Australian Banks Express Support For Establishment of Government Lending Fund
Australian Banks have expressed keen support for the government initiative to establish a fund which would cover any potential funding gaps left by international banks retreating from the Australian market.
Speaking to reporters last Thursday, NAB Chief Executive Mr. Clyne said that so far there had been no evidence of international lenders exiting Australia (although last Wednesday Toronto Dominion Bank announced it was folding its Australian investment banking franchise TD Securities into its Singapore office).
Mr. Clyne did however say that it was vital should international banks beat a retreat, that the Government and domestic banks should be ready to step in and offer refinancing options to Australian borrowers.
The biggest funding problems would be in commercial property, a sector where Australian banks are not keen on increasing their exposure. “I think this is the time when strong, functioning, major banks look at partnership opportunities with the Government on a whole range of issues,” Mr Clyne said.
Weak international banks are expected to use the rollover of large syndicated loans as an opportunity to withdraw from the Australian market over the next couple of years cutting back on lending, focusing instead on their own domestic markets, nursing back to health, cash strapped balance sheets.
After discussions with the banks, the Government is finalising plans that could see it effectively become lender of last resort to Australian corporate borrowers. The Government is determined to ensure that it acts ahead of any funding crisis in the Australian market.
The plan would see the establishment of a multi-billion dollar fund which would provide a special and temporary facility for Australian borrowers, which would be funded both through the sale of government debt and contributions of up to A$500 million each from the big domestic banks. Such a fund would have the advantage of being relatively quick to set up.
NAB is understood to have been the most active bank campaigning in Canberra for the creation of the corporate credit fund. Westpac has also been close to the negotiations.
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Non Bank Lenders Continue To Lose Mortgage Market Share
The market share held by non banking finance companies in the home loan markets has collapsed to a record low reducing pressure on big banks to pass cuts in official interest rates on to their customers.
In November last year, data from the Australian Bureau of Statistics (ABS) shows that non bank lenders held just 7.7 per cent aggregate market share in the market for mortgages, and was at the lowest level since records began in 1975. Non banking finance companies share of the mortgage market has halved in little over a year, with their share of the market in November 2007 having stood at 15.3 per cent.
The reduction in market share is largely due to the global credit crisis which has rerated risk increasing borrowing costs of lenders with smaller balance sheets in comparison to large banks, making it hard for non bank lenders to offer competitive lending rates.
The banks have increased market share to more than 92 percent of the mortgage market and in contrast to non banking finance companies have access to depositors as a source of funding.
Choice senior policy officer Elissa Freeman said less competition in the home loans market means less pressure on banks to match upcoming official interest rate cuts.
“With the banks having a 90-plus percentage share now in home loan approvals, that’s clearly not enough pressure on them to drive interest rates lower. In past years, pressure came from non-banks and that pressure’s just not there at the moment. With less power as a consumer, you have less power over fees and interest rates.” Miss Freeman said.
Analysts have suggested that government intervention in the residential mortgage-backed securities market would help non bank lenders increase their market share this year. The Federal government has a program to buy up to A$ 8 billion in mortgage securities.
Westpac To Bin Virgin Money Brand
The Virgin Money brand is about to binned in Australia after six years of issuing credit cards. Former Virgin Money Australia CEO David Wakely wrote to card holders last week letting them know that the brand would cease to exist in the coming months and would be replaced by the “Ignite MasterCard” issued by Westpac.
When contacted Mr. Wakeley said he resigned from the company last week and could not comment on whether customer benefits associated with the Virgin-branded card would be preserved by Westpac. Mr. Wakeley added that the letter announcing the changes was written in early January and was sent to 600,000 customers at different stages this month.
The letter which announced the retirement of the credit card brand went on to say that Westpac would ensure that credit services would continue to be provided to customers.
“We’ve loved having you as a customer and now Westpac will continue to take very good care of you,” The letter written by Mr. Wakely said
Ignite MasterCard will continue to carry the same rate of interest as Virgin Money cards and would be priced at 12.99 per cent. The cards would have no annual fee but the Mates Rates rewards program would cease on February 9th. The rewards program gave cardholders discounts on goods and services marketed by merchant partners.
It is believed that the Australian banking major is now planning to attach its own loyalty program to the new card. Westpac acquired the Virgin Money credit card portfolio last year after the global financial crisis created severe funding problems for the company.
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Toronto Dominion Shutting Up Shop In Australia
Canadian Banking Major and fixed income powerhouse Toronto-Dominion bank intends to retreat from the Australian market, scaling back its activities and shutting its local sales and trading as well as debt origination desks. The move will result in the loss of 65 jobs.
The announcement reinforces the Federal Government concern which has been voiced by both the Prime Minister and Treasurer that International banks whose balance sheets have taken a beating as a result of the credit crisis may exit the Australian market leaving Australian corporate borrowers with loans unable to refinance.
TD said that it would continue to service its existing A$2.2 billion Australian loan portfolio, but other operations would be moved to Singapore. The bank also intends to shut up shop in Japan and also plans to move its Tokyo operations to Singapore as well.
Simone Philogene a TD spokesperson told Reuters “Asia is an area where we foresee solid growth opportunities for TD Securities. Having one central operating center, that being Singapore, will help us grow and it will also help us improve our operational efficiency.It will help us grow our international fixed income and foreign exchange business in Asia because we’ve already had an establishment there for some time.”
TD Securities, the investment banking unit of TD Bank is a major player in the Australian fixed income market, specializing in the origination of Kangaroo bonds. The decision to shut up shop has come as a surprise to many market participants since the business was thought to be extremely robust. Kangaroo bonds are those bonds issued in Australian dollars by foreign issuers.
TD Securities ranked second in Australian bond issues sold in 2008 thanks to strong sales of Kangaroo bonds, or Australian dollar bonds sold by foreign issuers, according to KangaNews magazine, which covers the Kangaroo bond market.
TD’s decision comes as many U.S. and European banks have retreated from some major foreign investments, including those in Asia, as a result of the global financial crisis.
Given the global capital drain, there is pressure on international banks to unwind their exposure to Australia; an unnamed banking executive was quoted by The Age as saying on Wednesday. “It’s not business as usual, everyone is running their balance sheet tight, and that’s because capital is tight,”
International banks typically participate in about 25 per cent of all syndicated direct financing for Australian corporate borrowers. However the proportion of debt actually carried by balance sheets of international banks ends up being much higher, at just over 50 per cent.
Australian banks, while escaping the worst of the crisis, do not have the balance sheet capacity to make up for the $100 billion exposure foreign banks have to Australian companies.
Some large players, such as Citigroup, one of the largest international banks operating in Australia have said that the pressures being faced by their parents has not diminished their commitment to servicing the Australian market.
“While we are part of a global organisation, we are very much run locally,” said Citigroup Australian chief executive Stephen Roberts. “It’s not really having an impact beyond the overall operating environment for the whole marketplace.”
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Government Considering Establishing A$ 75 Billion Crisis Fund To Plug Lending Shortfall
Wayne Swan the Federal Treasurer has said the Australian Government is considering establishing a crisis fund which would enable Australian corporate borrowers refinance $75 billion in loans made by international banks who are unwilling to roll them over in the aftermath of the credit crisis.
The Government estimates that there are A$75 billion worth of syndicated loans that have been funded by international banks, which finance everything from large commercial property construction, to shopping centres, that need to be renewed over the next couple of years.
On Tuesday Prime Minister Kevin Rudd said that he was concerned that international banks retreating to their home markets will not continue to finance Australian business which would leave the big four Australian banks to fill the shortfall.
Mr Swan said the issue was under consideration, but said there had not yet been any such withdrawal of foreign banks.
“What we’ve said is there have been indications to us that there may be the possibility that some foreign banks will withdraw their funding in the Australian market. Now if that were to occur, what we have said is we will take any measure that is responsible to ensure the flow of credit to Australian businesses and Australian investors so we can support Australian jobs. That’s an issue that’s under consideration and I don’t intend to make any more comment than I’ve already made.” Mr. Swan told reporters in Sydney.
The proposed A$75 billion crisis fund would be funded by the sale of Federal bonds and also include some money contributed by Australian banks. The Australian newspaper said it was considered necessary to allow some of Australia’s biggest companies to roll over existing credit facilities.
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Prime Minister Rudd Warns Lending Gap Left By International Banks Could Be Catastrophic
Prime Minister Kevin Rudd has warned that there may be as much as a A$75 billion shortfall in business lending if international banks hobbled by the credit crisis retreat from Australia to their domestic markets and decide not to extend credit to Australian corporate borrowers.
Mr. Rudd ideologically aligned himself with US president Barack Obama calling for increased regulation of financial markets. Speaking in Adelaide Mr. Rudd said “If there is one thing we all now know, it is that only when America properly regulates its own financial institutions will Australia’s markets be immune from the mess we are now managing,”
The Prime Minister warned that crippled international banks had begun to scale back their businesses in overseas markets including Australia and would therefore not roll over business loans which could result in another bout of deleveraging and forced assets sales, this time by corporate borrowers rather than financial institutions.
“If banks do not allow clients to refinance as they would in normal conditions, then companies can be forced to sell assets, often at low value,” he said.
A recent Merrill Lynch analysis suggests that lending by international banks to Australian corporate borrowers stands at more than half the $286 billion in syndicated loans issued to Australian businesses since 2006. About $75 billion of those outstanding loans will fall due over the next two years.
“If foreign banks do not roll over their share of these loans, it would be difficult for Australia’s four major banks to fill the gap on their own,” Mr. Rudd said.
In Australia, the Government has had to step in to save car dealers from losing their credit after two foreign financiers withdrew from the market. Taxpayers are also guaranteeing deposits in banks, building societies and credit unions, as well as wholesale term funding.
Mr. Rudd yesterday hinted at further measures to plug the looming lending gaps.
“The Government stands ready to take whatever further action is necessary to stabilise financial markets and to help reopen the private lines of government to business, to get blood flowing through the arteries of the economy,” he said.
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Spending On Australian Credit Cards Down Reflecting Consumer Sentiment
The Reserve Bank of Australia released data this week showing that the total value of Australian credit card and charge card transactions including advances fell in the month of November.
Total spending on Australian credit cards and charge cards during November was A$17.614 billion, compared with $19.413 billion in October. A reduction of 9.3 per cent data from the central bank suggests.
The number of purchases made using credit cards in Australia also fell by 7.1 per cent. The value of cash advances on credit and charge cards fell by nine per cent to $1.027 billion in November, from $1.128 billion the previous month.
The value of credit card repayments fell by 11.4 per cent in November. Total credit and charge card balances outstanding was up 1.2 per cent in November to $45.280 billion, from $44.729 billion the previous month. Balances accruing interest rose 0.8 per cent to $32.729 billion, from $32.469 billion.
Total credit and charge card balances outstanding have risen by eight per cent over the past 12 months, compared with an average of 13.0 per cent over the preceding five years. The number of credit and charge accounts increased by 0.2 per cent in November.
The data shows that the effects of the economic slowdown which has clearly had a negative effect on consumer spending in Australia.
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Westpac The Only Big 4 Australian Lender Clean in Madoff Affair
Australian financial institutions are still trying to work out whether they have any exposure to the US$ 50 billion ponzi scheme operated by disgraced money manager Bernard Madoff. Currently the only big four lender which has said it has zero exposure is Westpac. Whilst none of the big four say they have any direct exposure to the scheme, Other than Westpac they are yet to say they have a clean sheet.
Only Westpac has confirmed it has no exposure whatsoever and a Westpac spokesperson was quoted as saying “We have no exposure to Madoff,”
The banks are in the process of trying to identify their indirect exposure to the financial scandal through any counterparties they may have. CBA has said it is still investigating and a spokesperson said “At the time our risk management team was asked to identify and assess possible exposures and contact customers accordingly, which is an ongoing process,”
Similarly NAB is still looking at its clients and counterparties but a spokesperson did say that the bank is “not aware of any material impact on counterparty risk,”
ANZ echoed the sentiment and through a spokesperson also said “We have been reviewing possible indirect effects, but at this stage we appear to have no indirect exposures to Maddoff,”
Investor anger has been directed to custodian banks which played the role of funelling investment funds into the ponzi scheme. Global banking giants HSBC and UBS both of whom operate substantial custodian businesses and have come in for particular criticism.
The two banks were the largest European custodians for “feeder” funds which channelled billions of dollars to Madoff, holding assets on behalf of investors.
However, the custodians’ legal relationship with investors is at question since Madoff required his clients to open accounts giving custody to Bernard L. Madoff Investment Securities, effectively forcing the fund custodians to outsource custody to him as sub-custodian.
Custodians’ duties include overseeing funds and managing cash inflows and payments to investors.
In 2003 Commonwealth Bank of Australia sold its custodian business to National Australia Bank and as a result has had no activity in the sector. NAB now operates Australia’s largest domestic and master custodian business by market share. ANZ also offers custodian services with the assets held by ANZ Nominees.
NAB has categorically stated that its custodian unit had no direct relationship with the Madoff scheme.”National Custodian Services has never had Madoff as a client or sub-custodian,” NAB said. NAB declined to discuss any indirect relationships as a result of clients’ instructions to invest in entities associated with Madoff.
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Global Banking Stocks Hemorrhaging, Australia Not Immune
Australian banking stocks were steam rolled on Tuesday as the international crisis of confidence began engulfing banking equities globally. The renewed turmoil means that Australian regulators face increased pressure to maintain the ban on short selling. Currently the ban is scheduled to expire next Tuesday, but the corporate regulator ASIC is expected to announce its decision this week, which in all likely hood will have to be an extension of the ban.
The extension will come largely as a move to pre-empt hedge funds from savaging global financial stocks through the establishing and running of short positions in those stocks, which would only add to negative sentiment according to The Australian.
The malaise began last week, with Morgan Stanley issuing a research report which said that global banking giant HSBC would need to cut its dividend payment in half and recapitalise itself by as much as US$30 billion through a rights issue.
The report suggested that HSBC may even be required to seek government assistance. The bank quickly issued a statement saying its fiscal position remained extremely strong, and it could not foresee any circumstances in which it would need to seek government assistance.
That was not enough for the sceptics and HSBC lost 15 per cent of its value last week alone and has sold off for 7 straight trading sessions.
On Monday, UK banking major Royal Bank of Scotland (RBS) announced the largest ever loss in British corporate history, totalling some US$61 billion for the financial year, which has resulted from write downs related to its acquisition of the majority of ABN Amro’s business units.
The loss, sent waves of paranoia ricocheting around the global investment community, with fears beginning to emerge about the very survival of the British banking system. There has been large scale selling across the entire sector with RBS haemorrhaging 65 per cent of its value on Monday alone.
The sell off in UK banking stocks began on the first trading day after the ban on short selling of financial stocks was lifted by the FSA and suggests that the second rescue package announced by the British Government had failed to restore confidence in the British financial system.
Fears about the state of the UK began infecting other financial markets; the British Pound was trading at seven and a half year lows against The Euro, Yen and US dollar. Whilst Australian indices and in particular banking equities began seeing heavy selling pressure on Tuesday.
The benchmark ASX closed down 3.1 per cent on Tuesday erasing its gain for the whole year in a single session.
Tuesday’s sell off was led by NAB, which fell 5.4 per cent; ANZ was down 5.06 per cent; CBA lost 4 per cent; and Westpac dropped 3.67 per cent. The sudden loss of confidence has lent weight to the voices calling for an extension to the ban on short selling in Australia.
Chief executive of the Australian Bankers Association David Bell said the developments on international markets warranted the ban remaining in place to restore systemic confidence.
“The ABA supports the extension of the temporary ban on short selling of financial stocks in Australia, especially given the recent and overnight activity in the UK following the lifting of the ban in that jurisdiction,” Mr Bell said.
Australian banks have been the target of shorting by hedge funds throughout the past year. It is estimated that up to 10 per cent of Westpac’s free float are currently in a “short” position, while 5 per cent of Suncorp’s capital is the subject of lending agreements.
A broker downgrade on Tuesday added to the sectors troubles. Credit Suisse downgraded the Australian banking sector, saying that though the stocks looked inexpensive, the economic downturn would continue to weigh on valuations pushing them lower rather than higher.
UBS director of equity research sales Edward Hartman said the current valuation of the banks could lead to more sales by international investors, as the appetite for financial stocks dwindled.
Mr Hartman told the Australian it was “not impossible” that the banks could see savage selling similar to the overseas experience once the ban was lifted. “The Australian banks are trading at a premium to the book value, but in the UK and the US they are at a discount,” he said. “Ahead of the short-selling ban coming off, there could be some price action being signalled.
“If you were a long-only fund you would be positioning yourself ahead of that event.”
The selling pressure was also driven by some market speculation that ANZ could be the next bank to carry out a capital placement, given it has the lowest tier one ratio of the majors. The current offer by Westpac to retail investors is also facing pressure, as the shares are being pitched at $16, a significant premium to yesterday’s close of $15.50.
There was no mercy for American financial institutions either, despite the massive amounts of goodwill generated by the inauguration of President Barack Obama, there was no rest for the wicked.
Venerable American financial institution, State Street , previously seen as a safe haven in the financial sector due to its relatively small loan portfolio and reliance instead of consistent fee based income from activities which do not completely depend on the robustness of financial markets, took an absolute beating during Tuesday’s US trading session.
State Street lost half its value on Tuesday after reporting paper losses on its bond holdings. State Street’s main revenue source is fees from services such as securities custody and asset management. But in Tuesday’s fourth-quarter results, State Street reported higher paper losses on its $US78.9 billion ($121 billion) of bond holdings than analysts expected. Mark-to-market losses increased $US3 billion in the fourth quarter to $US6.3 billion.
The problems at State Street underline a new problem that has emerged as a result of the creation of the Sovereign backed asset class, a lack of investor appetite for other types of debt instruments which has resulted in a lack of demand.
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State Governments Finding Financing Increasingly Tricky, Despite Australian Banks Bonds Bonanza
The six States and two Territories who make up the Commonwealth of Australia having been looking at new ways to raise funding in response to increased borrowing costs, deteriorating budgetary situations and the prospect of little financing from the Federal Government.
The additional need for funding by local governments at a time when the cost of access to capital is extremely high has created a specific set of issues which require unique solutions. According to data compiled by Westpac Bank, the five largest state governments had $104.56 billion in fixed-rate notes outstanding in late December.
State governments have been looking at offshore funding possibilities with the New South Wales government thinking of tapping the Euro denominated commercial paper market, something it first did back in 2003.
Stephen Knight, chief executive of NSW Treasury Corporation, the funding arm of the NSW Government, said “We’re looking at issuing in offshore markets that we haven’t done for some time, Even though our benchmark bond program is our major source of funding we have been active in terms of diversifying and these events just encourage us to continue to do that” Mr. Knight reckons about 50 to 60 per cent of T Corps funding is raised in offshore markets and that percentage is slightly above the estimated long term average.
In recent months all of Australia’s State Governments have either seen their budgets fall into deficit or had their budgets surpluses diminish substantially as the economic slowdown reduces revenue collection, and governments respond with fiscal stimulus measures which increase spending.
State Government issuers also have the added problem of having to compete with the domestic banks for investors, a lot of whom have been taking advantage of the Sovereign guarantee on their funding obligations, raising over US$ 40 billion in new financing since the start of December.
Investors seem to be shunning state government debt, known as semi bonds preferring to hold debt issued by Australian banks which have Sovereign guarantees attached to them, which means they get higher returns for the same triple A rating that accompanies Australian Sovereign debt.
State government debt is also triple-A-rated but carries only an implied understanding that the federal Government would support any state facing default on its debt.
Spreads between yields on Australian semi-government bonds and federal or commonwealth government bonds have blown out in recent months, largely as a result of the introduction of the government guarantee for bank debt.
“The spreads being offered by the banks are very, very generous and in theory offer an even better credit rating than the states,” says a person at one government financing agency who does not want to be named. “The incentive to hold semi-government bonds in that environment isn’t so good.”
The yield on NSW Treasury Corp or TCorp March 2017 bonds is now 95 basis points above the commonwealth government February 2017 yield. This compares with a spread of about 50 to 60 basis points in June although it is down from a peak of 130 basis points in mid-December.
Market participants believe that spreads will start to contract in the coming months before the funding requirements of the individual states becomes acute.
“The fiscal situation, not just for the federal Government but the state governments, is going to be pretty horrible over the next couple of years,” says JPMorgan senior interest rates strategist Sally Auld. Semi-government agencies “might be able to hold out in the short-term but I suspect their medium-term issuance needs will be reasonably elevated”.
The Australian Federal Government with a net worth of $61 billion as of June 30th 2008 is in relatively strong budgetary position, and this means it has the ability to provide assistance to the states and territories for the funding of infrastructure projects and other fiscal stimulus measures they choose to embark on to counter economic slowdown.
However Kevin Rudd’s Government has so far resisted pleas for it to provide direct financing options to state governments in the same way it has helped the countries banks.
The Australian Office of Financial Management, the Federal Government’s financing agency, has been issuing federal government bonds and then using the proceeds to buy semi bonds in the secondary market.
Treasurer Wayne Swan however has flatly said no to the proposal of raising funding on behalf of state governments or providing them with a sovereign guarantee which would enable them to tap global credit markets in the same way the banks are able to do.
Mr. Swan was also remarkably silent on the proposal for an infrastructure bank specifically created to help finance state governments. The bank which would be able to borrow on international credit markets in the same way that Australian banks can now, would be subject to a Sovereign guarantee and could lend the proceeds of its borrowing to various state governments for their individual infrastructure projects.
Currently most Australian state governments are well ahead of meeting their funding requirements for the fiscal year ending June 30, 2009. Going forward however there is little doubt governments will need to calibrate their financing strategies.