Westpac Reports Lackluster Third Quarter Cash Earnings
Australian banking major and the nation’s largest bank by market capitalisation, Westpac Banking Corp posted third quarter cash earnings of $1.1 billion, in line with the previous year.
Deposits for the quarter ending June 30th grew by 2.3 per cent, whilst lending increased by 1.3 per cent compared to the previous quarter. Credit impairment charges grew to $865 million in the quarter up from $811 million, the lender said in a statement to the ASX based on unaudited figures.
Australia’s Big Four lenders continue to remain highly profitable as the economy managed to avoid slipping into recession which has gripped many other parts of the world. Mortgage approvals rose for a record ninth consecutive month in June, as interest rates hit half century lows and cash subsidies from the government helped boost demand from first time buyers.
Westpac said its net interest income had help from increased volume and stable customer net interest margins. The lender said that non-interest income however fell, but that its key Tier 1 capital ratio was 8.2 per cent on June 30th.
“Given the improving economic fundamentals and the extensive reviews of our portfolio we believe that the rate of increase in stressed exposures is unlikely to be repeated in coming months. The third quarter has shown some early encouraging signs of improvement. In particular, stronger business and consumer confidence and better-than-expected growth in China are assisting the Australian economy.” Chief Executive Officer Gail Kelly said.
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Australian Fund Managers Mark Down Property Investments
Independent property research firm IPD has issued a report which suggests that capital values of Australian property have reached nearly two decade lows for the year ending June 2009 as investment fund managers mark down the value of their real estate assets.
The IPD and Australian Property Council index suggests that capital values across all real estate sectors plunged 13.3 per cent during the period, the largest drop in asset values since the 1991 recession.
“There is a clear move by the industry towards stronger governance and reporting, with many more organisations now valuing all of their assets each quarter,” Adrian Harrington, non-executive chairman of IPD Australia’s Board, said in a statement on Tuesday.
Of the 1,100 assets included in the IPD database, approximately 80 per cent were revalued in June, up from 60 per cent in the previous two years.
Real estate investment trusts (REIT’s) have taken the biggest hit, with Stockland Group, Australia’s second-largest property trust, reporting a loss of A$1.8 billion for the year to June.
The worst performing sector was office real estate, which returned a total of negative 9.6 per cent, whilst retail property posted negative 4.5 per cent in total return.
Despite the drop in capital values, IPD believes a bottom may either have been reached or reached shortly.
“The true test will be with the transactions of larger assets that are starting to occur what differences still remain between value and price,” John Garimort, director of IPD in Australia and New Zealand, said.
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Macquarie To Acquire US Asset Management Firm
Australian investment banking major Macquarie Group will acquire US asset manager Delaware Investments from Lincoln Financial Group in a deal valued at $516 million.
Macquarie said that it would provide the asset manager with additional capital to finance growth, though it did not say how much funding it intends to provide.
“Upon completion of the transaction, the combined assets under management of Macquarie and Delaware are expected to be over $US300 ($A361) billion,” Macquarie said in a statement to the Australian Securities Exchange (ASX).
“We have a high regard for the Delaware team and are delighted to have them join us. Delaware will form a key element of Macquarie Funds Group’s offering to our clients globally and will significantly enhance our existing North American asset management activities,” Macquarie Funds Group global head Shemara Wikramanayake said.
Funds for the purchase will be provided by Macquarie Bank Ltd (MBL).
“MBL’s Tier 1 capital ratio is anticipated to decrease by approximately 1.2 per cent as a result of the transaction,” the company said.
The deal is expected to be completed by the end of the year subject to regulatory approval and closing conditions.
Industry analysts say that the investment bank continues to carry surplus capital and more than enough financial muscle to fund this and future acquisitions.
Analysts expect the fund management industry to continue consolidating in the wake of BlackRock’s US$13.5 billion acquisition of Barclay’s asset management unit.
Macquarie has a history of using depressed market valuations to make predatory acquisitions. In 1999 it purchased Bankers Trust’s (BT) Australian operations, and again in 2004 acquired the Asian equities business of ING Group.
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QBE First Half Profits Jump 19 Per Cent
Australian insurance major and the country’s largest general insurer posted a 19 per cent jump in net profit for the half year ending June 30th. Profits rose to $1.02 billion from $859 million in the same time period of the previous year, which was just above market expectations.
Shares in the insurer rallied by as much as 8.3 per cent immediately after the announcement compared with a slight rise in the broader ASX 200 index.
GBE generates almost 80 per cent of its revenues internationally in more than 40 countries.
Net earned premium, a key measure of revenue for insurance companies, rose by 21 per cent to $6.19 billion from $5.11biliionn helped by a weaker Australian dollar. The recent rally in the value of the dollar though, meant that the insurance major cut its expectation of full year gross written premiums from $16.2 billion to $12.5 billion at year end.
The volatility in the foreign exchange markets resulted in a gain in currency positions of $282 million, up from $8 million in the previous year.
QBE said the strong results were achieved despite weak economic conditions and volatility in financial markets.
“The strong underwriting profits from our four insurance divisions, together with overall average premium rate increases of around 4 per cent and the expectation of higher interest rates as economic conditions improve, give us confidence about the outlook for the insurance profit margin going forward. Higher interest rates on our $24 billion of high quality, short duration cash and fixed interest investments will also benefit our capital adequacy. This, and our low debt levels and strong capital position, provide considerable flexibility to convert further bolt-on acquisitions.” QBE chief executive Frank O’Halloran said.
The group has completed around 120 acquisitions in the past 25 years
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CBA Maintains Stake In Chinese Lender By Subscribing To Equity Follow On
Australian banking major, Commonwealth Bank of Australia, has maintained its stake in Chinese lender, Bank of Hangzhou, by taking part in its equity raising and paying up to $165 million for new shares.
Prior to the capital raising, CBA held a 19.9 per cent stake, which will remain the same after the follow on offer, and falls just below regulatory threshold of allowable foreign investment by a single entity.
The Sydney based lender will subscribe to 20 per cent of the total number of new shares on offer in order to maintain its stake at its current level. CBA will pay $2.30 per share and make a total investment in the region of between $160 million and $165 million, the lender said in a statement.
Bank of Hangzhou, based in Zhejiang province on China’s eastern seaboard is raising fresh capital to fund future expansion and increases its capital adequacy ratio, in anticipation of new regulatory requirements which the state regulator the China Banking Regulatory Commission (CBRC) plans to introduce.
CBA acquired its initial stake for in the Chinese lender for $100 million in 2005. Hangzhou has 79 branches and 2448 staff. CBA also owns 20 per cent of Qilu Bank and has its own representative offices in Beijing and Shanghai.
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RBA Sounds Note Of Cautious Optimism Over Australian Recovery
An official of the Australian central bank, The Reserve Bank of Australia, has said he believes that the country’s banking system is emerging from the global financial crisis in a better condition relative to its peers.
Assistant RBA governor, Malcolm Edey says that despite indications of an economic recovery, growth remains fragile.
Mr. Edey, who was speaking at a business forum, said that though conditions have improved significantly since the worst of the crisis, “they are still by no means back to normal,”
The assistant RBA governor said that measures such as the sovereign guarantee of deposits and wholesale funding obligations were temporary, and pointed to the fact that major Australian issuers were now raising funds without the use of the guarantee.
“It’s encouraging to note that Australian banks have again begun to issue significant amounts of unguaranteed debt in the last month or so,” Mr Edey said.
Wawrick McKibbin, also a board member of the Reserve Bank of Australia, speaking at separate economics conference, told attendees that he was optimistic about the outlook for global economic growth.
“I still am very optimistic that this is going to be a very different future than a lot of different people who are very pessimistic think it is going to be. The bubble may have burst but there’s still a lot of growth left in this part of the world.” Mr. McKibbin said
Mr McKibbin also sounded a note of caution however, saying that the huge fiscal and monetary response to the crisis by central banks and governments globally, means that inflation is now a major risk.
“We should be very concerned about inflation I think — that’s the one major risk. We are getting a very big monetary response — the question is as the world economy recovers, and I think it will recover much more quickly than most people think, how will these central banks pull back?” he said.
Mr. McKibbin went on to say that economic recovery would be asymmetric, and primarily driven by emerging economies such as that of China, India and Latin America. He also added that the worst of the crisis appeared to be over, and that there were definitely some positive indicators since then.
Mr. Edey added his voice to that view, saying global equity markets have rallied since their lows, and in some cases by as much as 50 per cent and “there has been a significant rebound in indicators of business and consumer confidence,”
Credit spreads and risk premiums in a range of global markets have been narrowing, “though they are not yet back to normal,” he said.
Mr. Edey also sounded a note of caution saying that uncertainty over the global economic outlook remained and threats to growth continue to be possible.
“But without making predictions, it’s reasonable to say there are encouraging signs now that confidence is improving,” he said.
Australian banks continue to be highly profitable, earning shareholders a high return on equity, with the Big Four retaining their high credit ratings, suffering only a small decline in their aggregate profitability.
Mr. Edey pointed out that the credit impairment rate in Australia continued to remain low compared to that of other countries, but that lenders should be vigilant and expect increased regulation.
“Effort has to be made to contain system-wide risks within reasonable bounds. We are moving into a world where banks are going to be required to hold more capital and to take less risk. In all of this there is a balance to be struck. It will be important to get this balance right,” he said.
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ASIC Eases Withdrawal Restrictions For Mortgage Fund Investors
The Australian Securities & Investment Commission (ASIC) has given mortgage fund investors facing financial difficulties the ability to withdraw as much as $100,000 a year from their accounts, providing relief to investors facing financial hardship who previously were barred by the regulator from accessing their funds.
On Monday, ASIC announced that it will allow exemptions to the Corporations Act, and enable investors in financial need, to have access to funds which were previously frozen. Investors that would be exempted include the beneficiaries of estates of the deceased, and the long term unemployed.
Until Monday, investors in frozen mortgage funds could only obtain $20,000 in capital and half the outstanding interest in a one off payment, which had to be pre approved by the regulator first, with no discretion given to the fund managers.
The new rules allow for investors to have access to $100,000 of their capital over four payments during a 12 month period.
A spokesman for the $2.8billion Challenger fund, on Monday lauded the new rules .
“Once approved, hardship payments could be made in as soon as seven days,” the spokesman said.
He said the changes, applied for by the affected funds, had been necessary to battle the “continued unintended consequences of the retail bank deposit guarantee”.
ASIC Commissioner, Greg Medcraft is said to have fast tracked the changes and said on Monday, that the new rules were necessary to cover “special situations”.
“We have expanded hardship relief to pick up special situations where the industry considers that further discretion for relief is needed,” Mr Medcraft said.
The mortgage fund industry was thrown into chaos last October when the federal government’s retail bank guarantee sparked fears investors would flee the funds for the safety of the banks.
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NAB To Acquire Challenger’s Mortgage Business
Australian banking major National Australia Bank (NAB), announced its intention to acquire the mortgage business of Challenger Financial Services for $385 million.
In a bid to increase its market share in mortgage lending, which has recently come to be dominated by CBA and Westpac as a result of the formers acquisition of Bankwest and the latter’s merger with St. George. NAB is set to acquire three mortgage aggregator businesses from Challenger.
Market analysts believe that the multi-brand multi origination businesses are the largest of their kind in the market, including a portfolio of mortgages worth $4 billion and a 5700 strong broker network.
NAB chief Cameron Clyne said of the deal “As I have said previously, we will take advantage of compelling opportunities to enhance our organic growth capabilities. This acquisition provides additional distribution and capability in Australian mortgages.”
Challenger, a non bank finance company was securitising it loan portfolio rather than funding it through deposits. The company has been struggling to obtain finance, with the market for residential mortgage backed securities still frozen. The portfolio of mortgages being sold to NAB was to have been securitised.
NAB has been aggressive in its bid to expand, pursuing a strategy of inorganic growth through acquisition, purchasing Aviva’s Australian wealth management business and acquiring a majority stake in a joint venture wealth management business with Goldman Sachs JBWere.
The Big Four Australian banks have used their relative financial strength at a time of rising bad debt and slower global economic growth, to increase market share in a variety of business segments at the expense of regional rivals and international peers. The latter, unable to weather the financial crisis without either divesting assets, or requiring government financial assistance.
NAB’s acquisition of Challenger will give it a larger market share of loans underwritten by mortgage brokers. The deal gives NAB a 17.5 per cent stake in Homeloans with the option of increasing its stake to 41 per cent, subject to Homeloans shareholder approval.
The acquisition will impact NAB’s Tier 1 capital ratio by 15 basis points, is subject to regulatory approval first and will likely complete towards the end of 2009.
Separately, Sydney-based Challenger Financial said in a statement that it expects to report a loss of between $88m and $93m for the year ended June 30.
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Big Four Banks Likely To Follow CBA Lead And Issue Hybrids
Australia’s Big Four banking groups are likely to follow the lead of rival Commonwealth Bank of Australia (CBA), who is raising $700 million in fresh capital through a Tier 1 Hybrid issue.
An unnamed banking source told The Age, that ANZ, NAB, Westpac and Macquarie would all be looking at similar issuance of hybrids.
Hybrid issuance has declined by nearly 80 per cent in 2009 as Australian financial institutions opted instead to raise finance through equity sales, increasing capital levels and reducing the need to issue hybrids.
Tier-1 Capital is a closely watched measure of lenders stability, and provides a buffer for protection of the bank’s deposits. Lenders often choose to maintain higher ratios if they are considering future acquisitions, or anticipating further credit impairment.
Hybrid Tier 1 issues in Australia typically target retail investors with franked dividends, or tax benefits and attractive returns. A hybrid offer by CBA currently yields around 8.5 per cent including the tax benefit.
Institutional investor appetite for such issues is expected to decline going forward, as ratings agencies increasingly take a more punitive view on the credit ratings of hybrid issues.
Hybrid Tier 1 issues are usually rated two notches below senior bank debt, but credit ratings agency Moody’s Investor Service has indicated that it may now rate them three to four notches below.
The terms of CBA’s Hybrid Tier 1 issue have still not been disclosed. The lender is expected to provide the prospectus for the deal to ASIC shortly, and the deal is likely to be managed by a large syndicate of banks.
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Australian Property Market Continues To Recover
Further signs that the Australian property market continues to recover have emerged, with the average new mortgage in Australia reaching record highs in July of $345,000, showing that confidence in the property market is increasing.
AFG’s Mortgage Index has shown that average mortgage values have been rising since May, having reached a bottom of $339,000 in January.
The data shows that property prices based on average mortgage values in New South Wales were the highest, followed by Queensland and Victoria. The average loan size in each of those states is $407,000, $339,000 and $321,000 respectively.
The results of the survey conducted by AFG, also suggest that the popularity of fixed rate home loans has declined rapidly. The data shows that the number of fixed rate mortgages fell from 8.3 per cent in June to 5 per cent in July.
Mark Hewitt, AFG’s general manager sales and operations said Australia continues to see increasing confidence in the property market on a weekly basis.
“Recent reports of house price increases are stimulating the market as a whole, and encouraging investors in particular. That said, because interest rates remain at 40-year lows, we’d encourage buyers to take into account the fact that their mortgages will almost certainly cost more to service as the overall economy picks up,” he said.
Activity from investors remains strong, with 30% of all activity coming from that section, while first home buyers make up 19% of the mortgage market.