Australian Household Financial Conditions Deteriorate
A new report suggests that whilst the Australian economy continues to recover, and will most likely grow further during 2010, Australian household finances are deteriorating to the point that Australia may experience a W shaped economic recovery.
The report, authored by The Melbourne Institute suggests that the domestic economy is set to expand by 0.8 per cent during the March quarter, and by 0.6 per cent during the June, September and December quarters.
Despite the growth in the overall economy predicted by the report, it also suggests that its household financial conditions index declined 16.6 per cent to 28.8 index points during the March quarter.
It was the first fall in the index after four consecutive quarters of improvement.
14.4 per cent of households polled defined themselves as being financially stressed and over half of those households are employed.
Ironically, households with income exceeding $80,000 are the most financially stressed amongst all income groups.
The report suggested that the reason for the deterioration was the increased burden of servicing household debt, in particular mortgage debt.
“The Reserve Bank is now in a difficult position, rises in house prices and associated rises in consumer debt seem to warrant a swift tightening in monetary policy but if the tightening is too fast it may choke-off business investment that is only now starting to recover. This means that if the RBA gets policy wrong, Australia may experience a W-shaped recovery.” the Melbourne Institute’s Ada Claus said in a statement on Friday.
Most Australian states experience deterioration in household financial conditions, with Western Australia experiencing the largest decline at minus 17.7 per cent.
The only state that showed improved financial conditions was South Australia, which improved by 7.8 per cent.
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Fund Managers Bullish On Equities According To HSBC
A new survey by global banking giant HSBC suggests that fund managers are more bullish on equities today, than they were three months ago, and are maintaining their holdings of Australian equities steady.
The HSBC survey says that a large proportion of fund managers (nearly 75 per cent) are optimistic about Chinese equities, up 16 per cent from the final quarter of 2009.
13 global fund managers were polled and nearly half of them have increased their exposure to US equities to 50 per cent overweight, compared with just 22 per cent in the final quarter of 2009.
The fund managers that were polled expressed little change in sentiment toward Asia Pacific equities including Australia, with 70 per cent of managers maintaining an overweight position.
The growth in funds under management (FUM) declined in the fourth quarter 2009 as equity markets lost some of their froth following a remarkable recovery in valuations that begun to occur in March that year.
Asia Pacific equities grew by 9.9 per cent during the quarter ending December 31st 2009, having leapt by 30.7 per cent in the previous quarter.
Chinese equities were the only stocks that defied the trend having grown 12.8 per cent in the final quarter, compared with 9.5 per cent in the preceding quarter.
Global equity markets have made a stunning recovery however, with the ASX 200 having risen from 4500 in January to 4850 on Friday.
Illustrating the growing shift in power, the Asia Pacific region has now overtaken Europe as the second largest region for equity funds behind the US, according to the survey.
Fund managers in the survey included BlackRock, JP Morgan Asset Management, Schroders Investment Management and Societe Generale.
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RBA Says Further Interest Rate Hikes Likely
Guy Debelle, an assistant governor with the Reserve Bank of Australia has warned that it was extremely likely that interest rates would rise further, but said that central bank was acutely aware that higher levels of household debt, means that tightening monetary policy had a far greater impact than it did in the past.
Speaking at a conference in Melbourne, Mr Debelle said interest rates “look likely to rise a bit further”.
The RBA at the beginning of March, raised the official cash rate by 25 basis points to 4 per cent.
The central bank has tightened interest rates four times during the last six months, after interest rates were lowered to nearly half century lows in response to the global financial crisis.
The RBA notes that the securitisation market appears to have thawed, with a number of deals having successfully been completed this year.
“It is now becoming a competitive source of funds again,” he said.
Mr Debelle said lending from non-bank lenders was on the rise and this was because their source of funding was now close to being competitive with that of the larger banks.
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Bankwest Enters RMBS Market For First Time Since Being Acquired By CBA
Bankwest has waded into the residential mortgage backed securities market for the first time since it was acquired by Commonwealth Bank for $2 billion. The lender launched a $620 million deal with three different classes of securities.
Global credit ratings agency Standard & Poor’s gave the $586 million in A-class notes a triple A and assigned the same rating to AB notes valued at $23.4 million.
S&P gave Bankwest’s B notes valued at $10.6 million a double A negative rating.
In assigning the ratings, the ratings agency says that there is sufficient credit support in each class of notes.
Structured finance analyst Fiona Otway said: “Our expectation is that the various mechanisms to support liquidity within the transaction are sufficient under our stress assumptions to ensure timely payment of interest.”
S&P expects payment of interest and principal by April 2041 for all classes of notes.
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Superannuation Funds To Eventually Become Australia’s Largest Institutional Investor
Australia’s superannuation industry, estimated to manage $1.2 trillion in assets, will eventually have to assume a leadership position as the country’s largest institutional investor as it increases in size by more than four fold over the next two decades.
Speaking at a conference on the superannuation industry held in Brisbane on Wednesday, The Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen said the industry faces over the next two decades, the twin challenges of ensuring that the system is able to deal with an ageing population, and managing the system’s exponential growth.
“A big strength of the super system will be its exponential growth over the next 20 years — it will grow and exceed GDP and it will be one of our great assets. Therein lies a challenge, and we need to ensure that great asset is used to maximum advantage for the Australian economy and that we don’t squander the opportunities that exponential growth in funds under management will provide.” he said in a video statement.
Assets managed by Australia’s superannuation system are currently valued at approximately $1 trillion and are expected to grow to $5 trillion by the year 2025.
Pauline Vamos, chief executive of the Association of Superannuation Funds of Australia says the industry would ultimately become the largest Australian institutional investor, a position that would grant it significant leverage over the economy.
“How we manage that responsibility as investors in the whole of the Australian economy, how we drive that, how we manage that and use that quite significant leverage responsibly so that we don’t scare the horses, is what will be our biggest challenge. Speaking with one voice and speaking responsibility is where we have to go over the next few years.” she said.
However large differences still remain in the sector, between industry and retail super funds.
David Whiteley chief executive of the Industry Super Network warned industry funds not to side with retail super funds in their response to proposals from the government’s Cooper review of the sector.
“What Cooper is trying to do is get rid of unnecessary fees and unnecessary costs — and the retail sector is, by and large, the source of that through the commissions system. They have a vested interest in derailing the Cooper review, and we have to make sure that doesn’t happen.” he said.
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RBA Says Bad Debt Cycle Has Peaked
The Australian central bank, the Reserve Bank of Australia (RBA) says that bad debt charges faced by Australia’s major lenders appear to have peaked, and in doing so will help them maintain their position amongst the most profitable banks in the world.
According to the minutes of the most recent meeting of the RBA, held at the beginning of the month, when the central bank raised the official cash rate by 25 basis points, board members in debating the hike, pointed to the strength of the Australian financial system compared with international peers.
The minutes of the meeting also reveal concern expressed by RBA board members that despite the worst of the bad debt provision cycle having passes already in Australia, the global financial system could yet be surprised by a bad debt crisis in other countries.
“The main factor to watch in the period ahead would be bad debt charges, which were likely to remain high for some time and could rise further. Banks in Australia, Canada and Asia were doing considerably better than those in the US and Europe. Their profitability had generally improved recently after holding up relatively well during the financial crisis.” the minutes said.
The optimism expressed by the central bank echoes similar sentiment expressed by the majors with the exception of NAB during the recent earnings season, where they recorded better than expected profits.
“For the major banks in Australia, growth in net interest income had increased and provisions for loan losses appeared to have peaked at levels that were low by international standards. Non-performing loans were disproportionately in commercial property lending while impairment rates for housing loans remained low.” the minutes said.
The members of the rate setting committee of the central bank noted the increasingly bitter battle for retail deposits as Australian lenders prepare for more onerous liquidity and capital adequacy requirements.
Some lenders have begun offering term deposit rates in excess of mortgage rates, something which has not occurred for nearly two decades.
“Australian banks and other authorised deposit-taking institutions remained well capitalised, reflecting ongoing profitability and recent equity raisings, and had increased their holdings of liquid assets,” the minutes said. “The global focus on strengthening the deposit bases of banks and higher liquidity standards had seen increased competition for deposits, resulting in sharp rises in interest rates on term deposit specials.”
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Citibank Has Ambitious Plans For Australian Credit Card Market
Global bank giant Citibank has ambitions to end the near total dominance of Australia’s Big Four banking groups on the consumer credit card market.
Citibank, which is the retail banking operation of Citigroup says it wants to usurp NAB’s position as the fourth most active issuer of Australian credit cards.
John Larsen of consumer banking and cards for Asia-Pacific says there are tremendous opportunities for growth in retail banking in Australia.
“We see Australia as a sophisticated and very competitive market — it’s dominated by the four major banks here, we are continuing to see opportunities for us. We’re a significant player in the credit cards market and we’ve had success with a number of the partnerships we have in place We also have our own branded credit cards business, which is a durable business.” Mr. Larsen said.
Citbank, with 9.8 per cent of the market, is the fifth largest credit card issuer in Australia. CBA is the dominant player having captured 19.7 per cent, with ANZ in second place controlling 18.2 per cent. Westpac is the third largest issuer, owning 17.6 per cent with NAB rounding up the rear, having issued 12.1 per cent of all cards.
Citibank’s ambition to break into the top four is largely driven by 10 per cent growth in receivables the lender experienced during calendar 2009, well above the rate experienced by the major lenders.
“The competitors don’t make it easy for us; we think we offer better value for the business that we are competing for. We offer value and transparency, and if we can continue to do there’s no reason we can’t gain the additional market share to take us to number four.” Mr. Larsen said.
Mr. Larsen says Citbank intends to eschew large scale acquisition opportunities in the Asia Pacific region, preferring instead a strategy of organic growth.
“If you look at Citibank and our DNA, we have done very few acquisitions, although we have created some alliances, but the core of our business is to grow, account by account.” he said.
Citibank’s joint venture to offer finance and operations support in conjunction with branded cards from Richard Branson’s Virgin Group will begin in July.
Mr. Larsen said Citibank was now well-positioned in the Asia-Pacific region.
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Australian Tax Office To Crack Down On Tax Evaders
The Australian Tax Office (ATO) is cracking down on thousands of wealthy individuals and has asked banks to warn customers using offshore tax haven accounts that they may face huge penalties for doing so.
According to a report in The Australian, the ATO has contacted a number of international lenders with Australian operations, including UBS, and requested them to warn customers of the potential of being levied with huge penalties, should they fail to declare foreign income.
Duncan Fairweather, director of the Australian Financial Markets Association says he has written to roughly 50 lenders and requested them to deliver the warning to clients on behalf of the ATO.
“We have contacted all the foreign banks working in the Australian market and asked them to remind their clients they may have tax obligations in Australia,” Mr. Fairweather said.
On Tuesday, UBS released its global annual report, which showed that Canadian, British and Australian tax authorities had filed requests for information regarding cross border wealth management services, following the tax evasion case in the US.
Last August the Swiss bank said it would reveal the identities of more than 4000 alleged tax evaders from America, as a result of legal action initiated by the US government.
“Tax and regulatory authorities in a number of countries have (subsequently) requested information relating to the cross-border wealth management services provided by UBS and other financial institutions. In particular the revenue services of Canada, the UK and Australia have served requests upon, or made inquiries of, UBS and other Swiss and non-Swiss financial institutions.” the group’s annual report said.
UBS says it will comply with those requests, but added it would only do so “strictly within the limits of financial privacy obligations under Swiss and other applicable laws.”
A spokesperson for the ATO says the office was unable to comment on the warnings as a result of privacy issues concerning the lenders.
The ATO is providing amnesty for tax evaders who have until the middle of the year to disclose international earnings.
So far approximately 500 people have surrendered under the amnesty, declaring a total of $50 million in undisclosed income since December.
About 500 people have owned up to holding $50 million in undisclosed income since December, when the ATO had originally flagged it would end the amnesty period.
Australian citizens can legally hold bank accounts in tax havens but all income earned from money held in those accounts must be disclosed to the ATO for tax purposes.
Under the terms of the Amnesty, Australian taxpayers, who hold undisclosed income internationally, would be liable for highly reduced penalties, such as a 10 per cent interest surcharge on undisclosed tax liabilities resulting from income exceeding $20,000 a year.
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Treasury Secretary Says Australian Financial Services Highly Competitive
The Federal Treasury believes that the financial services industry in Australia remains highly competitive, despite the capturing of a large proportion of market share by major lenders in the aftermath of the financial crisis.
Secretary of the Treasury Ken Henry on Monday said that though some financial institutions continue to face funding difficulties, a large number of smaller and regional lenders including credit unions and building services offer standard variable rate mortgages at a 100 basis points less than the major lenders.
“As global financial markets continue to recover, we expect to see competitive pressure in the banking sector rebuild,” Dr. Henry told a business conference in Canberra.
Dr. Henry added that the securitisation markets re-opening would further help smaller financial institutions who also needed to deal with pressure on their balance sheets stemming from bad debt, which had resulted in some lenders scaling back their lending activities.
Dr Henry also expects international lenders to rebuild their presence in the country, as the situation in their domestic markets stabilised.
“It is these smaller players that have generated the most competitive pressure in Australia’s banking sector,” he said.
Dr. Henry acknowledged that the major lenders had captured significant share of the mortgage lending market, which had increased from 60 per cent prior to the financial crisis, to a whopping 80 per cent after the financial crisis. Mr. Henry made the point that market remained competitive however, with 110 providers of more than 2070 mortgage products.
Dr. Henry illustrated his point with a report from the OECD which suggests that an Australian financial services continues to remain competitive, with foreign lenders accounting for 30 per cent of business credit.
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Super Fund Reform Two Decades Too Late Says Industry
Kevin Rudd’s government says it full intends to follow through with controversial new regulations for the superannuation industry despite vehement opposition from the sector.
Jeremy Cooper who heads the government inquiry into the superannuation industry, also known as the Super System Review, told industry participants that whilst the government did not seek to cause unnecessary disruption or costs, the current system needed to be “recalibrated” since it resulted in far too many investors being disengaged with their investments.
Last year Mr. Cooper unveiled new proposals which would classify super fund members based on their level of involvement with the management of their super.
This would mean that members, who were not actively involved and failed to make investment choices, would have their money placed in a universal category, which is a low cost fund that has a single diversified investment strategy.
The industry responded to the proposal by making a joint submission which said that the new regulations are too drastic and would result in increased complexity and higher costs.
During an annual industry conference held in Sydney on Monday, many industry participants ratcheted up the rhetoric, suggesting that the proposals were two decades too late, with many in the industry arguing that it would have been better to introduce such measures at the same time as when the compulsory super was first launched.
Mr. Cooper, former chairman of the Australian Securities & Investment Commission (ASIC) responded by saying that despite some sectors of the super fund industry finding the universal model quite challenging, the issue of rising costs had to be addressed.
Mr. Cooper said that the right of all Australian’s to choose their own investment fund had the inadvertent effect of driving management fees upwards, as managers spent more money marketing their various bells and whistles.
Mr. Cooper says that the proposals also sought to reduce costs and save the industry roughly $1 billion a year through the streamlining of back office functions, with a drive to make the industry paperless, and all transactions electronic.