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.
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Australian Banks To Face Fines For Unsolicited Increases In Credit Limit Offers
Under proposed revision of lending laws, Australian banks will receive a fine of as much as $220,000 every time they raise credit limits of their credit card customers without having first received a request from the customer that was not solicited by the bank.
Under National Consumer Credit Protection legislation employees of banks run the risk of criminal prosecution for breaching a law which bars banks from offering higher credit limits to their card customers without having solicited permission of the card holder. The law also prevents lenders from allowing their credit card customers to exceed their credit limit.
Australian banks have complained that the new law is draconian; however the Gillard government has gone ahead and introduced the legislation in parliament anyway.
Steven Munchenberg, chief executive of the Australian Bankers Association on Sunday said that the new law “goes way over the top”.
“At this point any bank that even writes to an existing customer and suggests they might like to apply for an increase in their credit limit could be in breach of this legislation. There will be people with an irregular income or who are not in regular employment who will find it harder to get credit. The banks will be nervous about providing credit for fear that if a person subsequently gets into debt trouble the bank will become liable. The banks are going to be a lot warier about lending to them and there is a danger people will be forced into an unregulated market.” Mr. Munchenberg said.
The new legislation if passed, will bar lenders from bombarding consumers with unsolicited “tick the box” offers for higher credit card limits and will be implemented by July 1st 2012, giving banks enough time to prepare.
Under the new law, lenders will only be able to offer credit card customers higher credit limits only if those customers have first given the bank permission to be approached. Banks will no longer be able to authorize payments that exceed the borrowers credit limit by over 10 per cent unless the increase in limit was pre-arranged, and fees for exceeding the credit limit within the 10 per cent buffer will be banned as well the imposition of higher interest rates.
Any breaches will attract 2000 “penalty units” – equivalent to a $220,000 fine – as well as criminal sanctions for bank staff who authorise the breaches.
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How Much Does One Need To Retire On
Self help financial journalists tend to suggest that for individuals to maintain a comfortable lifestyle post retirement, that should aim for an annual income during their golden years of between 60 to 70 per cent of their final salary.
However that benchmark percentage raises a number of questions such as whether it refers to gross or net final salary, or whether there is a rule of thumb that can be applied to expected expenditure when calculating the value of assets required to achieve the much vaunted ”comfortable lifestyle”
Prudence suggests that after tax or net final salary be used to calculate retirement income, which really should be 75 per cent or more. That is to say if a family earns $100,000 after tax, then $75,000 would be an appropriate retirement income.
To put things into perspective, a couple who wishes to retire on $75,000 a year by the time they both reach 65 will require roughly $1.2 million in their super in order to deliver a tax free pension of that size, which is indexed at a modest 2 per cent a year to maintain parity with inflation. That figure assumes the wife will have a further 22 years of life expectancy post retirement, and assumes that the couple will sell their property to pay for access to an elderly care facility in the very twilight of life.
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Macquarie Expected To Post Decline In Full Year Profits
Australian investment banking major Macquarie Group is widely expected to report a decline of 10 per cent in its 2011 full year profits, but forecasts that improving market conditions will have a positive impact on its future earnings.
Nicholas Moore, Macquarie chief executive will announce the company’s earnings on Friday, with consensus market estimates of a $945 million net profit for the year.
Analysts expect the investment banking group to report second half profits of $542 million, 5 per cent below the same time period in the previous year, but 35 per cent higher than the previous half of the current financial year.
Earlier in the year, Macquarie issued a profit warning, saying that volatile global financial markets had negatively impacted the group’s earnings.
Analysts say despite the setback in revenues, Macquarie has effectively managed to contain its costs over the last year, which has helped mitigate the weak performance in earnings.
Last week rival Credit Suisse published a report on the Australian investment bank, suggesting it was well positioned compared to its major Wall Street rivals.
Jamie Ellis, banking analysts at Credit Suisse said Macquarie was much less capital intensive and much closer aligned to the higher growth markets of Asia, which comprised of as much as 18 per cent of the group’s earnings last year.
“Less positively, Macquarie’s cost-to-income ratio and non-compensation expense is currently relatively higher than Wall Street. There are also aspects of Macquarie’s global brand presence and distribution capabilities that are still in the process of being developed.” Mr. Ellis said.
Macquarie’s announcement on Friday, will kick start first half reporting season for most of Australia’s banks.
ANZ, Westpac and NAB will all be reporting their earnings results next week whilst rival CBA is due to deliver its third-quarter trading update.
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Australian Banking Returns Outperform Its Natural Resource Sector
Returns from the Australian banking sector have begun to outperform the previously booming resources sector as global investors began switching into stocks of the big four banking groups in the country.
The stock price of the major banks rose by an average of 6.3 per cent, easily outperforming the 2.5 per cent increase in the natural resource sector.
After leading the sector in 2010, ANZ’s performance lagged a little having risen by 3.2 per cent during the March quarter, well behind rivals Westpac which registered an 11 per cent increase, NAB which produced an increase of 10.7 per cent, and CBA which gained 5.7 per cent.
According to CLSA analyst Brian Johnson, the relative underperformance of ANZ is due to international investors cutting their holdings in the lender by 2.2 per cent, against a back drop of domestic institutional and retail investors picking up the slack.
Mr. Johnson says the opposite happened with rival NAB, who registered a two percentage point increase in ownership by international investors which was responsible for driving a quarter of unusual outperformance.
International investors have looked to pick up NAB stock for a number of reasons including the potential for the lender to realise some US$650 million on its troubled portfolio of collateralised debt obligation assets.
Investors have also expressed optimism over the impending transition of NAB’s British leadership from current chief Lynne Peacock to her well regarded replacement David Thorburn.
“While we cannot identify a ready catalyst for NAB’s present momentum to reverse, we reiterate our view that NAB is not cheap enough, given its above-peer risk profile,” Mr Johnson said.
Mr. Johnson has been a perennial NAB bear, and once again used this opportunity to cite the lenders relatively large exposure to commercial real estate, in particular with regards to its British banking assets. The CLSA analyst worries that there is a risk of M&A activity that would destroy value rather than create it, as the lender examined options of expanding its UK operations.
Mr. Johnson reiterated his underperform rating on NAB.
Mr. Johnson also warned that should the Australian dollar weaken, there was a large risk that international investors would sell their Australian banking assets. Despite the recent buying activity, global investors continue to remain more bearish than domestic investors on the funding challenges faced by the major lenders, and the risk of an emerging housing bubble.
Also, despite recent buying, international investors were far more bearish than local institutions about the funding challenges of the majors, and the risk of a housing bubble.
“These (factors) are not likely to improve anytime soon, with Australian banks facing the prospect of structurally lower . . . returns on equity, lagging dividend growth and net interest margin pressure should they have insufficient pricing power to pass on an increasing cost of funds to customers,” Mr Johnson said.
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Australian Banks Deny Underestimating Cost Of Living Expenses For Mortgage Borrowers
Australian banks which have been charged in a report by investment bank Merrill Lynch with underestimating the cost of living for their customers, and as a result lending to much as they seek to maintain their market share, have dismissed the accusation.
The report published by Merrill Lynch earlier in the week suggests that Australian lenders have not factored in costs of living at a high enough level, resulting banks lending to customers who may later struggle as expenses begin to rise.
According to the report, Australian lenders are using cost of living estimates which are as much as 7 per cent below mainstream forecasts.
Excluding housing expenses Australian banks have estimated that on average, the expenses of an individual are $1,208 whilst a couple faced expenses totalling $1,708.
The estimates fall well short of those by the globally recognized Poverty Index, which puts living expenses for a couple at $1,814.
According to the Merrill Lynch report, ANZ is the most aggressive lender, whilst rivals CBA and Westpac are the most conservative.
On Tuesday the banks responded by saying lower rates of credit impairment and arrears suggest that mortgage lending was far from being too aggressive, and that they had implemented stringent customer assessment plans.
“The poverty index certainly isn’t perfect and this is why we spend time with customers to help assess their real cost of living,” an ANZ spokesman said.
A spokesman for Westpac said the lender updated its living cost assessment once every three months.
“We also confirm a customer’s repayment history and savings record, as a proxy for proposed mortgage repayments,” he said.
“We review and update our servicing models quarterly, to take into account changes in living costs, market interest rates and other market factors.”
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ANZ Knocked Back In Defence Against Class Action Law Suit
Australian banking major ANZ received a blow to its defence against a class action lawsuit over bank fees it is facing when the presiding federal judge in the case ruled it could not be delayed in light of an internal investigation by the bank into costs.
Justice Michelle Gordon called ANZ’s request to delay legal proceedings by 15 months in order to prepare its defense in the $50 million class action law suit “an abuse of process”.
“I do not accept that a Court should wait and conduct a trial of all issues in two or three years’ time,” said Judge Gordon in a Melbourne court. “It is simply an inappropriate way in which to conduct this piece of litigation. It is an abuse of process because the allegations are made…without any foundation,” she said.
‘‘This is still very much still in the procedural stages of the trial and as we understand it simply means her honour has decided to split the case into separate parts, There remain complex issues to be tested in court and ANZ will of course continue to vigorously defend IMF’s claims.’’ An ANZ spokesperson said in response to the ruling.
Maurice Blackburn principal Andrew Watson said: “We are very pleased that the Court has rejected ANZ’s attempt to delay the case and that this class action on behalf of ANZ customers can now proceed in an efficient and cost effective manner. It’s in the interests of all concerned that we get to the heart of the case without any further delays.”
The hearing will continue on May 5th, at which point the timeline of the case will be determined, which is largely being seen as a test case for a much wider class action law suit also initiated by Maurice Blackburn that has 11 of Australia’s largest lenders including the big four banks in the dock.
That particular lawsuit on behalf of 200,000 plaintiffs is seeking $ 5 billion in damages which the lawyers for the plaintiffs claim has been paid by consumers as fees over the last six years.
Australia’s big four banks have faced intense criticism since they decided to raise interest rates out of synch with the central bank at the end of last year, despite having made a combined profit of at least $20 billion.
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Australian Bank Customers May Face Technology Issues For Up To 15 Years
A technology analysts says Australians may have to brace themselves for as long as 15 years of potential bank IT problems.
Last week Australian banking major NAB experienced yet another technology glitch which deprived its customers of their pay, and affected employers who use NAB and other lenders to process their payrolls.
Jorn Bettin an analysts at technology research firm IBRS says that the NAB failure would certainly not be the last one of its kind and that it might take big four lenders as long as 10 years to upgrade their IT systems, and a further five years for the upgraded platforms to stabilise.
“These outages can be traced back to the complexity of the systems that these banks are running. Some of these systems are 30, 40 years old and hard to grasp by the average consumer.” Mr. Bettin said.
He added that a large domestic bank would typically have computer code consisting of as much as 10 million lines, or the equivalent of 500 books, and even if the bank employed teams consisting of hundreds of people to oversee the system, it would still be an incredibly complex task to manage, and could hardly be described as being trivial.
Mr. Bettin says that a single minor change may result in a major disturbance.
NAB and CBA between them are spending a combined $2 billion upgrading their core banking platforms. According to Mr. Bettin, smaller regional lenders would find it difficult to offer stable banking systems unless they spent double or even triple their existing IT expenditure.
Mr Bettin cited the example of Airbus, which has seven systems running in parallel to ensure technical problems are managed effectively. “Why would you want to ever run seven systems? The answer is because of the complexity.
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Big Four Subsidiary Banks Fail To Impress Business Customers
The results of a new survey suggest that smaller Australian banks including St George and Bankwest perform little better than their big four parents when it comes to customer service for their business clients.
Both banks also underperform when compared to regional banks and other smaller non allied lender, according to DRM business financial services monitor.
According to the survey, non allied smaller lenders such as Bendigo and Adelaide Bank and Suncorp were able to achieve higher customer satisfaction levels from their business clients compared to allied banks such as St George and Bankwest.
“There is a very significant and consistent difference in average satisfaction scores between the big four and the independent regionals and others,” the report said.
Dhruba Gupta managing director of DBM said it was surprising that subsidiary banks such as Bankwest and St George did not achieve higher customer satisfaction marks than their big four parents.
“Businesses are making clear distinctions between non-big four banks allied with a major bank and those that are independent regional’s or another bank. The results suggest that for a regional brand to deliver the higher levels of satisfaction they need to be seen to have the true qualities of a regional bank. This has important implications for the major banks using regional brands,” he said.