Australian Retail Sales Edged Up In November
Despite multiple rate rises enacted by the Australian central bank, Last year November retail sales still managed to grow, all be it marginally by 0.3 per cent, which was in line with expectations.
According to the latest data released by the Australian Bureau of Statistics (ABS), November retail sales increased to a seasonally adjusted $20.328 billion, after a revised 0.8 per cent decline during October.
Analysts had forecast a 0.3 per cent rise in sales, seasonally adjusted.
Michael Blythe, chief economist of Commonwealth Bank of Australia said that whilst the rise in retail sales was positive, the data suggests that consumers, despite their rising income levels remain cautious.
“To get any rise at all in retail sales in November, given we had sort of a double-whammy rate rise, is probably not a bad result. Other parts of the consumer story still look pretty strong, motor vehicle sales are holding right up there at very high levels, so it’s a very patchy story. This will give the Reserve Bank some comfort. They were looking for consumer caution to continue and for any increase in income to be saved rather than spent. We’ve still got the next (rate) move up in April.” Mr. Blythe said.
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Former Central Bank Governor Unconvinced Over Fifth Pillar
Bernie Fraser a former governor of the Australian central banks says he is not fully convinced that proposed banking reforms from the Federal government will enable alternative lenders such as credit unions and building societies to emerge as a viable fifth pillar in the Australian banking sector.
Mr. Fraser made his comments to the Australian Financial Review and is expected to deliver his report to the government in June on the viability of bank account portability, which some believe is a barrier to greater competition within banking.
Mr. Fraser says so far he has received very little feedback from the banking industry as a result of the holiday season, adding that he was speaking with the Treasury and had several meetings planned.
“Obviously though, consumers should be the main beneficiaries (of the reforms)”, he said.
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Australians Increasingly Turning To Fixed Rate Mortgages
In a climate of rising interest rates and volatile financial markets, Australians are increasingly turning to fixed rate mortgages.
According to data released by mortgage broker AFG, the total number of mortgages in 2010 fell by 10 per cent, whilst nearly 10 per cent of all borrowers opted for a fixed rate mortgage.
AFG estimates that nearly $27 billion in mortgages were processed in 2010, down from $30 billion in 2009.
Mark Hewitt of AFG said that the rate rises of 2010 and political criticism of the banking industry resulted in a challenging environment. Despite the issues, Mr. Hewitt believes that there will be more activity in the market during 2011 largely driven by competition from smaller lenders.
Data from AFG suggests that during December 2009, fixed rate mortgages comprised only 2 per cent of all mortgages. During December 2010, that figure rose to 12.6 per cent.
According to Mr. Hewitt, this increase was driven by banks aggressively marketing fixed rate mortgages, and concerns by borrowers over potential rate rises.
On Thursday, the Housing Industry of Australia revealed that during November 2010, the number of building approvals declined 4.2 per cent.
Andrew Harvey and economist with the HIA said that residential approvals fared worse falling 9.9 per cent over the year.
“It’s unfortunate to begin the new year with disappointing building approvals data which point to subdued housing starts in the first quarter of 2011. The real concern is that the November figures would not have felt the full impact of the November interest rate hikes by the Reserve Bank and the banks, so it’s hard to see Australia’s residential building activity improving any time soon.” Mr. Harvey said.
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Analysts Downgrade Suncorp
Analysts have already begun circling Australian insurers with Goldman Sachs downgrading Suncorp Group’s full year earnings estimates as a result of the impact of claims stemming from the flooding in Queensland.
Despite downgrading Queensland based Suncorp, Goldman’s did quite the opposite with rival Insurance Australia Group (IAG), upgrading the insurer’s full year earnings.
According to the investment bank, the impact of flood related claims on Suncorp will result in an 11.3 per cent decline in full year earnings per share compared to its estimate prior to the flooding.
In its research note on Wednesday, Goldman Sachs said that compared to rival IAG, Suncorp faced a much larger exposure to the flooding as a result of its larger market share in its home state of Queensland, its broader policy terms and the fiscal year structure of its reinsurance arrangements.
Goldman believes that the bancassurer will take a $200 million hit as a result of the flooding, which would result in the company exceeding its first half budget for claims by $150 million.
In upgrading IAG’s 9.1 per cent earnings estimate despite the flooding, Goldman said that IAG operated its reinsurance arrangement on a calendar year basis and this means that prior to the flooding, it estimated that the insurer came in by $100 million under its natural perils budget.
Goldman estimates IAG’s exposure to the flooding in Queensland at about $40 million, implying that the insurer would be $60 million ahead of its budget for the half.
“Notwithstanding the floods, IAG looks to us to be in pretty good shape and we are forecasting a 12-month total return of about 20 per cent. SUN (Suncorp) remains a higher-risk, higher-reward proposition. In our view the stock has been significantly oversold and we see very strong upside potential from current levels.” Goldman said.
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Will Goldman Sachs Ever Buy Full Control Of Its Australian Joint Venture
Every couple of years the rumour mill begins with speculation that investment banking powerhouse Goldman Sachs will buy the 55 per cent stake in its Australian joint venture Goldman Sachs & Partners that it does not own.
The reason for the two year cycle, according to a report in The Australian is that it coincides with a 90 day window of opportunity for Goldman’s to discuss the stake sale with its domestic joint venture’s 120 plus shareholders.
The arrangement is part of the deal that was negotiated when Goldman acquired its 45 per cent stake in 2003, and was designed to allow both stake holders to regularly review their Australian business.
Despite what many of Goldman rivals actually believe, the window of opportunity for the time being has closed, and the shareholding structure will continue as before.
The fact that for now there is no change in ownership, does not preclude that in the future Goldman will not pursue seeking full ownership of its Australian operations. Goldman Sachs executives have always had a cordial relationship with the management of its Australian joint venture, most of whom are now in fact from Goldman Sachs, which means there is no reason why a sale could not take place outside the traditional window of opportunity.
Australia is the only market which Goldman Sachs operates in where it does not exert 100 per cent control of its entity, and whilst an outright sale to the investment bank would make little difference to its Australian capital markets or M&A operations which are already well integrated with Goldman Sachs globally, full ownership would gives its sales and trading operation access to larger balance sheet funding.
In the immediate aftermath of the financial crisis, it was always unlikely that Goldman’s would initiate a stake sale or enter acquisition mode, but as the recovery builds momentum assessing its options is certainly much more realistic.
Despite the number of reasons for Goldman’s to initiate a full takeover, it may be still be reluctant to do a deal fearing it may upset key executives who already run a successful business franchise by appearing to take over full management control.
The deciding factor, of course, will be price.
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Investors Sell Off Insurer Stocks Amidst Uncertainty Over Exposure To Queensland Floods
Australia’s three largest insurers saw their market capitalisation wiped by over $830 million, as investors fearing the impact on earnings as a result of the Queensland flooding intensified.
Suncorp, QBE and IAG all saw their share price decline on Tuesday, after JP Morgan analysts began suggesting preliminary damage estimates could be as high as $1 billion, with Suncorp’s exposure as high as $200 million.
IAG according to JP Morgan may have its entire exposure covered by re-insurance if its gross exposure was between $15 million to $50 million.
“If they are greater than $50m, IAG will wear the cost in excess of $50m up to a maximum of $175m,” JPMorgan said.
The investment bank also said was uncertain of QBE’s reinsurance plan, but it did not expect the impact to be significant.
Of the three insurers, Queensland based Suncorp has by far and away the largest exposure to flood claims, with a spokesperson saying it had received 1,800 claims and was expecting many more.
“Most of the claims we’ve had so far are home and motor vehicle claims, but we’re expecting a lot more from areas like Rockhampton which are still being flooded and people have other immediate priorities.” she said.
IAG said it had received 600 claims so far which were both flood related and cyclone Tasha related, whilst QBE has not disclosed the number of claims it has received.
Analysts say the sell-off in insurer stocks was driven by uncertainty over the extent of their exposure to the flooding in Queensland, the level of which will not likely be identified for a long time yet.
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Suncorp Urges Queensland Flood Victims To Lodge Claims ASAP
Queensland based bancassurance firm Suncorp issued a statement to the Australian stock exchange re-assuring investors that is has sufficient reinsurance to cover claims related to flooding in the state.
The flood crisis has affected more than 20 cities and towns and is expected to cost more than $1 billion described as the worst in 50 years. Suncorp says it has received over 1,800 claims since Christmas Eve.
Suncorp operates a number of general insurance brands and as part of its response to the Queensland flood crisis has increased the number of staff dealing with claims, assessment and support.
“Suncorp makes allowances for natural hazard claims and has a comprehensive reinsurance program in place. Claims numbers are expected to increase as waters recede and customers return to their homes,” Suncorp said.
It encouraged customers to lodge claims as soon as possible.
“A cost estimate for the event will be provided when claims in affected areas have been assessed,” the company said.
On Friday Prime Minister Julia Gillard toured some of the affected areas.
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E*Trade Australia Aggressively Seeking To Expand Market Share
Australian banking major ANZ’s online stock broking unit E*Trade posted a weak set of results as it suffered from increased levels of competition and investor caution stemming from the global financial crisis.
E*Trade Australia Securities did manage to make a dividend payment to its parent, but according to a filing with the Australian Securities and Investments Commission recorded a lower level of turnover for the year ending September 30th 2010, which resulted in reduced profits.
According to the filing, the slowdown in the market dented profits by as much as 23 per cent, coming in at $24.1 million whilst total revenue fell 6 per cent to $98.3 million. Brokerage income declined from $85.7 million to $78.2 million during the same period, while fees and commissions rose 8 per cent to $20.2 million.
Dividends totalling $17m were paid on August 20. No distribution was paid the previous financial year.
“The company continues to diversify its customer base and develop relationships with other licensed financial services providers,” E*Trade said in its accounts.
Following the global financial crisis, the level of competition between online stock brokers intensified as they all sought to get a larger share of the market, estimated to be 2 million Australians with internet trading accounts.
E*Trade was compelled to cut its brokerage rates in response to aggressive pricing from rival Commsec, the stock broker jointly owned by CBA and CMC.
This followed E*Trade chief executive Stuart Sayers declaring his company would offer more aggressive pricing on fees for international trade.
“On the 17th of November (E*Trade) altered its pricing on certain equity products and services,” the accounts say. “The directors believe that, together with continuing development of functionality, this pricing change delivers the optimal value proposition to our clients and will position the company for the future.” E*Trade chief executive Stuart Sayers said.
The outlook for the online share trading market seems optimistic, with trading volumes during the 2010 calendar trending higher. According to data from the ASX monthly trades have risen from 9.3 million in December 2009 to 12 million last month.
Commsec controls about half the market for online share trading, with E*Trade accounting for 20 per cent. As well has aggressively competing on price, E*Trade has sought to better integrate ANZ’s online banking platform with the E*Trade website as it seeks to increase traffic.
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Big Four Banks Dominance Of Australian Banking During 2010 Almost Total
2010 ended with intense debate over the level of competition within the Australian banking industry. Which critics argue is unhealthily dominated by the Big Four banking groups.
Despite the measures introduced by the government to stimulate competition and all the criticism, new data from the Australian Prudential and Regulatory Authority (APRA) suggests that in the post global financial crisis world, the position of the majors remains strong.
According to statistics from APRA, the major banking groups held 75.3 per cent of the $1.342 trillion of deposits held in Australia in November 2010, up from 69.9 per cent of all deposits held in January 2010, and dramatically higher than the 61 per cent of all deposits held in November 2007.
The acquisition of St George by Westpac in 2008 cemented the position of the major lenders in the market place.
According to the APRA data CBA holds the largest amounts of deposits of $341.9 billion when aggregated with its Bankwest subsidiary, Westpac places second with $282 billion, NAB holds $218.4 billion and ANZ holds $209.5 billion.
The size of the disparity between the big four and the rest can be clearly discerned from the size of the fifth largest holder of deposits in Australia, which is Bendigo and Adelaide bank with $33.7 billion. Regional lenders represent a small fraction of the overall deposit market.
AMP, which likes to describe itself as a potential fifth pillar in Australian banking, after it completes its acquisition of AXA APH holds just $3.5 billion in deposits or just 2.6 per cent of the entire market.
The major lenders have put a lot of effort into maintaining their market share as they competed aggressively to attract retail deposits in order to diversify their funding base away from wholesale international markets.
Deposits now fund about 50 per cent of bank liabilities, compared with 44 per cent in June 2007.
The story does not differ substantially when it comes to mortgage lending, with the big four banks controlling 74.6 per cent of the home loan market in January 2010, a figure which grew to 83.3 per cent of the market by November 2010.
The mortgage lending rate effectively became a political football during 2010, with the major banks attracting intense political criticism, in particular from the opposition over their treatment of customers.
The chief executives of the major lenders all responded with the same argument that they were simply responding to the rising cost of funding, which led them to raise their mortgage lending rates beyond official rate hikes by the Australian central bank.
Critics however accuse the majors of gouging their customers and the government of ignoring the needs of smaller lenders. Federal Treasurer, Wayne Swan responded in December with a set of reform proposals designed to stimulate competition in the banking industry.