NAB Delivers Strong First Half Results
Australian banking major National Australia Bank reported better than expected earnings on Thursday, announcing that first half profits rose by 22 per cent, driven by lower charges for bad debt and increased market share.
NAB has made a concerted effort to attract more customers by offering lower interest rates on loans made to businesses and consumers, than those offered by its big four rivals.
Cameron Clyne, the lender’s chief executive says the bank’s decision to aggressively compete on price is starting to be vindicated.
“I think this result is a sign that there is some momentum in this strategy,” Mr. Clyne said.
NAB’s strategy of offering lower interest rates has taken a toll on profit margins at its consumer banking unit which fell by 12 basis points. However the lender has achieved some level of success, having attracted increased customer volumes and increasing its market share by a full percentage point from a year earlier which had the effect of contributing towards a 36 per cent increase in from that business unit.
The improved performance from its consumer banking unit helped drive NAB’s 16 per cent increase in first half net profit to $2.43 billion, from $2.10 billion a year earlier.
In business banking, where NAB has traditionally been strong, the lender also grew its market share from 20.8 per cent to 23.8 per cent.
“Broadly we still see quite a few positives in the economy,” Clyne said, “But there is still some fundamental strength to the economy. Unemployment is relatively low and there is an early sign that businesses are looking to invest again.”
The 22% gain in NAB’s cash profit compares to a 7% gain reported by Westpac on Wednesday and a 19% gain reported by ANZ on Tuesday. CBA which has a June 30th balance sheet reported a 13% increase in cash profit in February.
Profits at NAB’s UK units rose by 14 per cent, however the lender re-iterated its warning that the economic environment in Britain is more challenging than that of Australia.
“Overall this result reaffirms NAB as our top pick in the sector, with above peer pre-provision profit growth, a more rapid improvement in returns and more attractive valuation,” Goldman Sachs analysts said.
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ANZ Chief Says Australian Business Remains Unprepared For Structural Shift In Economy
Mike Smith, chief executive of Australian banking major ANZ is warning that Australia remains unprepared for a structural shift in the economy that will exacerbate its dual speed which will have damaging consequences for industries that are already struggling.
ANZ kicked off earnings season for the major lenders after reporting a first half profit of $2.8 billion, which met market estimates and rose 23 per cent. ANZ will raise its dividend from 52 cents a share to 64 cents a share.
The latest set of results show that the vast majority of growth came from the lenders growing operations in Asia, in particular benefiting from its acquisition of the banking assets of RBS in the region, vindicating Mr. Smith’s stated ambition of transforming ANZ into a super regional lender.
ANZ’s domestic profits rose by just 2 per cent the reasons for which according to Mr. Smith were slower credit growth from cautious businesses and consumers.
Whilst stating that ANZ was well positioned going forward, but pointed out that economic conditions of Australia continued to remain volatile.
“The environment is a little bit more difficult,” Mr. Smith said. “Parts of the Australian economy have clearly hit a flat spot, with consumers and businesses being more conservative now, after the financial crisis. They are more reluctant to spend in an uncertain economy.
“The bigger picture is that we are starting to see the effects of a major structural change that’s under way as the economy continues the shift towards being much more based around hard and soft commodities.
“I don’t think the magnitude of this shift is fully understood, nor are the implications for industries such as manufacturing, tourism and retail, where business models are clearly going to have to adapt to a lower-margin, lower-growth environment.”
Mr. Smith says whilst the natural resource industry was both positive and important for the Australian economy, there could be some negative consequences for other industries who may suffer as a result of the strong Australian dollar that has risen on the back of robust demand for natural resource exports.
Mr. Smith says the strong dollar is a structural shift, and Australia’s lack of preparedness to adapt cannot be blamed on the government, but rather on lack of motivation by business to change.
“I think that it is an issue for businesses to adjust themselves. We ask for government help too often. Businesses should be looking for opportunities, and I’m not leaving banks out of that.The business models of banks have been driven by bull market condition sentiment, and that run is over. The banks have to change as well.” he said.
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Australian Banks Reach Detente In War For Retail Depositors
The major Australian banks are trying to cool down the red hot war for retail deposits as they seek to mitigate slowing demand for credit which analysts forecast will remain “lower for longer”.
According to the JPMorgan-Fujitsu annual Australian Mortgage Industry Report, growth in mortgage lending will hit high single digits during the next year, and well below the 15 per cent peak growth rate achieved prior to the financial crisis.
Demand for credit by both households and business is expected to remain flat and will force the major lenders to reconfigure their business models in order to maintain profitability and growth.
Scott Manning, banking analyst with JP Morgan says that the major lender face constraints in repricing their mortgage portfolio through raising interest rates outside official tightening by the central bank
“The move that we saw in November last year was quite politically charged and quite transparent. One of the ways that the banks can also move in is to manage the liability side of their balance sheets. The household deposits are quite expensive for the banks and in the second half of last year we saw Commonwealth Bank grew significantly below system in deposits and sit outside the market in terms of price to maintain their margins.” Mr. Manning said.
The results of the study suggest that Westpac and CBA have both ceded deposit market share to rivals ANZ and NAB, as they beat a retreat in the aggressive pricing war for depositors.
In its most recent set of results CBA said it would refuse to enter into a war for “hot money”, worth some $7 billion in deposits which switched between banks as it seeks the highest rate of interest.
“The focus of the banks is going to remain on improving profitability at lower levels of [lending] growth,” the report said. “The current lower mortgage growth is taking pressure off funding requirements. Commonwealth and Westpac have substantially pulled back on deposit growth in the first half, which has had a favourable impact on net interest margins. But in our view this is not sustainable.”
Both Westpac and CBA have also ceded market share in mortgage lending to their two other big four rivals after consciously slowing down their mortgage lending growth.
Both lenders were expanding mortgage lending by 25 per cent on a quarterly annualized rate immediately after the financial crisis, but since then have cut that to just 5 per cent.
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Australian Banks To Face Fines For Unsolicited Increases In Credit Limit Offers
Under proposed revision of lending laws, Australian banks will receive a fine of as much as $220,000 every time they raise credit limits of their credit card customers without having first received a request from the customer that was not solicited by the bank.
Under National Consumer Credit Protection legislation employees of banks run the risk of criminal prosecution for breaching a law which bars banks from offering higher credit limits to their card customers without having solicited permission of the card holder. The law also prevents lenders from allowing their credit card customers to exceed their credit limit.
Australian banks have complained that the new law is draconian; however the Gillard government has gone ahead and introduced the legislation in parliament anyway.
Steven Munchenberg, chief executive of the Australian Bankers Association on Sunday said that the new law “goes way over the top”.
“At this point any bank that even writes to an existing customer and suggests they might like to apply for an increase in their credit limit could be in breach of this legislation. There will be people with an irregular income or who are not in regular employment who will find it harder to get credit. The banks will be nervous about providing credit for fear that if a person subsequently gets into debt trouble the bank will become liable. The banks are going to be a lot warier about lending to them and there is a danger people will be forced into an unregulated market.” Mr. Munchenberg said.
The new legislation if passed, will bar lenders from bombarding consumers with unsolicited “tick the box” offers for higher credit card limits and will be implemented by July 1st 2012, giving banks enough time to prepare.
Under the new law, lenders will only be able to offer credit card customers higher credit limits only if those customers have first given the bank permission to be approached. Banks will no longer be able to authorize payments that exceed the borrowers credit limit by over 10 per cent unless the increase in limit was pre-arranged, and fees for exceeding the credit limit within the 10 per cent buffer will be banned as well the imposition of higher interest rates.
Any breaches will attract 2000 “penalty units” – equivalent to a $220,000 fine – as well as criminal sanctions for bank staff who authorise the breaches.
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How Much Does One Need To Retire On
Self help financial journalists tend to suggest that for individuals to maintain a comfortable lifestyle post retirement, that should aim for an annual income during their golden years of between 60 to 70 per cent of their final salary.
However that benchmark percentage raises a number of questions such as whether it refers to gross or net final salary, or whether there is a rule of thumb that can be applied to expected expenditure when calculating the value of assets required to achieve the much vaunted ”comfortable lifestyle”
Prudence suggests that after tax or net final salary be used to calculate retirement income, which really should be 75 per cent or more. That is to say if a family earns $100,000 after tax, then $75,000 would be an appropriate retirement income.
To put things into perspective, a couple who wishes to retire on $75,000 a year by the time they both reach 65 will require roughly $1.2 million in their super in order to deliver a tax free pension of that size, which is indexed at a modest 2 per cent a year to maintain parity with inflation. That figure assumes the wife will have a further 22 years of life expectancy post retirement, and assumes that the couple will sell their property to pay for access to an elderly care facility in the very twilight of life.
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Macquarie Expected To Post Decline In Full Year Profits
Australian investment banking major Macquarie Group is widely expected to report a decline of 10 per cent in its 2011 full year profits, but forecasts that improving market conditions will have a positive impact on its future earnings.
Nicholas Moore, Macquarie chief executive will announce the company’s earnings on Friday, with consensus market estimates of a $945 million net profit for the year.
Analysts expect the investment banking group to report second half profits of $542 million, 5 per cent below the same time period in the previous year, but 35 per cent higher than the previous half of the current financial year.
Earlier in the year, Macquarie issued a profit warning, saying that volatile global financial markets had negatively impacted the group’s earnings.
Analysts say despite the setback in revenues, Macquarie has effectively managed to contain its costs over the last year, which has helped mitigate the weak performance in earnings.
Last week rival Credit Suisse published a report on the Australian investment bank, suggesting it was well positioned compared to its major Wall Street rivals.
Jamie Ellis, banking analysts at Credit Suisse said Macquarie was much less capital intensive and much closer aligned to the higher growth markets of Asia, which comprised of as much as 18 per cent of the group’s earnings last year.
“Less positively, Macquarie’s cost-to-income ratio and non-compensation expense is currently relatively higher than Wall Street. There are also aspects of Macquarie’s global brand presence and distribution capabilities that are still in the process of being developed.” Mr. Ellis said.
Macquarie’s announcement on Friday, will kick start first half reporting season for most of Australia’s banks.
ANZ, Westpac and NAB will all be reporting their earnings results next week whilst rival CBA is due to deliver its third-quarter trading update.