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Macquarie Reports First Half Profits Drop But Performs Better Than Expected
Australian investment banking major Macquarie Group has reported a 16 per cent decline in first half net profit as lacklustre financial markets continue to act as a drag on key businesses.
Macquarie reported a first half net profit for the period ending September 30th of $403 million, down from $479 million in the same time frame during the previous year. The profit decline was less than expected, after Macquarie warned last month that it’s first half net profit could drop by as much as 25 per cent.
Macquarie said that should market conditions return to “more normal levels”, the company would be on track to deliver a full year profit result in line with the previous year.
The investment banking group said that subdued financial markets had been a drag on the performance of certain divisions, including Macquarie Capital, Macquarie Securities Group and its Fixed Income, Currency and Commodities division.
All three divisions were the largest contributors the investment banking group’s net profit during the previous financial year, with FICC delivering 33 per cent of group profits, Macquarie Capital contributing 26 per cent, and Macquarie Securities adding 23 per cent.
Annualised return on equity in the first half was 7.1 per cent, down from 9.6 per cent a year ago and 10.3 per cent in the second half of the last financial year. Macquarie said that the cost of excess liquidity continue to weigh on its balance sheet and “adversely impacted” returns on equity.
The board declared an interim dividend of 86 a share, in line with the interim dividend last year.
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Australian Bankers Voice Opposition To Coalition Plans For Banking Reform
Australian bankers have voiced strong opposition to proposals by the opposition Treasury spokesperson Joe Hockey to increase competition within the banking sector. Mr. Hockey has made suggestions for raising the level of competition within the banking industry by limiting the Federal Government deposit guarantee to smaller regional lenders only.
On Thursday Mike Smith, chief executive of Australian banking major ANZ said the deposit guarantee was in the interest of depositors rather than banks, and had been introduced at the height of the financial crisis to halt the haemorrhage of deposits from smaller lenders to the major banks.
“The idea that you can actually guarantee different institutions is an unusual one. The deposit guarantee is for the banking system, including foreign bank branches.” Mr. Smith said.
Mr. Smith said the notion of excluding three or four banks from the guarantee was a “a very strange concept” and whilst the major lenders had not specifically asked for a guarantee, the government had been correct in its implementation of the measure, given the global crisis of confidence at the time.
Mr. Smith suggested that Mr. Hockey had appeared to have confused the Federal deposit guarantee with that of the of wholesale funding guarantee, which is no longer in place.
Both guarantees were introduced by the government in 2008 during the height of the crisis, shortly after Lehman Brothers collapsed.
Mr. Hockey said that the arguments for continuing the guarantee for smaller lenders were both “strong and compelling”
“But I’m not necessarily sure that a bank that makes $4 billion profit . . . needs to continue having that guarantee,” he said.
Steven Munchenberg chief executive of the Australian Bankers Association said the lenders in the country were worried that the opposition was: “floating all sorts of different ideas every day. Many of them are dangerous and could acquire a life of their own. The Coalition’s approach in the last week has shifted the pendulum strongly back towards excessive regulation. That could weaken the system by interfering with how the market works, and creating additional costs for the industry.”
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Analysts Applaud Strong ANZ Profit Numbers
ANZ became the latest Australian lender to deliver a solid profit result, after reporting a full year profits rise of 53 per cent to $4.5 billion.
ANZ’s result follows on the heels of NAB who reported a 53 per cent gain in full year profits earlier in the week. ANZ reported cash earnings of $5.13 billion and declared a final dividend of 74 cents.
“Compositionally, the earnings surprise to our estimates came half from lower bad debts and half from underlying earnings. A blow-out result, with reasonable quality to the earnings surprise. Reinforces our outperform rating on ANZ.” Credit Suisse analyst Jarrod Martin said.
Deutsche Bank’s James Freeman agreed, saying “the strong set of numbers reinforces our positive view on ANZ, with evidence that the core business is performing well, and management’s strategy is being executed effectively”.
Citigroup banking analyst Craig Williams maintained his buy rating for the bank, saying ANZ was his top pick for the sector.
“With stronger volume and net interest margin than the market had been anticipating. Franchise maintains very good momentum at a time when peers are finding growth tough,” he said.
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Cameron Clyne Latest Banking To Chief To Add Voice To Calls For Higher Interest Rates
Cameron Clyne, chief executive of Australian banking major NAB has warned that the major lenders would not back away from their push to raise interest rates, raising the prospect for continued public debate on the matter.
Mr. Clyne said that Australian lenders would continue to push for higher interest rates, arguing that they were necessary irrespective of how the central bank adjusts the official cash rate, as higher funding costs persist in the aftermath of the banking crisis.
“We will be persistent and consistent in putting out the facts as we see them. This will not be resolved at the next interest rate rise. There will be an ongoing debate over time.” Mr. Clyne said.
Mr. Clyne railed against the argument made by Federal Treasurer Wayne Swan and the Reserve Bank that the rising profitability of lenders undermined their justification that their interest rates needed to rise beyond official rate hikes.
Mr. Clyne made his comments after unveiling a 63 per cent leap in NAB full year net profits for the year ending September 30th.
The impressive profit gains resulted in the Treasurer once again re-iterating his call for lenders to refrain from increasing their interest rates beyond any move by the central bank.
The central bank will meet again next Tuesday to decide whether it should lift interest rates.
“There is no justification for very profitable banks to raise rates (above any rise in official cash rates),” Mr Swan told parliament yesterday. “The figures from the NAB today prove that yet again.”
Mr. Clyne cited what every other bank CEO has said when defending their desire to raise interest rates, that funding costs remain under pressure, and that those costs needed to be passed on to customers.
Mr. Clyne went on to add that when the central bank cited the measure of net interest margin as the reason why lenders should not lift interest rates independently, it failed to take in to account the higher cost of attracting retail deposits, and the prospect of higher interest payments when banks roll over funding that was secured prior to the global financial crisis.
Mr. Clyne rejected the competition regulators claim that Australian lenders in their discussion of their need to raise interest rates, and the rising cost of funding, were in effect signalling their pricing intentions to one another.
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NAB Delivers Strong Full Year Profit Result
Australian banking major NAB reported a 63 per cent rise in full year net profit as the Australian economy rebounded and bad loan provisions fell.
NAB’s full year net profit rose to $4.22 billion up from $2.59 billion a year earlier as credit impairment charges fell to $2.26 billion from $3.82 billion in the previous year.
Cash profit, a closely watched measure of performance which excludes volatile items and is used to determine dividends increased from $4.58 billion, up from $3.84 billion in the previous year.
“We feel that the economy is probably going to strengthen in 2011. The big question is when does that strengthening economy translate into business confidence that translates into investment?” chief executive Cameron Clyne said.
Mr. Clyne added that it appears that demand for business credit is returning, but that NAB does not expect a substantive uptick until next year.
Despite the improved performance by NAB, its results continue to highlight the fact that demand for credit continues to remain weak especially by businesses operating in non resource states.
NAB which has a strong business banking franchise is more dependent on business credit that it’s other Big Four rivals.
Over the last few months Australian lenders have said that whilst a significant pipeline of business loans exist, borrowers did not yet feel confident enough to finalise their loans.
NAB declared a final dividend of 78 cents a share, up from 73 cents a year earlier.
NAB’s result comes at a time when it is widely expected that the Big Four lenders will unilaterally lift their mortgage lending rates, outside of the official interest rate cycle, as interest rate margins continue to face pressure from higher funding costs on wholesale international credit markets.
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CBA Chief $16 Million Pay Package Defended By Bank Chairman
David Turner, chairman of Australian banking major CBA has defended the lenders decision to award its chief executive Ralph Norris a $16 million pay package, after the bank delivered record profits.
Mr. Turner, who was speaking at the lenders annual general meeting in Sydney, said that while Mr. Norris was well paid, the salary was justified in light of CBA’s performance during the banking crisis.
Mr. Norris received a compensation package valued at $16.16 million for the previous financial year, making him one of the highest paid executives in Australia.
Reporting a $6.1 billion cash earnings profit for the previous financial year, the lender set a record for an Australian company.
“Of course that ($16m) number is large, Ralph is well paid. This has been calculated on the basis of a formula agreed by shareholders. Our outcomes are being achieved by the bank. It’s performed very well indeed. Over the past five years, the bank’s performance has been very strong indeed,” he said. Our compound annual growth rate has been 71 per cent over that time. I hope that you would agree that this is a very strong performance in really very difficult trading times.” Mr. Turner told shareholders.
Commenting on CBA’s prospects for the future, Mr. Turner said: “Recent uncertainty over the pace of recovery in the United States and Europe highlights the downside global economic risks still in play. Evidence of these is a slowing in the underlying momentum of our business at the end of the 2010 financial year. This has continued into the current year, with underlying credit growth in Australia slow, particularly so for business lending, where our customers remain cautious. As a result, we must remain cautious about the prospects for our business for the coming year.”
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Australian And Singapore Stock Exchanges To Merge
Australia’s stock exchange ASX Ltd has agreed to merge with the Singapore stock exchange (SGX) in a deal that will create the second largest bourse in the Asia Pacific region.
The deal is valued at $8.4 billion and will result in SGX acquiring all outstanding ASX shares through an arrangement scheme, paying $22 in cash, and 3.473 new SGX shares per ASX share.
The deal still requires regulatory approval from both the Australian and Singapore authorities, including Federal Treasurer Wayne Swan, The Monetary Authority of Singapore and the Australian Securities and Investments Commission (ASIC).
The transaction is expected to be approved by both regulators and shareholders during the first half of 2011 and the merger executed during the second half of the year.
The merged entity will have combined revenues of $1.12 billion, and earnings before taxation and interest of $711.6 million.
The market capitalisation of the combination of two exchanges was $12.5 billion on October 22nd.
The combined exchanges would give investors access to in excess of 2700 listed companies from over 20 countries and would provide the largest range of equity, fixed income and commodity derivatives in the Asia Pacific.
“The combination leverage’s the strengths of ASX through its listings, stock options and fixed income franchises, with SGX, the Asian gateway for international listings, equity futures and OTC clearing, to create the regions pre-eminent exchange group,” ASX said in a statement.
Both exchanges will retain their structure as separate legal entities and maintain their respective brands, with the holding company ASX-SGX Ltd listed on both the Singapore and Australian exchanges.
The merged company will have a 15 director board, four of whom will be nominated by the ASX. The chief executive of the combined company is expected to be SGX CEO Magnus Bocker, whilst Chew Choon Seng the chairman elect of SGX is expected to take the role of non-executive chairman, with ASX’s David Gonski to assume the role of deputy chairman.
It will have a board of 15 directors from five countries, four of whom will come from the ASX board – David Gonski, Russell Aboud, Jillian Broadbent and Alan Cameron.
Robert Elston CEO of ASX said that the deal was unanimously approved by the boards of both exchanges.
“In a period of profound structural change in financial markets, ASX has carefully considered its strategic options to enhance its future competitiveness,” he said.
“This combination delivers tangible value today and presents the opportunity for shareholders, customers, employees and other stakeholders to participate in the growth options that this broader based exchange group can make available in the future, whilst preserving strong governance and regulatory oversight in Australia.”
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Australia’s Banks Face Earnings Growth Pressure
This year, despite worries over interest margins, Australia’s big four lenders look set to report a combined $21 billion in full year earnings, representing a 30 per cent increase from the previous year’s result.
Despite the robust profits, the banks face a number of headwinds as the pressure on interest rate margins becomes more acute, and demand for credit, particularly in the non resource states remains anaemic.
NAB is set to report its numbers on Wednesday, delivering what is widely expected to be the weakest result amongst the big four. Rival ANZ will report its full year result on Thursday, whilst Westpac reports its result a week on Wednesday.
CBA which has reported already delivered a 42 per cent increase in cash earnings of $6.1 billion.
The key issue facing lenders, now that the threat of rising bad debt following the financial crisis has receded, is the prospect of declining revenue.While bad debts are now well under control after the fright of the GFC, dwindling revenue has been a key point of concern.
Analysts say that volumes have fallen, revenue from traditionally strong earners such as wealth management will not perform as usual and anemic credit growth will all have an impact on earnings.
According to James Ellis, banking analyst at Credit Suisse, banks core earnings growth face pressure.
“System lending growth is relatively weak, but judging from the RBA’s recent commentary on commercial property lending there’s been more pressure in this segment outside the major banks, especially among the foreign banks,” Mr. Ellis said.
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Australian Treasury Secretary Says Not Practical For Government To Regulate Interest Rates
The head of the Federal Treasury says it would be difficult to implement laws which regulate interest rates whilst having an independent central bank that was responsible for monetary policy.
Earlier in the week Joe Hockey, shadow treasury spokesperson suggested that the treasurer should legislate to ensure that lenders do not raise their interest rates higher than any hike enacted by the Australian central bank.
Ken Henry, the Treasury secretary told a senate hearing that the practice of regulated interest ended in 1986, and that since then, the Reserve Bank of Australia sets monetary policy.
Treasury secretary Ken Henry told a Senate estimates hearing that regulated interest rates ended in 1986, and monetary policy since has been set by the RBA.
“It would be rather difficult to have a central bank independently operating monetary policy through interest rates at the same time another body – the government – regulating those interest rates, It doesn’t sit too well together.” Dr Henry said.
Dr. Henry recounted a story of how he had unable to obtain a mortgage from a bank prior to 1986, and that was why Australia had building societies.
“So, the effect of regulated interest rates in that period … was that the people who had sufficient wealth to be able to get to the front of the queue were able to get low-interest mortgages,” he said.
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ACCC Issues Another Warning To Banks Over Interest Rate Signalling
The Australian competition regulator says that the country’s banks could face possible action over signalling their interest rate policy.
The warning was given by Graeme Samuel, chairman of the Australian Competition and Consumer Commission and follows similar remarks he made last week, when he said that interest rate signalling by banks borders on misconduct.
Today, Mr Samuel said: “There’s a constant problem when you’ve got competitors signalling to each other as well as signalling to the public what they intend to do with their prices, in the case of the banks, interest rates.”
Generally when banks discuss the prospect of rate hikes, they are softening up the public and sending signals to their rivals, Mr. Samuel said in an interview on ABC Radio.
Mr. Samuel stopped short of defining such behavior as public collusion, but did say that the ACCC was concerned.
The major lenders have been told their actions are “bordering on conduct that could be treated as anticompetitive”, and that such behaviour would be carefully examined by regulators in the European Union and the US, though under current Australian law, this is not possible, he said.