Super Funds On Course To Have Worst Ever Year
Superannuation funds stand to have their worst year on record this financial year with expected double digit losses for most accounts despite the global rally in equity and other asset prices over the last few months.
Two market research firms that analyse the super fund industry Chant West and SuperRatings have expectations that four out of every five workers will post losses of between 10 to 14 per cent on their super fund account in 2008-09.
Such losses would result in the worst performance of fund accounts since super funds became obligatory in 1992. The loss in this financial year would also mean that it would be the second consecutive year that super funds posted negative returns. In the previous financial year, super fund posted a median loss of 6.4 per cent.
SuperRatings spokesperson Jeff Bresnahan expressed a lack of surprise at the result due to the effect that the global crisis in banking had on the value of most investments.
“It got as bad as minus 20 per cent at one point, so if we can bring it to minus 10 per cent, in a broad sense, I think that is quite a good result given what we have been through in the last 18 months,” Mr. Bresnahan said.
The expectation for a record year of losses comes in spite of the fact that super funds posted positive results in May, with a median balanced portfolio with 60-76 per cent allocation in growth assets returning 1.01 per cent.
The positive result in May took three month returns ending May 31st to 6.25 per cent and according to the research firm was the first period of three month positive consecutive returns since October 2007.
Chant West spokesperson Warren Chant, said that the turnaround in super fund returns was largely driven by rising equity valuations on domestic and international stock markets. The ASX has rallied 25 per cent since hitting 5 and half year lows at the start of March.
“The general consensus of opinion among the investment experts we speak to is that the two sectors that are most likely to perform best (next financial year) are equities and credit and the ones that are likely to perform the worst are cash and government bonds. So if we look over the year ahead and if markets generally did improve, we would expect the next financial year to return to positive returns. But I think it is going to be a number of years before we return to the levels we saw (before the GFC).” Mr. Chant said.
Mr. Chant said investors should expect long term returns after tax of between 7 and 8 per cent a year for the average balanced option. Data from SuperRatings suggest that the return over a seven year horizon for most balanced options has been 5 per cent a year.
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Treasury To Look At Ways Of Ending Federal Government Bank Guarantees
The Federal Treasury Department is looking for ways to lift the Federal Government guarantee on bank deposits which has resulted in the Big Four banks to gain market share at the expense of smaller rivals and also led to mortgage funds freezing investor assets, threatening the income of retirees who depend on investment income to live.
The executive director of a mutual fund industry lobby Abacus, Louise Petschler, said that the government was acutely aware of the distortions that the guarantee has caused in the market and called on the government to lift the guarantee.
“Treasury is well aware of some unintended consequences of its guarantees on banks that flow from the financial crisis last year. We are urging them to wind back the wholesale guarantee for banks and find some other form of support to allow non-banks back into the lending market.”
Alternatives to the blanket deposit guarantee are policies implemented in Canada and the UK. The Canadian Government guarantee residential mortgage back securities, whilst the British Government allows smaller financial institutions access to cheaper funding.
“Canada has five big banks, and yet more competition than here because of the government’s backing of RMBS securities,” Ms Petschler said.
Another proposal being bandied about is a multi billion dollar index linked Federal Government bond issue which could be accessed by the property sector.
Fund managers, building societies and regional lenders have asked the Government to review its wholesale funding guarantee policy as soon as next month. The policy which was in response to global credit markets freezing in October, after the collapse of Lehman Brothers.
The guarantee provides the Big Four lenders an 80 basis point advantage in funding over regional lenders, building societies and credit unions.
Lindsay Tanner, the Finance Minister conceded the point that wholesale funding guarantees no longer appear to be necessary, but said unless there was multilateral action globally, lifting of the guarantee would be difficult because it would make Australian issuers less attractive to global investors.
Both ANZ chief executive Mike Smith and CBA chief Ralph Norris have called for an end to the guarantee.
The Big Four lenders want to end a government fee charged for insuring deposits of over $1 million, whilst the wholesale funding guarantee has raised the Government more $1 billion in revenue.
Bank critics said yesterday that if the government were to drop guarantees, it should do so across the board, in retail funds as well as wholesale funds.
The Federal Treasurer Wayne Swan had previously said in a television interview, that lifting of the guarantee would be an “act of madness”.
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NAB To Acquire Aviva Australian Wealth Management Unit
Australian banking major National Australia Bank (NAB) announced on Monday a deal to acquire the Australian wealth management division of insurance giant Aviva for $825 million.
The acquisition should contribute to earnings per share and the lenders return on equity within the first year after acquisition according to an official statement released by NAB.
Aviva’s Australian wealth management unit will first pay a $40 million dividend and then a net asset adjustment of $60 million once the deal vests resulting in a total sale price of $925 million.
Aviva Australia Holdings will become a wholly owned subsidiary on NAB, and the deal includes Norwich Union Life, strategic equity stakes in four independent financial advisory firms and the Navigator investment platform.
Aviva, Britain’s largest insurer said the deal would not include Aviva’s assets management business nor its interest in PIH financial advisory business.
“This acquisition will enhance our offering in key wealth management segments including insurance and investment platforms, adding scale, efficiency and new capabilities to our operations,” NAB chief executive Officer Cameron Clyne said.
NAB said the cost of the acquisition was at a lower PE multiple then comparables such as AMP and AXA Asia Pacific, and that its closely watched tier one capital ratio was be reduced by about 15 basis points as a consequence of the deal.
Aviva said it jettisoned the unit as part of strategy of selling of non core assets and focusing instead of key markets in Asia which can deliver growth such as in China and India, where it has ambitions to become a leading player.
“The decision to sell these businesses is based on the belief that it would be challenging to reach a leading position in Australia in the foreseeable future in an increasingly consolidated market,” Aviva said.
The insurer’s Australian life insurance business ranks ninth in Australia, whilst its wealth management business ranks eighth according to Aviva.
“It gives us greater financial flexibility and we can redeploy the capital to other markets which we believe will deliver better returns to our shareholders over the next few years,” Aviva chief executive Andrew Moss said.
The transaction price represented 16 times 2008 net earnings, Aviva said.
Aviva’s Australian business earned $60.7 million in the year ending December 31 2007, which represented a 37 per cent decline from $96.2 million the previous year. Last year Aviva plc reported a full year loss of $1.9 billion.
The insurance giant said it intends to hold on to its Australian asset management business.
“As a global asset management business Aviva Investors remains committed to the Australian market where it is focused on building its external funds under management, benefiting from the growth of the pensions market,” Aviva said.
The business had about 350,000 customers at December 31, with NAB having to compete with rivals including AMP and Macquarie Group for the prize,.
The business saw a 24 per cent reduction in life and pension sales during the first quarter, which was largely as a result of a product withdrawal.
The sale subject to regulatory approval was managed by Morgan Stanley and JPMorgan Chase & Co, and is expected to be completed during the fourth quarter of this year.
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5 Mortgage Tips
Mortgages or buying a house can often be the most expensive financial undertaking for an individual over their lifetime. It is therefore critical that they are aware of common pitfalls and unforeseen costs when buying a house and obtaining a loan to finance the purchase. Here are six common borrowing traps that can be avoided.
1. Avoid Expensive Arrangement Fees
A lot of banks (not all of them) levy a charge for the cost of arranging mortgages. These charges can run hundreds if not thousands of dollars. Borrowers who manage to obtain low interest mortgages should be careful to find out whether the loan comes with a large arrangement fee which could easily make redundant any savings made from paying a low interest rate.
Arrangement fees that are charged as a percentage of the total loan should in particular be avoided, and the fee for that type of loan can be nothing short of extortionate.
If the lender provides the option and the borrower has the ability, then individuals should try and pay the fee in advance instead of allowing it to be combined with the loan and attracting interest. However borrowers should be extremely careful, and should read the fine print before they pay the fee. Some banks will keep the fee despite rejecting the applicant for a loan, so individuals should make sure what the lenders policy is before paying a fee in advance.
2. Avoid Paying The Higher Lending Charge
Individuals who want to borrow a high proportion of the property value they are financing (known as high loan to value) may end up being required to pay a higher lending charge, which compensates the bank for the increased risk exposure they have.
For example an individual who has the ability to make a 10 per cent down payment and needs finance the other 90 per cent of the purchase has a high loan to value, and such a loan may attract the higher lending charge.
HLC’s are expensive, and a little unfair since high LTV’s tend to incur higher interest rates to begin with, which should more than compensate the lender for the increased risk, without requiring the borrower to pay an additional charge.
The best way to counter such charges is increase the amount of deposit, perhaps defer the purchase until the individual can finance a greater proportion of the loan, themselves.
3. Be Aware Of Extended Early Repayment Charges (ERCs)
A lot of mortgage loans come with an ERC attached targeted at those borrowers who manage to pay off their loan early or decide they want to refinance and move the debt onto another lenders books.
Some banks levy ERC’s even longer than they offer the special rate deals and borrowers should actively seek to avoid these kind of loans. ERC’s which have long periods of validity basically hold the borrower to ransom, allowing the lender to set rates without giving the borrower the ability to refinance without triggering the charge.
Therefore though it can be tempting to overpay ones mortgage, borrowers should be careful by how much they do so lest they trigger an unnecessary charge.
4. Understand The Standard Variable Rate (SVR)
Standard Variable Rates (SVR), is the floating rate of interest that the lender charges once the introductory interest rate ceases to be applicable. SVR mortgages are a good deal when the central bank cuts official interest rates as it has done of late and can save the borrower a good deal of money., But they are double edged swords and when the central bank begins raising rates as they are likely to do shortly, then SVR’s can cause substantial increases in the monthly payment.
5. Do Not Use Mortgage Payment Holidays
Mortgage payment holidays may seem like a good way to bridge the gap for those struggling to meet their financial commitments, but this should be a last case solution for people who are struggling.
Payment holidays are not entirely cracked up to be what their name suggests and the true cost can be extremely expensive.
Though the capital payment is suspended, the interest incurred is added to the mortgage, increasing the amount owed to the lender, which is compounding. For every payment that is skipped, the interest amount increases because the amount owed to the lender has increased during the payment holiday. Therefore payment holidays should be used only when the borrower’s finances are dire, and are not a cost effective means for trying to get expenses under control.
ANZ Not Interested In RBS China Assets Without Banking Licenses
Australian banking major and its fourth largest lender has categorically stated that it is not interested in acquiring British banking giant Royal Bank of Scotland’s China operations unless the deal came with RBS’s retail banking licenses.
The comments were made by ANZ chief Mike Smith in an interview published by the Australian Financial Review on Thursday. Mr. Smith visiting western China said that ANZ intends to open up to 50 branches in China within five years, doubling its initial target.
Mr. Smith told the Review that if RBS decides to go ahead with dividing up its operation in China, into divisions focusing on investment and retail banking, ANZ would not be interested in acquiring assets from RBS.
Mr. Smith went on to make the point that “assets in China, Indochina and Southeast Asia would be a perfect fit.”
RBS which faced serious trouble at the height of the banking crisis and was forced to sell a 70 per cent stake in itself to the British government, wants to sell non core Asian assets, some of which were acquired when it embarked on the ill conceived takeover of Dutch rival ABN Amro. RBS wants to retreat to its domestic markets and part of that retreat includes the sale of 13 branches in China.
Mike Smith has on numerous occasions has expressed an ambition of turning ANZ into a “super regional” bank earning 20 per of its revenues internationally. In March Mr. Smith said that he planned to have 20 branches in China by 2012.
In his interview Mr. Smith said he was sanguine about the Chinese economy, and wanted to target Chinese companies that operate in Australia as well as the higher end of the retail market.
“I am not really interested in the mass market, I don’t think we can play that,” Smith was quoted as saying.
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Merrill Lynch To Sell Berndale Securities
Global investment banking giant Merrill Lynch has put up for sale its Australian stock broking affiliate Berndale Securities which provides stock clearing services and is the largest provider of such services in Australia.
The sale is apparently not linked to the high profile court case Berndale is currently engaged in. Berndale had launched legal action against prominent investor David Waterhouse who failed to pay margin calls for an Opes Prime trading account.
The decision by Merrill to sell Berndale will have implications on smaller stock brokers who are now required to either close, merge or outsource trade clearing to a third parties like Berndale. Previously those type of firms used the ASX clearing house ACH.
Currently ASX stipulates that settlement of trades must occur through the Australian Clearing House (ACH), with the ACH now proposing more stringent liquidity requirements.
The proposed regulation is to give the ACH the ability to deal only with brokers with enough financial muscle to settle all outstanding trades. The ACH wants smaller brokers to pass on settlement risk to third parties who have the ability to settle all trades. Opes Prime for example used Berndale as a third party house to clear its trades.
Merrill Lynch acquired Berndale as a legacy unit, when it purchased Mcintosh Securities back in 1996. Berndale was initially only a nominee company that institutional investors used to hold their stock in return for a small fee. Since then, it has expanded rapidly and provides full service back office functions including both stock clearing and lending.
Industry analysts point out that if Berndale were to cease serving clients, the number of firms which offer clearing services would be reduced significantly, which would reduce the amount of counterparties, increase fees and the risk that transactions fail.
Smaller stock brokers wishing to avoid having to increase their core capital to $5 million by the end of the year, and $10 million beyond that, will have to outsource clearing and settlement to third parties.
The Reserve Bank of Australia recently issued a report recently which said that of the 57 existing market participants (brokers) 17 would be affected by the change in regulation whilst 10 of them had liquid capital of less than $5 million.
Merrill Lynch is large enough to clear its own trades and as part of its merger with Bank of America is required to sell off non core assets. Interested bidders may include Fortis which provides clearing for both cash equities and futures, UBS, ETrade, Citigroup and Macquarie.
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Macquarie Defers Implementing New Compensation Structure
Australian investment banking major Macquarie Group has had to defer the implementation of its new compensation plan as a result of changes to the tax code for employee share schemes.
Macquarie made the decision to delay the new pay structure after the Government ceded to pressure from trade unions and professional association and said it would change the tax plan.
Macquarie said it would consider the potential impact the change in legislation would have on its new compensation policy. The investment bank said that proposed legislation on executive termination benefits was also a reason for delaying the change.
In March Macquarie proposed to change the composition of employee bonuses, saying that it would cut the proportion of bonuses paid as cash and increase the proportion of bonuses paid in equity, which have longer vesting periods.
The proposed changes would impact 300 of the investment bank’s senior most employees including that of Chief Executive Nicholas Moore.
Macquarie had made the case that the new scheme would greater align the longer term interests of employees with that of shareholders, and when it announced the new structure said that it was more in step with global compensation trends.
The new structure was scheduled to be tabled at the firm’s annual general meeting in late July, where it would need to be approved before it could be implemented. Macquarie says that it will no longer ask its shareholders to approve the plan at its AGM.
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Banks Unlikely To Raise Variable Rate Mortgages Further
An unnamed banking executive with a Big Four lender has told The Australian that banks were unlikely to tinker further with their variable rate mortgages and that more rate increases would be unlikely.
As more lenders increased their interest rates on fixed rate mortgages on Tuesday, the banking executive dampened expectations that other major lenders would follow Commonwealth Bank’s lead and increase the interest rate on their variable rate mortgages, after CBA to much derision increased its variable rate mortgage interest rate by ten basis points.
The unnamed source made the point that CBA offered the lowest variable interest rate, which was still 17 basis points below its nearest Big Four rivals NAB and ANZ.
The executive said the differential in interest rates meant that CBA, the largest mortgage lender in the country missed out on $200-$300 million in revenue. Such a strategy would have meant that CBA would have had to have made lower quality loans in order to bridge the revenue gap.
CBA, whose decision to raise its interest rates despite The Reserve Bank of Australia having cut official interest rates by 425 basis points since last September, was controversial to say the least, has cited increasing wholesale funding costs and increased competition for deposits as the reason for their decision.
Senior figures in the government have expressed discontent with CBA’s decision, with the Prime Minister accusing banks of price gouging, saying that the banks move had undermined economic recovery and Australians had a right to be “furious”.
Federal Treasurer Wayne Swan slammed CBA, which also lifted offered interest rates on its fixed products as being “selfish”.
On Tuesday NAB, Westpac and its subsidiary St George Bank all followed suit and raised their rates on fixed rate mortgages.
Westpac raised interest rates on one fixed rate loans by 10 basis points, its two year product by 20 basis points and loans with duration of 12 years by 50 basis points.
NAB increased its interest rate on fixed rate loans with a duration of two to ten years by 15 to 40 basis points.
Steven Shaw NAB’s General Manager for Mortgages said NAB’s decision to raise interest rates on its fixed rate products was taken last Thursday, but said that decision would not have any implications for its variable rate mortgages.
“We have no current plans to lift our variable rate,” Mr. Shaw said.
Fixed interest rate mortgage costs have actually been rising for some time now, Mr. Shaw said, with rates having increased by as much as 100 basis points over the last month or so.The increase in fixed rates is as a direct consequence of the long term wholesale funding costs also having risen over the same period.
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Wayne Swan Says Lifting The Funding Guarantee Would Be An Act Of Madness
Federal Treasure Wayne Swan has suggested that the lifting of the Federal Government guarantee on bank funding simply to teach lenders a lesson for raising interest rates would be an “act of madness”
Last week Australian banking major Commonwealth Bank of Australia (CBA) became the first Big Four lender to raise its interest rates since the Australian central bank the Reserve Bank of Australia began an interest rate easing cycle in September.
During an interview on ABC’s Lateline, Mr. Swan called the move “selfish” branding the rate increase as being unjustified.
“Certainly the action from the Commonwealth Bank, from my point of view, is not justified, and it does counter the economic stimulus or the fiscal stimulus the Commonwealth government is putting in place and the stimulus that comes from the easing of monetary policy by the reserve bank,” Mr. Swan said.
Mr. Swan said that the lifting of the sovereign guarantee which has been in effect since October last year would be an irresponsible response.
“What the bank guarantee does is allow all Australian financial institutions, including the four major banks, to borrow on overseas markets so we can have credit flowing through this economy,” he said.
“To take it away would be an act of madness.”
Prime Minister Accuses CBA Of Price Gouging
The Federal Government says it believes that the Commonwealth Bank of Australia (CBA) engaged in price gouging when it raised the interest rate on its variable rate home loans despite enabling banks to reduce the cost of funding by offering sovereign guarantees.
Prime Minister Kevin Rudd has suggested that the cost of raising funds on the bond markets as well as inter-bank funding has declined sharply as a direct result of the Federal Government guarantee.
The equity market however cheered CBA’s decision to raise its variable rate mortgages and fixed rate loans by 10 basis points with CBA shares rallying by 1 per cent on Monday despite the broader marketing declining.
Mr. Rudd said CBA was able to issue bonds last December through the use of the sovereign guarantee at a cost of just 160 basis points above the bank bill swap rate inclusive of the government fee for use of the guarantee.
“As of 14 April 2009 – that is after the government’s guarantee came into operation – the spread on the CBA issue was down to 123 basis points,” Mr. Rudd said.
The Prime Minister said that credit spreads continued to fall after the Government introduced the guarantee, with credit spreads on CBA debt falling by 121 basis points between the immediate aftermath of the Lehman Brothers bankruptcy and the end of May.
The Australian Bankers Association chief David Bell expressed support for CBA’s decision by saying that the best course of action for banks is to operate commercially.
“One of the reasons we have such a strong banking system is our banks have lent properly and have been allowed to make commercial decisions,” he said.
Mr. Bell said that Australian banks had passed on to their customers 385 basis points of the 425 basis point cuts in official interest rates. Mr. Bell made the point that the proportion of cuts passed on was pretty good considering that Australian banks raised a large percentage of funding on wholesale international markets, where interest rates do not move in tandem with RBA interest rate moves.
Mr. Bell rejected the notion that banks were obliged to set interest rates as a result of the Federal guarantee on wholesale funding, saying that banks had paid the government fees for the use of the guarantee.
“Banks have paid the government $700 million for the price of using that guarantee,” he said.
One banking analyst noted that funding costs for banks had appreciated significantly as banks competed aggressively for deposits to replace previous wholesale funding through higher margin interest rates. The analyst added that pressure would continue as investors retreat from guaranteed deposits in order to seek higher returns from the equity markets.