profits.

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During one of its regular updates to the global bond markets, David Fisher who runs global product management for Pimco also said there was a “new normal environment”, which looked much different to that of previous decades.

Despite the volatility in Australia caused by former Prime Minister Kevin Rudd’s proposal to tax mining companies, a cooling China and debt concerns in Europe, Australia remains one of the top investment destinations of Pimco.

“Starting with a ladder, we would say those countries with solid fundamentals include in the developed world places like Canada and Australia, not only because they came into the crisis with better conditions … but also because they’re very well exposed to the growth dynamics in the emerging world and particularly through the channel of commodity prices,” Mr. Fisher.

Mr. Fisher also warned that there were risks posed by unrealistic expectations and over priced companies as both America and Australia both enter into critical reporting periods.

Pimco chief Bill Gross surprised global markets when he announced the asset manager had begun investing in equities.

“While we think bonds are priced for a depression, we think that equities are still priced for something more akin to the ‘old normal’ than the ‘new normal’, he said. We think that there’s still some scope for compression in PE ratios and we think that optimism over profit recovery is probably a little bit exaggerated in this environment of very, very weak growth, outside of a few countries such as Australia and Canada and the emerging world. So, on a relative basis, we would say that the returns in global bonds, while not spectacular, are certainly attractive.”

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The drop in financial markets is likely to result in investment earnings falling below double digits for the financial year, ending at about 9.6 per cent.

The recent volatility has seen Australian super funds lose as much as 50 per cent of their valuations which provided the federal government with the impetus to ease rules on capital draw downs from pension funds.

As recently as two months ago, analysts were confidently predicting investment returns as high as 15 per cent. However in the last couple of months valuations have been hammered by renewed fears of the recovery in the global economy, which has produced a string of negative equity market returns in Australia.

The poor performance this year has resulted in lower rolling cumulative returns, with the median five year return now estimated to be 3.7 per cent, according to research firm SuperRatings.

Since the compulsory super was established in 1992, the median balanced fund has returned 6.8 per cent a year, illustrating the fact that a well diversified portfolio does indeed protect investors from catastrophic loss.

Balanced funds have both met and exceeded their long term objectives of outrunning the Consumer Price Index by an annual 3 per cent SuperRatings data shows.
Chant West, another research firm estimates that the median returns for investment funds who hold between 61 to 80 per cent of their portfolio in growth assets is exactly 10 per cent.

Superannuation industry figures look better when taken over the past seven years, but the record has been remarkably volatile.

After a shaky start to the decade, when many Australians fell behind compared to the returns of cash investments in the aftermath of the collapse of the tech bubble, Australians enjoyed a four year period of uninterrupted gains in their super, after which the onset of the first global financial crisis took hold.

Growth funds especially were hit in the financial years 2008 and 2009, posting negative returns of more than 6 per cent and 12 per cent respectively.

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Window dressing typically occurs at the end of the financial year and is a deliberate strategy managers engage in of price manipulation which dresses up the performance of the portfolio or fund before presenting the performance to clients or unit holders.

Belinda Gibson, deputy chairwoman of the Australian Securities & Investments Commission (ASIC) says that the practice of window dressing distorts the value of a portfolio at a time when it benefits the manager, at the expense of current and potential investors.

“Investors may not only be looking at their funds performance through rose-coloured glasses — they may also be paying higher performance fees than are necessary,” Ms Gibson said in a statement yesterday.

The regulator is poised to take over responsibility of supervising real time trading on licensed exchanges.

Ms. Gibson added that brokers and other indirect market participants should view clients who place their orders close to the end of business on 30th June with some suspicion that they intend to try to set the closing price for the security higher than it otherwise would be.

ASIC and ASX surveillance teams would be monitoring end of financial year trading and exchanging notes, she said.

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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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Macquarie revised it second half profit forecast upwards by 10 per cent, and the revision failed to impress investors, with shares trading down by as much as 6.5 per cent immediately after the announcement.

Most market participants believed that Macquarie would deliver a full year profit of $10.4 billion, with guidance now driving expectations of roughly $10.1 billion.

During the investment banking group’s briefing, Macquarie chief Nicholas Moore said market conditions continued to be volatile, but the company had benefited from a stronger balance sheet in the aftermath of the global financial crisis.

“Despite improved trends in a number of major markets we continue to maintain a conservative approach to funding and capital. Our strong balance sheet, strong team, and encouraging market conditions continue to provide opportunities for medium term growth.” Mr. Moore said.

Mr. Moore stressed that Australian lenders including Macquarie still faced uncertainty when it came to the extent of changes to the regulatory framework that would be imposed on the Australian banking system.

“We are saying watch this space in terms of what is happening in Australia and globally with Basel. We don’t know what we are going to end up with but it’s a sure bet that there will be the requirement to have more regulatory capital. The impact on us is uncertain until we know more about it.” Mr. Moore said.

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