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Australian Banking Returns Outperform Its Natural Resource Sector
Returns from the Australian banking sector have begun to outperform the previously booming resources sector as global investors began switching into stocks of the big four banking groups in the country.
The stock price of the major banks rose by an average of 6.3 per cent, easily outperforming the 2.5 per cent increase in the natural resource sector.
After leading the sector in 2010, ANZ’s performance lagged a little having risen by 3.2 per cent during the March quarter, well behind rivals Westpac which registered an 11 per cent increase, NAB which produced an increase of 10.7 per cent, and CBA which gained 5.7 per cent.
According to CLSA analyst Brian Johnson, the relative underperformance of ANZ is due to international investors cutting their holdings in the lender by 2.2 per cent, against a back drop of domestic institutional and retail investors picking up the slack.
Mr. Johnson says the opposite happened with rival NAB, who registered a two percentage point increase in ownership by international investors which was responsible for driving a quarter of unusual outperformance.
International investors have looked to pick up NAB stock for a number of reasons including the potential for the lender to realise some US$650 million on its troubled portfolio of collateralised debt obligation assets.
Investors have also expressed optimism over the impending transition of NAB’s British leadership from current chief Lynne Peacock to her well regarded replacement David Thorburn.
“While we cannot identify a ready catalyst for NAB’s present momentum to reverse, we reiterate our view that NAB is not cheap enough, given its above-peer risk profile,” Mr Johnson said.
Mr. Johnson has been a perennial NAB bear, and once again used this opportunity to cite the lenders relatively large exposure to commercial real estate, in particular with regards to its British banking assets. The CLSA analyst worries that there is a risk of M&A activity that would destroy value rather than create it, as the lender examined options of expanding its UK operations.
Mr. Johnson reiterated his underperform rating on NAB.
Mr. Johnson also warned that should the Australian dollar weaken, there was a large risk that international investors would sell their Australian banking assets. Despite the recent buying activity, global investors continue to remain more bearish than domestic investors on the funding challenges faced by the major lenders, and the risk of an emerging housing bubble.
Also, despite recent buying, international investors were far more bearish than local institutions about the funding challenges of the majors, and the risk of a housing bubble.
“These (factors) are not likely to improve anytime soon, with Australian banks facing the prospect of structurally lower . . . returns on equity, lagging dividend growth and net interest margin pressure should they have insufficient pricing power to pass on an increasing cost of funds to customers,” Mr Johnson said.
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Australian Banks Deny Underestimating Cost Of Living Expenses For Mortgage Borrowers
Australian banks which have been charged in a report by investment bank Merrill Lynch with underestimating the cost of living for their customers, and as a result lending to much as they seek to maintain their market share, have dismissed the accusation.
The report published by Merrill Lynch earlier in the week suggests that Australian lenders have not factored in costs of living at a high enough level, resulting banks lending to customers who may later struggle as expenses begin to rise.
According to the report, Australian lenders are using cost of living estimates which are as much as 7 per cent below mainstream forecasts.
Excluding housing expenses Australian banks have estimated that on average, the expenses of an individual are $1,208 whilst a couple faced expenses totalling $1,708.
The estimates fall well short of those by the globally recognized Poverty Index, which puts living expenses for a couple at $1,814.
According to the Merrill Lynch report, ANZ is the most aggressive lender, whilst rivals CBA and Westpac are the most conservative.
On Tuesday the banks responded by saying lower rates of credit impairment and arrears suggest that mortgage lending was far from being too aggressive, and that they had implemented stringent customer assessment plans.
“The poverty index certainly isn’t perfect and this is why we spend time with customers to help assess their real cost of living,” an ANZ spokesman said.
A spokesman for Westpac said the lender updated its living cost assessment once every three months.
“We also confirm a customer’s repayment history and savings record, as a proxy for proposed mortgage repayments,” he said.
“We review and update our servicing models quarterly, to take into account changes in living costs, market interest rates and other market factors.”
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ANZ Knocked Back In Defence Against Class Action Law Suit
Australian banking major ANZ received a blow to its defence against a class action lawsuit over bank fees it is facing when the presiding federal judge in the case ruled it could not be delayed in light of an internal investigation by the bank into costs.
Justice Michelle Gordon called ANZ’s request to delay legal proceedings by 15 months in order to prepare its defense in the $50 million class action law suit “an abuse of process”.
“I do not accept that a Court should wait and conduct a trial of all issues in two or three years’ time,” said Judge Gordon in a Melbourne court. “It is simply an inappropriate way in which to conduct this piece of litigation. It is an abuse of process because the allegations are made…without any foundation,” she said.
‘‘This is still very much still in the procedural stages of the trial and as we understand it simply means her honour has decided to split the case into separate parts, There remain complex issues to be tested in court and ANZ will of course continue to vigorously defend IMF’s claims.’’ An ANZ spokesperson said in response to the ruling.
Maurice Blackburn principal Andrew Watson said: “We are very pleased that the Court has rejected ANZ’s attempt to delay the case and that this class action on behalf of ANZ customers can now proceed in an efficient and cost effective manner. It’s in the interests of all concerned that we get to the heart of the case without any further delays.”
The hearing will continue on May 5th, at which point the timeline of the case will be determined, which is largely being seen as a test case for a much wider class action law suit also initiated by Maurice Blackburn that has 11 of Australia’s largest lenders including the big four banks in the dock.
That particular lawsuit on behalf of 200,000 plaintiffs is seeking $ 5 billion in damages which the lawyers for the plaintiffs claim has been paid by consumers as fees over the last six years.
Australia’s big four banks have faced intense criticism since they decided to raise interest rates out of synch with the central bank at the end of last year, despite having made a combined profit of at least $20 billion.
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Australian Bank Customers May Face Technology Issues For Up To 15 Years
A technology analysts says Australians may have to brace themselves for as long as 15 years of potential bank IT problems.
Last week Australian banking major NAB experienced yet another technology glitch which deprived its customers of their pay, and affected employers who use NAB and other lenders to process their payrolls.
Jorn Bettin an analysts at technology research firm IBRS says that the NAB failure would certainly not be the last one of its kind and that it might take big four lenders as long as 10 years to upgrade their IT systems, and a further five years for the upgraded platforms to stabilise.
“These outages can be traced back to the complexity of the systems that these banks are running. Some of these systems are 30, 40 years old and hard to grasp by the average consumer.” Mr. Bettin said.
He added that a large domestic bank would typically have computer code consisting of as much as 10 million lines, or the equivalent of 500 books, and even if the bank employed teams consisting of hundreds of people to oversee the system, it would still be an incredibly complex task to manage, and could hardly be described as being trivial.
Mr. Bettin says that a single minor change may result in a major disturbance.
NAB and CBA between them are spending a combined $2 billion upgrading their core banking platforms. According to Mr. Bettin, smaller regional lenders would find it difficult to offer stable banking systems unless they spent double or even triple their existing IT expenditure.
Mr Bettin cited the example of Airbus, which has seven systems running in parallel to ensure technical problems are managed effectively. “Why would you want to ever run seven systems? The answer is because of the complexity.
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Big Four Subsidiary Banks Fail To Impress Business Customers
The results of a new survey suggest that smaller Australian banks including St George and Bankwest perform little better than their big four parents when it comes to customer service for their business clients.
Both banks also underperform when compared to regional banks and other smaller non allied lender, according to DRM business financial services monitor.
According to the survey, non allied smaller lenders such as Bendigo and Adelaide Bank and Suncorp were able to achieve higher customer satisfaction levels from their business clients compared to allied banks such as St George and Bankwest.
“There is a very significant and consistent difference in average satisfaction scores between the big four and the independent regionals and others,” the report said.
Dhruba Gupta managing director of DBM said it was surprising that subsidiary banks such as Bankwest and St George did not achieve higher customer satisfaction marks than their big four parents.
“Businesses are making clear distinctions between non-big four banks allied with a major bank and those that are independent regional’s or another bank. The results suggest that for a regional brand to deliver the higher levels of satisfaction they need to be seen to have the true qualities of a regional bank. This has important implications for the major banks using regional brands,” he said.
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NAB Faces Yet Another Technology Debacle
Australian banking major NAB has once again been hit by a computer glitch which may leave millions of Australians without their pay this weekend.
The current glitch follows just months after a previous processing failure which resulted in thousands of people unable to access their funds
A spokeswoman for NAB, said: “We are experiencing delays and some customer account balances are not up to date.”
The spokeswoman declined to say exactly how many accounts have been affected or the reason for the issue.
The current problem may well result in millions of accounts being crippled with customers at rival banks likely to be affected once again.
Previously NAB was forced to respond by taking out full page newspaper advertisements apologizing for the issues customers were facing, and opening branches throughout the weekend.
NAB posted on Twitter this morning that “some NAB customers’ account balances may not be up-to-date this AM”.
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Australians Increasingly Turning To Mortgage Brokers For Home Loans
Australians are increasingly turning away from their banks and opting for mortgage brokers when seeking a home loan according to the results of a new study.
The report, authored by the Market Intelligence Strategy Centre claims that mortgages originated by brokers rose by 7 per cent during the quarter ending December, and stood at $14.18 billion.
The increase in broker originated mortgages is the first such increase in five quarters, with the same time period in the previous year recording a 13 per cent drop.
Major lenders have been cutting commissions and fees paid to brokers as they seek to attract customers directly in a bid to cut their costs.
“The growth came as the broker channel effectively shrugged off the effects of successive rate rises in earlier periods,” the report said. “The better result also came on the back of a generally more active mortgage market in the broker channel.
“The major banks provided marginal growth in the September quarter despite tighter lending criteria and their early efforts to encourage more responsible broker lending practices from their distribution partners.”
The report also suggests that regional lenders have increased their dependence on broker originated loans, which have risen from 11.2 per cent to 14 per cent. The increase is thought to be as a result of the thawing of the securitisation market, giving smaller lenders greater access to funding and an increasing ability to underwrite a larger number of mortgages.
The big four lenders dominate the Australian mortgage lending market, controlling as much as 80 per cent of the total market for home loans between them.
“Variable rates were ultimately adjusted in the quarter, but some major banks lessened the impact with several offsetting measures of discounted fixed-rate specials and fee waivers,” MISC said.
“Both the ANZ and NAB took the initiative early and Westpac soon followed.”
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NAB Still Keen On Acquiring Lloyds TSB UK Branch Network
According to a report in The Australian, NAB remains keen to acquire the British retail banking assets of Lloyds TSB. Banking regulators have recently ruled that the troubled lender needs to double the number of branches it has put up for sale.
As a result of the ruling, and increase in number of branches now up for sale, it is widely believed that NAB is increasingly keen to pursue a transaction.
Initially regulators mandated Lloyds TSB to divest 600 high street branches, in response to the lender seeking government assistance, and reducing the level of its ownership.
Since then, the Independent Commission on Banking has further clarified and says that the lender should increase the number of branches up for sale to 1000. Lloyds TSB is a clearing bank in the UK, with one of the largest branch networks in the country with 2900 branches.
The increase in number of branches being offloaded by Lloyds was initially thought to act as a deterrent to NAB, since it owns two lenders in the UK already with a combined branch network of 410. Since then it has been emerged that NAB would be likely be tabling a bid with private equity firm NBNK, and a larger transaction size would not be prohibitive towards NAB pursuing a deal.
Should NAB ultimately be successful in acquiring the Lloyds branch network, it may result in NAB combing those assets with its Clydesdale and Yorkshire bank assets into a single banking group that could ultimately become listed. A listing could well be an exit strategy for NAB, which has endured speculation for many years about how it planned to exit its perennially underperforming British banking assets.
UK banking regulations prohibit Lloyds major rivals from tabling their own bid for the branch network, and so far NAB has refused to comment.
NAB chief executive Cameron Clyne has so far refused to commit on what his plans are in the UK. It is thought that Mr. Clyne is keen to leave the extremely fragmented UK banking industry, but is having difficulty finding a buyer for NAB’s interests at a price deemed reasonable.
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Westpac Chief Expects Interest Rates To Remain Steady
Gail Kelly, chief executive of Australian banking major Westpac says she believes that interest rates are likely to remain where they are for the next few months, before another wave of tightening begins sometime in September.
According to Mrs. Kelly, whilst the overall picture of the Australian economy was indeed strong, it is also mixed across various sectors, such as the buoyant resource sector which has been offset by weakness in exports and tourism as a result of the strong Australian dollar.
“So interest rates have been on hold for a period of time and I’d expect them to continue to be on hold, at least for the next several months,” Mrs. Kelly said speaking at an Australia-Israel Chamber of Commerce lunch in Melbourne.
“Possibly around September-time I would see the potential for another interest rate change, but I think that will be 25 basis points up.”
Westpac’s average cost of funding continued on its upward trajectory, as debt issued before the financial crisis was rolled over into post financial crisis rates which are much higher.
The rate of increase in funding costs had slowed down however as a result of increasingly stable financial markets, and slower credit growth which moderated demand.
“There will come a time, though, where we reach that plateau, and we have called that out to be the end of 2012 where the average (cost of funds) will start to decline,” Mrs. Kelly said.
Mrs. Kelly declined to say whether the lender would raise interest rates out of cycle as it seeks to preserve its net interest margin against a backdrop of higher funding costs.
Mrs. Kelly also forecasts that the industry return on equity would remain subdued in the range of 15-20 per cent, far lower than the pre financial crisis range of 20-25 per cent.
The Westpac chief cited slower credit growth and cautious consumers, as reasons behind lower rates of return on equity, and added that regulatory requirements which force lenders to hold larger levels of capital and greater liquidity reserves also contribute.
Mrs. Kelly said she believes that business credit would begin to pick up during the second half of 2011, a segment of the market which has experienced flat to negative growth of late. She added that lending would not return to pre financial crisis growth levels, which were double digit.
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Goldman Sachs To Take Full Control Of Australian Joint Venture
Goldman Sachs has finally resolved the vexed question of its ownership structure in Australia when it announced last week a deal that will enable the investment bank to take full control of its Australian joint venture.
The deal must be approved by 75 per cent of Goldman Sachs & Partners 130 shareholders, something which is considered a formality when shareholders meet in a few weeks to vote on the deal, after it recommended by the Australian members of the Goldman Sachs & Partners board.
The exact terms of the deal have not been made public, however it is believed that Goldman Sachs will acquire the 55 per cent of the joint venture it does not already own for 1.8 times book value, valuing the entire business at $1 billion and the acquisition stake at $550 million. Once staff retention payments are included the value of the deal increases, however it is difficult to establish the exact price since shareholders will be given the option to accept payment in either cash, Goldman Sachs shares or a combination of both.
The current $1 billion valuation of the joint venture suggests that Terry Cambell, JB Were Chairman sold the initial 45 per cent stake to cheaply to Goldman, which acquired it for $135 million in 2003. However since that acquisition, the joint venture has performed much better than many analysts predicted at the time.
After JB Were divested its private client business to National Australia Bank last April, at which point it was no longer included as part of the joint venture’s name. Managers at the company remain confident that the new ownership structure will maintain the autonomy of the venture which has propelled the business to one of the top three investment banks in Australia.
“We are incredibly proud of that, and it’s not something we want to disrupt,” said David Ryan, Goldman’s co-president of Asia. “We want to offer more firepower to people on the ground.”
According to Mr. Ryan, Goldman’s Australian employees have not been given any special treatment, and would be blended into the investment bank’s global bonus pool.
“The (joint-venture) arrangement which is seven years old has worked very well,” Mr Fitzgerald said yesterday. “Where this takes us though is that we have even more access to Goldman Sachs, to what that means to our clients and the scale of what we can bring to our clients.”
businesses such as equity derivatives trading and energy trading would benefit from access to Goldman’s balance sheet and back office and trading platforms infrastructure.
“Australia and New Zealand represent an important part of our growth strategy,” Goldman Sachs chairman and chief executive Lloyd Blankfein said. “This investment underscores our desire to continue to strengthen our Australasian client franchise.”