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Competition For Australian Deposits Less Intense
The battle for deposits amongst Australian lenders seems to be petering out, with only two of the country’s top online savings accounts passing on November’s interest rate hike by the Reserve Bank of Australia, to their customers in full.
Despite failing to pass on the interest rate increase to depositors, bank’s continue to make the argument that higher funding costs are the reason behind higher interest rates which have been passed onto borrowers in excess of official rate hikes by the central bank.
Most of Australia’s online banks have declined to pass on the 25 basis point rate hike to their customers, with some of them even doing the opposite and cutting their promotional rates.
Virgin Money cut its promotional rate by 24 basis points for its online savings account at the start of the week, when this cut is bundled together with the 25 basis point rate hike enacted by the central bank, the effective rate cut equates to 49 basis points.
Bankwest continues to offer the highest promotional online interest rate of 7 per cent despite failing to pass on the interest rate increase to its customers.
ANZ did pass on the rate hike to its customers and currently offers a 6.25 per cent interest rate to all its savings accounts, whilst Westpac and CBA did so only for their highest interest accounts.
Since the financial crisis in 2008, a dramatic battle for deposits erupted between Australian banks, as they sought to diversify away from wholesale international funding markets which are volatile and froze during the crisis, to a more stable depositor based funding.
The latest moves by lenders not to pass on rate hikes to their depositors implies that the intensity of competition between lenders is levelling off.
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Competition Regulator Wanted To Prosecute ANZ Chief In 2009
Graeme Samuel who heads up the Australian Competition and Consumer Commission (ACCC) says that he would like to have prosecuted Mike Smith, chief executive of Australian banking major ANZ for what Mr. Samuel believes was price signalling that the lender engaged in 2009. Mr. Samuel says he was unable to do so because he did not have the required regulatory powers.
Mr. Samuel made his remarks whilst appearing before the Senate inquiry into competition within the banking industry, and noted that Australian banks and other businesses could engage in price signalling and co-ordination with “a wink and a nod” and without breaking the law.
The competition regulator needs to be able to prove that both parties accused of engaging in price fixing understood how each other behaves under the regulations stipulated in the Trade Practices Act.
The implication of that is that so long as businesses do not explicitly agree to a particular course of action such as reciprocal identical price adjustments, they were free to inform rivals of their pricing intentions without actually breaking the law.
“Our concern is that you can just as easily set up a process of co-operation and co-ordination between competitors without a commitment,” Mr. Smith told the Senate
According to the ACCC chief, ANZ engaged in price signalling back in October 2009, when Mr. Smith made public statements saying the lender may raise its interest rates beyond the official rate hike by the Australian central bank.
“I’m not saying that I would not move outside of the RBA . . . but I’m not going to be stuck on my own. If everyone else moves then I would have to react to that.” Mr. Smith said whilst revealing the bank’s annual profit that year.
Mr. Samuel said that was exactly the type of remark the competition regulator was seeking to prevent by being able to prosecute companies.
“That sort of comment we can’t deal with under the law as it currently stands,” he said.
ACCC chief executive Brian Cassidy said Mr Smith’s comment “says to competitors ‘if you increase your interest rates, I will follow . . . you don’t need to worry about being stuck out there on your own and losing market share’.”
The competition regulator believes that in order to better effect a ban on price signaling it should be enacted as part of regulation rather than through legislation, which would mean it could easily be extended to other industries without the requirement for further legislation having to be passed.
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Westpac Chief Critical Of Some Aspects Of Banking Reform Proposal
Gail Kelly, chief executive of Australian banking major Westpac has warned the government that aspects of its banking reform proposal will not result in greater competition within the industry.
Mrs. Kelly made her comments whilst appearing before the Senate inquiry into the banking industry last week, and said that it would be unwise for the government to intervene in the process of fee setting by lenders as part of its proposal to do away with mortgage exit fees. Mrs Kelly also said that it was unnecessary to implement price signalling legislation.
Last month, the government released a set of proposals for banking reform, the aim of which was to stimulate competition within the industry and as a result reduce interest rates. The proposals included scrapping certain fees, allowing lenders to issue covered bonds, and to crack down on the practice of price signalling by banks.
Mrs. Kelly said she was unsure how effective the proposals would be in raising the level of completion within the industry:”We are broadly positive. There are some elements that we are enthusiastic about more than others. Covered bonds are valuable for us. It’s not a panacea for us but it’s an important next step to allow us to leverage our mortgages . . .that’s very helpful.” She said.
The Westpac chief said that the proposal to allow the issuance of covered bonds would help lenders with their management of interest rates, since the cost of issuing covered bonds was lower than obtaining finance in wholesale funding markets.
Mrs. Kelly went on to add that the proposal to scrap mortgage exit fees would not result in greater competition between lenders or act as an incentive of borrowers to switch banks.
Australia’s major lenders are estimated to earn as much as $280 million a year from exit fees.
“Mortgage exit fees — we don’t see that as a necessary step,” Mrs Kelly said. “I don’t think that is something the government should be looking at. There’s legislation now that makes fees fair and transparent. I don’t think it will have any effect on competition, it could hurt smaller lenders and from our point of view it’s not a big issue.”
“We are against price collusion or signalling but we don’t believe it occurs in the industry and we don’t think it (legislation) would have a positive impact on competition and could have unintended consequences if it’s poorly implemented,” Mrs. Kelly said.
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Australian Securities Regulator Endorses Bank Account Number Portability
The Australian Securities and Investment Commission (ASIC) says the concept of bank account number portability in the same way mobile phone numbers are portable is a “very good idea” and would further stimulate competition within the banking industry.
Greg Kirk a senior executive with the corporate regulator made the comment when a member of the senate inquiry into completion within the banking sector posed a question regarding the feasibility of the proposal.
Whilst endorsing the effect of such a system on competition, Mr. Kirk made the point that ASIC had yet to independently research the proposal.
“relationships customers have with their bank and the arrangements they have with payments to third parties make it necessarily complex to switch (banks). A lot of things have to be changed. If it can be done, intuitively it is hard to see why it wouldn’t make switching a lot easier – if you just switched your whole account and you moved your number across and everything that was attached to that number moved across automatically. It sounds like a very good idea, and a very good thing to promote switching and to promote competition. But we wait for the outcome of that review in terms of how feasible it is.” Mr. Kirk said.
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St George Puts Staff And Customers First In Flood Response
St George’s managing director for Queensland Martin Barrett has extensive experience dealing with natural disasters, experience which has come in handy whilst trying to formulate a strategy to deal with the latest flooding in Queensland. Last week St George was forced to shutter the bank’s headquarters as a result of the flooding.
“This has been an extremely difficult time for everyone in Queensland. A couple of our staff have lost their homes and others had their properties damaged. There’s a lot of hardship and we are trying to give as much support to our customers as possible.” Mr. Barrett said.
As a result of the flooding St George was forced to shut seven branches and five ATM’s when waters reached their peak, as they have receded only two branches remain shut though seven ATM’s are still not functioning because of power related issues.
St George has 34 branches and employs 500 staff in Queensland, and according to Mr. Barrett, the lenders first concern was to ensure that its staff were safe, and to tend to its 350,000 customers.
“We had to ensure that vital services like property settlement and cheque clearances were managed efficiently, so we relied heavily on other parts of the state and country to help out. We also deferred home and personal loan repayments and suspended interest charges. The bank also suspended credit-card repayments and interest, and provided emergency credit-limit increases. We waived early withdrawal costs for customers who wanted access to term deposits. We restructured loans for our customers and waived ATM fees.” Mr. Barrett said.
The big four banking groups have followed suit, with all suspending mortgage, loan, and credit card repayments for up to three months on request. Lenders have also agreed to waive fees associated with refinancing, including the breaking of term deposits.
Queensland currently contributes approximately 10 per cent of St George’s earnings.
“St George has 6 per cent market share in Queensland: we would like to grow this to about 10 per cent. That is the long-term focus.”
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Fitch Believes Suncorp Has Sufficient Reinsurance To Cover Queensland Flood Related Claims
Fitch, the credit ratings agency says it believes major Australian general insurers have more than enough reinsurance to cover the claims that are expected from the flooding in Queensland which is estimated to cost Suncorp as much as $150 million.
According to the ratings agency, whilst the insured losses have the potential to escalate substantially as flooding begins to engulf urban areas such as Brisbane, the major insurers have sufficient reinsurance protection.
Queensland based Suncorp received nearly $1.9 billion in premiums from Queensland based clients during the year ending June 30th 2010, resulting in the largest exposure to the flooding amongst all major Australian insurers. Suncorp said earlier in the week that it has received 2500 claims so far which will cost is between $70 million to $90 million, with the pre tax total costs of flood related claims amounting to between $130 to $ 150 million.
Fitch estimates that Suncorp has catastrophe reinsurance coverage worth $5.6 billion per event, which will have the effect of containing Suncorp’s exposure to such events.
Additionally because of covenants regarding time restrictions in its reinsurance coverage, the floods will be treated as multiple events and covered by the bancassurer’s $300 million aggregate reinsurance contracts.
As a result Fitch estimates that Suncorp’s total protection amounts to $400 million, and coupled with recent increases in premiums, will significantly cushion the impact of the floods on earnings of the company.
Insurers typically purchase reinsurance on their liabilities from global insurers to protect themselves from large losses, allowing them to issue policies with much higher limits than would otherwise be possible.
Shares in Suncorp, IAG, QBE and Bank of Queensland have taken a beating this week as the flood crisis unfolded with financial market awaiting gross claim costs from over 4300 claims to date.
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Australian Banks Pass APRA Stress Tests
According to the results of stress tests conducted by the Australian Prudential Regulation Authority (APRA), Australian banks have the ability to withstand an economic shock even worse than the recession the country experienced during the 1990’s.
On Wednesday APRA said that of the 20 lenders it tested, none would fail in a bleak economic environment which consisted of high unemployment and a housing price bubble.
APRA conducted the tests in two parts as it seeks to determine how ready the Australian banking industry is to implement proposals for bank regulation being considered by the Basel III committee.
Basel III is part of the regulatory response to the global financial crisis.
Paul Tattersall, who headed up APRA’s analysis team said that none of the lenders tested would have breached the 4 per cent minimum tier-one capital ratio requirement that is part of the current Basel regulations.
The scenario imagined by the stress test was one in which the Australian economy was expected to contract by 3 per cent before recovering to growth of 2.1 per cent and 3.5 per cent in the next two years. Unemployment was projected to double to 9.8 per cent, before rising to 10.8 per cent in the second year and falling marginally to 10.7 per cent in the third year.
House prices in the stress test declined by 12.1 per cent whilst commercial property growth was expected to contract by 21.5 per cent.
“This stress scenario, was, by design, demanding. An important element of the external shock relevant to Australia is that China is assumed not to be able to offset all of the decline in its exports with domestic spending. As a result, the rate of growth of the Chinese economy falls by at least as much as that of other countries. The implied reduction in Chinese demand for minerals reduces commodity prices by about 60 per cent from their peak, with a consequent depreciation in the exchange rate. The disproportionate impact of China’s slowdown means that the Australian economy contracts more than its trading partners, other than China,” Mr. Tattersall said.
The Australian banking industry is one of the most profitable in the world, with the four largest lenders earning a combined $26 billion over the last year and are four of only eight AA rated financial institutions left in the world.
The sector is believed to be on track to implement the Basel III reforms, which will be rolled out on a staggered basis until 2017.
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Westpac Says “Absolutely No Truth” To Reports It Is Looking To Replace Gail Kelly
Australian banking major Westpac has issued a strong denial to reports that suggest the lender is looking for a replacement to current chief executive Gail Kelly.
On Tuesday, Westpac said there was “absolutely no truth” to a report in the industry news letter Banking Day which said that the lenders chairman Ted Evans had given a search mandate to head hunting firm Egon Zehnder for a new CEO.
Responding to the speculation a Westpac spokesperson said the report was “completely false” and that no mandate had been issued nor any executive search firm been retained.
“There’s absolutely no truth to that (report),” the spokesperson said.
The report contradicts statements made by Mr. Evans during the lenders annual general meeting last month which strongly endorsed Mrs. Kelly.
“Do I want Gail to remain as CEO? Absolutely, as does the rest of the board,” Mr Evans said in response to a question from a shareholder.
Mr. Evans said Mrs Kelly provided strong leadership to the bank.
“The fact that your company remains in a very sound position and has bounced back so soundly from the depths of the GFC reflects strongly on the strong leadership of your CEO Gail Kelly and her hard working executive team,” he said.
Some investors have questioned Westpac’s strategy since the lender acquired St. George two years ago for $12 billion, arguing that the timing of the acquisition left something to be desired given the global financial crisis and the cooling of the housing market.
The acquisition has resulted in a substantial deepening of Westpac’s dependence on costly and mercurial wholesale funding which has kept its profit margin continually under pressure.
Westpac shares have fallen about 12 per cent over the past year, under performing its big four rivals
Mrs. Kelly is currently on annual leave and is scheduled to return to work next week.
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Bank Call Centre Staff Prepared To Help People Access Customer Accounts Not Belonging To Them
A survey conducted which polled call centres of Australian banks found that as many as half of all staff are prepared to help individuals who call them access financial records belonging to someone else.
Global Research a customer experience research firm undertook the survey in November, calling the call centres of eight of Australia’s largest lenders including the big four banks.
The researches made the calls without identifying themselves, placing as many as 20 calls to each bank, asking each time, whether they could gain access to a friend or partner’s bank account.
In every case, the first response of the call centre staff was to say it would go against the lenders rules. However when the researchers pressed further, staff at the call centre began to behave more co-operatively.
”The callers would say things such as, ‘My girlfriend needs to transfer money today, she’s gone to work, I have to do it for her, she’ll kill me when I come home tonight’ ” Global Research managing partner Peter Grist said.
”Half the time after saying no the call centre staff would work with the caller to find out ways to do it.”
In cases where call centre staff allowed researchers to access accounts not belonging to them, details such as bank account numbers and dates of birth were used, verification types that would most likely be known by either current or estranged partners.
The survey found that ANZ staff were significantly less keen to advise the researchers on how to circumvent the rules than staff of other banks.
When ANZ’s results are excluded from the survey the proportion of call centre staff prepared to help individual’s access customer accounts not belonging to them leapt to two thirds.
An extraordinary 15 per cent were prepared to go further. ”They said if the caller was worried about how to go online and do it, they would stay on the phone and guide them through it. They don’t illegally enter accounts themselves, but they do guide other people through how to do it,” Mr Grist said.
”I was astounded that so many call centre operators would get so actively involved in helping someone break the rules. What didn’t astound me was their desire to help. There’s a massive drive for customer satisfaction. It is drilled into them,” he said.
”They weren’t trying to be fraudulent. They knew the rules. But human beings like to help. And not just in banks. I think it would be the same in any industry.”
Each of the banks surveyed has been sent a copy of the results. Mr. Grist said they were surprised.
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Australian Central Bank Decision To Sell Gold Reserves Cost Country $5 Billion
Just over ten years ago, Australia’s central bank the RBA sold off most of the countries gold reserves under the belief that the price of gold would continue to remain flat, and that as an asset, it would no longer play any role in the future financial system, or any crises that may result.
Based on the current market price of $1,400 an ounce for gold, the decision to sell 167 tonnes of the precious metal by the central bank has cost Australia approximately $5 billion.
A paper written by the central bank which recommended selling off the gold reserves conceded that that asset whilst the assets served as “insurance against a breakdown in the international financial system”, it was not necessary to hold.
In recommending the decision the paper went on to add that Australia did not need to be overly concerned about selling off its existing gold stock because it has vast reserves of the precious metal, though according to Geoscience Australia, the country has reserves that will last no more than 30 years.
In 1997 the Reserve Bank of Australia sold 167 tonnes of gold over a six month period, reducing the nation’s gold reserves to just 80 tonnes. Over that period the value of its gold holdings declined to $1.1 billion from $3.6 billion.
The sale of gold by the Australian central bank had a significant impact on world gold prices, sending them tumbling to an 11 year low, returning just $2.4bn for the gold that was sold via a single broker engaged without a tender. The same amount of gold would be worth about $7.4bn today.
The central bank’s justification for reducing its gold reserves so drastically was that gold represented a poor investment, and Australia had successfully integrated itself into global financial markets, and that it need not worry about access to those markets during a financial crisis.
Since the sale of the gold reserves the global financial systems has experienced severe stress on a number of different occasions, starting with the implosion of the technology bubble at the start of the millennium followed by the September 11th terrorist attacks, and more recently the global financial crisis in 2008.
The price of the precious metal over that time frame has risen spectacularly and the asset has begun to play an increasingly important role in the global financial system since the financial crisis.
The central bank argued that continuing development of financial system meant that circumstances which would require Australia to call upon our gold holdings for economic reasons looked increasingly remote.
“Central banks traditionally hold gold because of its ability to be used in the event of a crisis in the international financial system; it is the only reserve asset that is not a claim on some other government, international institution or bank. However, over the past two or three decades, the world has experienced a number of economic ‘crises’, but gold played no part in coping with them,” the paper said.