Central Bank Governor Defends Decision To Allow Bankwest Firesale
Governor of the Australian central bank Glenn Stevens has strongly defended his decision to support CBA’s opportunistic acquisition of Bankwest whilst it was teetering on the edge of insolvency during the global financial crisis.
The Australian Competition & Consumer Commission sought the opinion of the central bank before granting regulatory approval for the 2008 deal.
Industry watchers have criticized the government’s decision to allow the fire sale of Bankwest and the merger of St George with Westpac as being the primary reason behind the reduced level of competition within the banking sector.
In defending his stance, Mr. Stevens said that rather than allow Bankwest to be left “twisting in the wind” during the height of the crisis, it was better for stability in the financial system to be re-inforced by allowing the lender to be acquired by CBA.
Mr. Stevens said that Bankwest had been left in a precarious situation after its British parent HBOS came close to collapsing, and as a result, its Australian subsidiary had to be sold one way or the other.
“I think in the environment that we were in, you don’t want an institution with a weakened parent to be sort of twisting in the wind while they work out in the UK what they are going to do. That was the situation we were facing.” Mr. Stevens told the Senate banking inquiry.
Mr. Stevens said his primary concern during the height of the crisis had been stability of the Australian financial system, which meant the prevention a bank failure and the requirement of finding a buyer for Bankwest which had relatively few takers at the time.
“Were I to be faced with that situation again, I don’t think you have much but to err on the side of stability. In situations of potential crisis it’s our job to try and preserve stability, which is what we sought to do,” the governor said.
Mr. Stevens said he could not remember whether the competition had sought an opinion from him or whether he offered one prior to the merger between Westpac and CBA.
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Members Equity Chief Disappointed With Scope Of Government Reform Proposals
Whilst endorsing the set of government reform proposals designed to stimulate competition within the Australian banking sector, smaller lenders said they regretted the decision by the government not to scrap the tiered guarantee system.
Jamie McPhee chief executive of Members Equity Bank said the proposals offered a good balance across the entire financial system.
“On balance, I think it’s a reasonable set of initiatives,” he said after the government unveiled its keenly awaited Competitive and Sustainable Banking reforms package.
According to Mr. McPhee off all the initiative, perhaps most important is the proposal for the government to spend $4 billion purchasing residential mortgage backed securities (RMBS), a measure which will provide a level of support for smaller banks.
“If you said to me what’s the one thing that’s very critical to ME Bank, it’s that one. To have the AOFM (Australian Office of Financial Management) continue to support that market for us was quite critical”. Mr. McPhee said in an interview with The Australian.
Despite expressing his broad support for the set of reform proposals, Mr. McPhee said he felt one key initiative was missing, a decision to scrap the tiered pricing for lenders to access the Federal government wholesale funding guarantee.
Banks can take advantage of a Federal government guarantee on debt that they issue for a price that is dependent on the credit rating, a measure that was introduced in 2008 during the global financial crisis in order to ensure that lenders could continue to tap capital markets and find buyers for their debt at a time when investor risk aversion was at its greatest.
“I felt that was never appropriate, relying on ratings to determine the pricing with the government. So one thing I would have liked to see the government do . . . is to put everyone back on the same level of the fee that they’re paying for the government guarantee. If you look at the developing of covered bonds, that’s obviously something that’s not going to help the smaller banks but it is going to help the major banks access funding. Anything that’s going to assist the banking system as whole . . . such as accessing funding . . . is a healthy thing.” he said
Once again since smaller players are lower rated than the major lenders, they still faced a disadvantage in covered bond issuance.
“For us, that is the advantage of mortgage-backed securities, rather than covered bonds. If there needs to be further investment down the track to make sure that market continues to operate, then I would like to think there’s a high possibility that could happen,” he said.
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Banking Reform Proposals Unlikely To Impact Profitability of Major Australian Banks
The profits of Australia’s big four lenders are unlikely to be hit by proposed reforms of the banking industries, prompting Bank of Queensland chief executive, David Liddy to condemn the proposals as being a setback in the effort to create a fifth banking pillar.
Mr. Liddy said he was disappointed by the set of initiatives proposed by the government which include removing restrictions on banks issuing covered bonds (bonds which are backed by cash flow from high quality mortgages) and the creation of a fifth pillar in Australian banking through the combined market power of the mutual and regional sectors.
“I’d have been happy with a copper bullet, as opposed to a silver bullet, but I don’t think we even got that, I think this puts the cause for a fifth banking pillar back 15 years.” Mr. Liddy said.
Analysts and investors are fairly united in their assessment of the reform package, which they believe will have little effect on the combined $22 billion in profits earned by the major lenders.
Fund managers say that after escaping from the financial crisis unscathed, the last thing the banking industry needs is instability.
Market participants say that whilst the proposal will result in greater transparency, it is unlikely to significantly impact profitability of the majors, because the funding disadvantage encountered by smaller lenders will continue to persist after the government reached the conclusion that it would be impossible to implement a policy where by only some players benefited whilst others did not.
Bryan Johnson a noted banking analyst of broking house CLSA said that whilst the reform proposals came with a lot of hype, they failed to deliver any initiatives that would significantly increase the level of competition within the industry.
Mr. Johnson says that whilst the proposal to allow lenders to issue covered bonds would be welcomed, it came against a backdrop of widening credit default spreads in jurisdictions where there was likely to be a lot of issuance.
“The reason for that is covered bonds make senior debt more risky. The package falls well short of creating much in the way of incremental competition. The one well-known fact is that bank funding costs will continue to rise, but the ability to re-price lending in this politically charged environment is likely to be limited, so net interest margins are going to fall regardless of these measures.” Mr. Johnson said.
Other initiatives announced on Sunday include the total bank on mortgage exit fees, which would come into effect on July 1st 2011, a mandatory requirement for lenders to provide mortgage borrowers with a key fact sheet. The ability for the competition regulator to prosecute banks for anti-competitive behaviour such as price signalling, and new legislation which is to be fast tract which would offer better protection for credit card borrowers.
Federal government guarantees on deposits will become permanent, with the level of insurance provided by the government are yet to be determined. Currently deposits of up to $1 million are guaranteed by the government, a measure which is set to expire by October 2011.
The government will also provide $4 billion to further develop the securitisation market as well launching a securities exchange which would develop a deeper more liquid market for corporate bonds.
The proposal by former Reserve Bank Governor, Bernie Fraser to introduce bank account number portability which would allow customers to switch banks quickly and easily has been met with scepticism by banks, which have expressed concern as the lack of consultation on the initiative, and its feasibility.
Steven Munchenberg chief executive of the Australian Bankers Association said that the costs of account number portability would more likely be borne by smaller lenders and that the proposals failed to address the key issue faced by them which was their higher costs of funding.
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ANZ Strongly Defends Its Interest Rate Policy To Law Makers
Australian banking major ANZ has come out in strong defence of its interest rate policy, after raising them higher than the official rate hike. The lender says it needed to pass on higher funding costs in order to maintain its profitability.
ANZ made its case in a submission to the Senate inquiry investigating competition within the banking industry, and was more vociferous that its rivals in defending its super sized rate hikes which it began implementing in 2008.
“Had we not passed through these cost increases, the rate of return on the capital employed in that area of ANZ’s business would have fallen to levels unacceptable to the investors who provide us with capital, and a rational outcome would be reduced lending or credit rationing. Indeed, had we not passed on any of these increases, the mortgage portfolio would have been operating at a loss.” ANZ said.
ANZ says its net interest margins will continue to face pressure for the next year and a half as it rolls over funding raised prior to the financial crisis, in to debt priced at the current more expensive rate.
ANZ rejected criticism that its strategy of expanding into riskier Asian markets, as it seeks to transform into a super regional lender posed a risk to financial stability in the country.
ANZ argued that its strategy of diversification did the opposite, and its presence across 14 Asian economies mitigated risk. The lender pointed to higher savings rates in Asian countries which provided a new source of funding for the bank during a period when the overall environment for fund raising remains costly as a consequence of the financial crisis.
ANZ added that its international businesses were required to comply with Australian prudential standards.
In defending its position, ANZ said that whilst industry absolute profit numbers were indeed large, they did not represent an excessive return on equity. Justifying its position further the lender cited the common argument made by all the big four lenders, that it had not required government bailout money during the crisis.
According to ANZ, its use of the wholesale funding guarantee meant that it paid $2.1 billion in fees to the government so far, a figure that is expected to grow to $5.5 billion by the time all the sovereign guaranteed debt it issued matures by 2015.
ANZ made its argument ahead of the release of government proposals for banking reforms, which are expected any day now.
The reform proposals are designed to increase the level of competition within the Australian banking industry, a sector where the big four banking groups control 75 per cent of the market.
ANZ says it would back any proposal for the government to support the securitisation market, proposals which would allow lenders to issue covered bonds (bonds backed by high quality mortgages), and any proposal designed to increase the number of funding options available to banks.
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NAB Technology Debacle Continues Angering Customers
After last week’s payments debacle, Australian banking major NAB’s reputation continues to take a battering with both customers and regulators after the lenders technology platform once again appears to be suffering from problems.
The lender blamed last week’s problems on the execution of a corrupt file and now says its most recent issues which have affected overnight transaction processing are an unrelated “temporary interruption” to part of its electronic payments platform.
Once again NAB customers are experiencing problems with the lenders ATM network, its internet banking facility and EFTPOS.
NAB customers in Melbourne have reported that NAB ATM’s were not dispensing cash, that account transfers did not accurately depict remaining balances, and that long queues had sprung up at certain NAB branches in Melbourne.
One rival lender says that its customers had been unable to obtain cash from NAB ATM’s using their cards, whilst NAB customers had also not been able to receive cash from ATM networks of other banks.
Bankers say whilst the current situation is not as serious as the lenders previous technology issue, it is still problematic.
Retailers have been complaining that they have been forced to manually record customers credit card details following the crashing of their NAB terminal.
On Wednesday afternoon, an NAB spokeswoman confirmed the lender was once again experiencing difficulties, and said the issue occurred at 3 PM, after which normal services had resumed after an hour.
“NAB can confirm that this issue was not related to the recent payment processing delays the bank has experienced,” she said.
Despite its claim that its most recent problem was unrelated to its previous one, NAB has so far not explained what caused the disruption.
Regulators from the central bank and the Australian Prudential Regulation Authority were unavailable for comment. Regulations stipulate that lenders are both obliged to inform APRA within 24 hours of a major outage and to have continuity plans in response to potential disruptions and recover business critical business functions.
Both APRA and the RBA are believed to be examining recent events involving NAB, whilst NAB has contracted professional services firm KPMG to investigate last week’s problems.
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Australian Credit And Debit Card Fraud Rising
Fraud perpetrated on Australian credit and debit cards rose to $183 million over the last financial year, from $167 million in the previous financial year according to new data from the Australian Payments Clearing Association (APCA).
The biggest increase occurred in fraud perpetrated on proprietary or brand name credit cards, where PIN’s were also compromised, leaping from $18 million in the 2008 to 2009 financial year, to $27.5 million in the current financial year.
That figure includes fraud committed using counterfeit cards containing stolen information which resulted in $22 million in fraudulent transactions over 70,000 incidents.
$1.8 million was stolen by criminals who used compromised PIN’s, whilst fraud committed using PIN’s of lost or stolen cards fell slightly to $3 million.
According to APCA, debit card fraud is defined as fraud involving PIN only protected cards, which are used at ATM’s or for EFTPOS transactions. Scheme credit, debit and charge card fraud is defined by the agency as including signature protected cards and card not present transactions.
Card not present fraud, where stolen account data is used for transactions over the internet, phone or mail rose from $82 million to $102.6 million, whilst skimming declined to $35.5 million from $45 million.
Fraud committed in Australia using cards issued by international lenders fell to $68 million from $105.5 million.
Chris Hamilton chief executive of APCA says criminals are increasingly focusing their attention on card not present situations which do not require chip or PIN security.
“This is consistent with what happened in Britain during the transition to chip,” he said. “Fraud where the consumer is not physically present for a transaction increased by 25 per cent in the past year, and now accounts for 52 per cent of all frauds on locally issued credit, debit and charge cards. Wider and better implementation of the Payment Card Industry Data Security Standards to tighten controls around card information, as well as improved authentication methods, are critical to reducing this type of fraud. We encourage internet shoppers to register a password when prompted to do so online.” Mr. Hamilton said.
Credit and debit card customers are not liable for fraudulent transactions conducted using their credit card, provided it is established that the customer exercised reasonable care such as protecting PIN’s and looking for suspicious behaviour whilst using store payment devices and ATM’s.
Mr. Hamilton says there is strong evidence that chip technology was having a positive effect on protecting both businesses and consumers from fraud.
“Skimming fraud is dropping significantly as financial institutions and merchants progressively roll out chip,” he said. “This is making Australia less attractive for fraudsters from other countries.”
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Smaller Australian Banks Offer Loyalty Interest Rate Discounts To Mortgage Borrowers
Smaller Australian lenders have begun offering rewards to mortgage borrowers who stay loyal to their bank by offering discounts to home loan interest rates which can be as high as 0.75 per cent.
Smaller banks are seeking to retain their existing customers and are pushing harder to earn their loyalty by rewarding loyal customers with significant discounts on their borrowing rates.
The move by the smaller banks comes against a backdrop of negative public sentiment towards the big four lenders, who angered many with the size of their most recent rate increases, which were higher than the official hike in interest rates implemented by the Reserve Bank of Australia.
Discounts are being offered by Bankwest (a unit of CBA), HSBC, Credit Union of Australia, State Custodians Mortgage Company and ECU Australia.
Currently HSBC offers the highest level discounts amongst the six lenders offering them, with borrowers receiving a 0.25 per cent discount of the standard variable rate after the first year, followed by another half a per cent off after the second year, under the HSBC’s Home Rewards Loan program.
Market watchers believe that as the government cracks down on early exit charges, and interest rates continue to rise, borrowers will have a greater incentive to shop around for the best deal. In order to pre-empt any exodus of customers, the lenders have embarked a strategy of offering discounts to borrowers who stay loyal to their lender as they seek to hold on to customers for longer.
Discounts on interest rates over time is an effective alternative to exit fees and provide smaller lenders with a great mechanism in retaining their customers.
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HSBC Australia Plans To Increase Its Market Share
Europe’s largest lender by market capitalisation HSBC says it intends to strengthen its Australian corporate finance business, as part of a strategy that will broaden its presence in a country whose economy is expanding as a result of a commodities boom driven by strong demand from Asia.
“There’s a lot of interest in good corporate fundamentals coming out of Australia,” Paulo Maia, HSBC’s Australia head, said in an interview with The Wall Street Journal.
International banks are searching for lower risk opportunities as they seek to diversify away from their domestic markets in Europe and the US, which are still only slowly recovering from the global financial crisis, whilst Asia is experiencing robust growth. By that measure Australia represents an attractive destination for a bank like HSBC which already derives over half its total earnings from the region.
Mr. Maia who previously helped run HSBC’s Brazilian subsidiary as deputy chief executive says the lender will bulk up its debt capital markets group and expand its loan syndication and leveraged acquisition operations.
The lender is particularly keen on increasing its market share in offshore lending to local corporations and banks. In 2010 the market for foreign currency debt issued by Australian non bank corporations reached $13.97 billion from 26 deals, and has grown by 35 per cent.
Australian pre-tax profits for HSBC during the 2010 fiscal grew 28 per cent compared to the previous year coming in at $152 million. Despite the strong growth figure, HSBC’s rate was still slow when compared to local rivals such as CBA, which recorded a 37 per cent rise in pre tax profits during the same time period.
HSBC’s retail branch network in Australia is still much smaller than its domestic rivals; however Mr. Maia says acquiring a local bank with a strong presence in big cities such as Sydney, Melbourne or Brisbane is a path the lender is unlikely to take as its route to expansion.
“We haven’t been able to identify any bolt-on acquisitions that would make sense for us,” he said. “We want to play on the mass affluent; we don’t want to go too much downmarket.”
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Westpac Chief Says Global Investors Concerned Over Australian Banking Reform Proposals
Gail Kelly, chief executive of Australian banking major Westpac says that international investors are closely watching the political and regulatory developments of the Australian banking sector.
Mrs. Kelly made her comments whilst submitting a 46 page report to the Senate economics committee inquiry. Mrs. Kelly said her comments were driven by a recent investor road show she undertook to London, Boston and New York, in which a large part of her presentations were consumed by regulatory and political issues.
“Overseas investors are aware that we’ve come through the crisis well, but there is a concern that something might be done that harms that.” Mrs. Kelly said.
In its submission to the Senate inquiry Westpac argues that competition within the Australian banking industry is intense, particularly for deposits, and the real issue facing the industry is cheaper access to funding.
Westpac rejected the need for a new inquiry into banking industry, arguing that another was not required for at least another three to four years, whilst banks implemented existing global banking reforms.
Westpac suggested the adoption of four measures which would improve the ability of banks to raise funding. Westpac wants equitable tax treatment for bank deposits, which should be similar to the treatment for other forms of savings. The lender wants regulation to be loosened to allow lenders to issue covered bonds. It also says the RMBS market needs to be expanded and to include the securitisation of alternative asset classes.
Mrs. Kelly would not comment on suggestions for the creation of a fifth banking pillar, that would offer more effective competition to the major banking groups.
“We’re hopeful the package will come out soon, but we welcome a strongly competitive environment, including credit unions and building societies,” she said.
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Federal Treasurer Swan Urges Mortgage Borrowers To Switch To Credit Unions
Federal Treasurer Wayne Swan is advising mortgage holders to switch their lenders from the big four banks to credit unions. Mr. Swan is gearing up to reveal his proposals for a second set of banking reforms which include measures to curtail mortgage exit fees.
The Treasurer is his weekly address, said that smaller lenders, including regional banks, building societies, credit unions and wholesale lenders were a competitive force to be reckoned with.
“That’s why I’ve been working for years to support their ability to fund cheaper loans through our $16 billion investment in residential mortgage-backed securities so they can really give the big banks a run for their money. That’s why we’ve cracked down on unfair mortgage exit fees, which has already led two of the major banks to remove theirs in direct response, and it’s why we brought in an account switching package to help consumers more easily move their deposit account.” Mr Swan said.
Joe Hockey, shadow Treasury spokesperson for the coalition opposition writing in an op-ed featured in The Australian says they time is right for the banking industry to undergo further reforms. Reforms which reflect the political reality of the post global financial crisis world, that banks have effectively become “to big to fail”
“The Coalition is not calling for more regulation to address these challenges. It is not calling for greater interference in the commercial decisions of banks. It is calling for measures to facilitate greater competition in the provision of financial services so the market operates more effectively. It is also calling for specific recognition of the additional support provided to banks by taxpayers, a review of whether that support should continue, and if so, what the community should expect in return. The governor of the RBA has said banks are not like other businesses. We agree. It is time that unique position was formally recognised.” Mr. Hockey Said.