Westpac Reports Whopping 25 Per Cent Drop In First Half Profits
Australian banking major Westpac has reported a whopping 25 per cent drop in first half net profits 20 $2.97 billion.
Westpac blamed the poor performance on an increase in bad debt provisions, and costs that resulted from establishing the Bank of Melbourne.
Westpac delivered a net profit of $3.96 billion during the same time period in the previous year, with analysts forecasting an average estimate of $3.11 billion.
Westpac said that whilst the European debt crisis had resulted in significant volatility and uncertainty during the first half, financial markets were increasingly exhibiting stability.
Despite the positive assessment, and signs of improvement in the United States and Europe, Westpac warned the recovery was still fragile.
Australians have also remained cautious, paying down debt and opting to save cash instead.
“Funding costs are expected to remain elevated, with competition intense, particularly for retail deposits,” Westpac said.
“Lending growth is likely to remain modest.”
Cash profit at Westpac, which is the most closely watched measure of performance stood at $3.195 billion, which was 1.0 per cent higher than the same time in the previous year.
ANZ Posts Gain In First Half Profits
Australian banking major ANZ has reported a rise in first half profits rise of 10 per cent to $2.92 billion, however the lender warned that margins on its domestic Australian business are shrinking.
According to ANZ, net profit for the half year ending March 31st rose from $2.66 billion in the same time period during the previous year. Analysts had been expecting a slightly higher figure of $2.96 billion.
Market watchers are waiting to see whether the lender will pass on the rate cut announced by the Australian central bank, though ANZ refuses to comment on its decision before making its official announcement.
Mike Smith, ANZ’s chief executive said the lender was adapting to changes in the financial system, which would have an impact on both staff and its customers.
“Our recent decisions on interest rates for customers in Australia and on employment within the group reflect the need to reshape our business,” he said.
“Clearly, though, we need to work harder to find new ways of responding to customer and community concerns about banking and to the changes that have been brought upon the banking sector by this environment.”
In its statement, ANZ attributed the rise in profits to an improvement in the results delivered from the lenders operations in America, Europe and Asia.
“In Australia, we made market share gains and customer satisfaction remained strong,” Mr Smith said.
“Our financial performance, however, was subdued, significantly impacted by declining margins and the structural shift that’s occurred since the financial crisis with persistently lower demand for credit.”
ANZ says that net interest margins are declining due to the intense competition for deposits in Australia. The lender says that low demand for loans from both business and consumers coupled with increased long term funding costs were responsible.
Net interest margin during the half year ending March 31st fell six basis points, down from 2.44 per cent to 2.38 per cent.
Net interest margin is a reflection of the profit the bank makes on loan interest
NAB Sees Profit Tank On UK Businesses
After announcing a $305 million restructuring of its UK operations and job cuts numbering 1,400, Australian banking major NAB has seen its share price fall.
The lender recently announced a loss on its UK business for the half year ending March 31st resulted in a 15.6 drop in its own half yearly profit, which came in at $2.05 billion.
NAB says it will spend $305 million streamlining its UK operations, and will focus on both business lending and retail banking. The restructuring will save the lender nearly $116 million annually once the changes have been implemented.
NAB chief Cameron Clyne said a deterioration in the commercial property market in Britain was mainly responsible and in response NAB was reducing its exposure to the sector.
”This has contributed to the current downturn in the UK being longer and slower to recover than experienced in the 1930s following the Great Depression, and has led us to take these actions at this time,” he said.
After a review of its UK operations, NAB has opted for restructuring instead of an asset disposal. The UK businesses posted a $39 million loss during the first half, after delivering a $120 million profit during the same period in the previous year.
NAB said that increased bad debt provisions and higher funding costs were responsible for the loss.
Mortgage Broker Found Guilty Of Bilking Clients In Ponzi Scheme
A mortgage broker in Western Australia has been found guilty of bilking as much as $1.2 million from seven borrowers and using the cash to pay his credit card bills and other debts.
According to news paper reports, Max Booty was charged with eight counts of stealing and an additional eight counts of fraud and stood trial for a Ponzi scheme which he ran between August 2007 to March 2009. The jury took three hours to deliberate and found him guilty of all charges.
Mr. Booty acted as a mortgage broker and ran a property investment business in the city of Rockingham. The scheme he ran involved borrowing money for clients which was secured against their property and then “investing” the proceeds, which was actually used to pay off older clients under the ponzi scheme.
Mr. Booty attracted investors by promising 20 per cent or more in investment returns. Some investors even received regular payments until finally Mr. Booty was forced to declare bankruptcy in 2009.
The investors who were duped have not received any of their principal and sank anywhere between $70,000 to as much as $330,000 into the investment scheme.
ANZ Defends Interest Rate Policy
Australian banking major ANZ has defended its policy on interests in a letter addressed to The Age from its Australian operations chief Phil Chronican who argues that the cost of funding has increased substantially, and provided data to support his claim.
”The bottom line is that, taking into account’s ANZ’s funding mix of deposits and short and long-term wholesale funding, our funding costs are up 18 basis points over the past six months while ANZ’s variable interest rates have risen by 12 basis points,” he said.
Mr. Chronican is basically saying that the margin the lender makes on lending money to borrowers has fallen with respect to the cost of raising the funds. Net interest margins is what determines profitability for banks.
”In the six-month period from October 1, 2011, to March 31, 2012, the average cost of ANZ’s $75 billion stock of term wholesale funding increased every month, except in December 2011 when credit markets froze because of the European sovereign debt crisis and wholesale markets were closed globally,” he said.
Mr. Chronican says ANZ has had to raise the interest rate it pays to depositors by 28 basis points compared to the Reserve Bank of Australia’s overnight rate. Last year the lender stopped the practice of making mortgage rate announcements following the monthly central bank meetings held on the first Tuesday of the month, and instead now reviews its rates on the second Friday of each month.
ANZ came under heavy criticism from politicians in particular Treasurer Wayne Swan for raising its interest rates by 6 basis points in February, despite the central bank holding the cash rate steady.
”Other Australian banks increased their interest rates by between nine basis points and 15 basis points,” Mr Chronican said. ”ANZ’s cumulative increase of 12 basis points has meant that although it has increased rates more slowly, its mortgage and small business lending rates remain in line with our competitors.”
Macquarie Chief Calls For Interest Rates To Be Cut
Nicholas Moore, chief executive of Macquarie has added his voice to growing calls made by leaders of industry for interest rates to be cut next week as a means by which confidence in the country would be boosted by helping export based industries who are currently suffering from the high value of the Australian dollar.
Mr. Moore made his comments after revealing profits at the investment bank plunged by nearly 24 per cent in the face of global market volatility. The performance was the worst on record since the very depths of the global financial crisis.
In response Macquarie has cut as many as 1300 positions from its workforce globally as it undertakes a strategy of cost control.
The investment bank blamed its poor performance on results from its two main units, Macquarie Capital and Macquarie Securities.
The latter business is Macquarie’s institutional broking business, which produced its first ever loss of $184 million.
Macquarie Capital, which is the group’s investment banking division saw profits tank by 60 per cent, earning just $85 million.
According to Mr. Moore, were the central bank to cut interest rates when it meets next week, it would help restore both retail and investor confidence in the domestic economy.
“I don’t think it would be surprising for the RBA to cut rates and I think that would be good for confidence and good for those businesses that are suffering right now,” Mr Moore told The Weekend Australian.
“People are nervous right now. Why are they nervous? They are getting media reports from the US and Europe, reading what is happening over there.
“I think that is dampening the morale of the average person in Australia.”
Most analysts believes that it is a near certainty that the Reserve Bank of Australia when it meets on Tuesday will cut official interest rates by 25 basis points from 4.25 per cent to 4 per cent.
Some economists are predicting the central bank may even slash interest rates by as much as 50 basis points, though many are predicting to equal cuts of 25 basis points in both May and June.
Mr. Moore added that a cut in interest rates would weaken the Australian dollar, the value of which has had a profound negative impact on export industries with the exception of the mining sector which continues to boom.
“The impact of the Australian dollar shouldn’t be underestimated,” Mr Moore said.
“It’s great if you’re a consumer, but from a business point of view it makes it very difficult to compete. Manufacturing and agriculture is quite tough at the moment, tourism is very difficult and education, which is our third-largest exporter, is finding it tough.
“So the dollar is having a major impact on confidence.”
NAB To Hold On To UK Businesses For Now
Banking analysts are predicting that Australian banking major NAB will not sell its interests in the UK, whilst the economy continues to stay weak.
The analysts cite pricing as the main reason, arguing that NAB will not be able to obtain a decent price for the Clydesdale and Yorkshire banks according to CBA analyst Ben Zucker.
Mr. Zucker sent a note to investors where he suggested that the UK banking operations were likely to remain with NAB for the foreseeable future.
Cameron Clyne, chief executive of the lender has promised to finalise a review of the bank’s troubled British operations before the lender releases its first half results on the 10th of May.
According to Mr. Zucker, whilst a sale of the units was the most attractive option, NAB may choose to stick it out in the short run by investing more capital and splitting the businesses.
NAB is likely to incur a charge for restructuring of its UK businesses of as much as $180 million the analyst said.
“While we believe the best scenario for NAB would be to sell its UK business, we see little likelihood of a successful sale at this time.”
“Given general concern that the UK economy is likely to remain soft for the next couple of years along with pressure to increase capital, the major UK banks have been more active in reducing key exposures,” Mr. Zucker said.
Mr. Zucker added that British lenders have limited their exposure to commercial property lending. The two units of NAB have a combined 355 branches spread across the north of England and in some parts of Scotland.
There have been reports that both banks have as much as 10 per cent of their portfolio held in stressed assets. The CBA team says that the restructuring charge of $180 million would cover redundancy costs.
In the past analysts have predicted that Mr. Clyne would not consider a clean sale of the two UK businesses, despite having received interests from investors.
Bank Funding Costs Rising Again
As fears begin to mount that the European sovereign debt crisis is spreading, Australian lenders are finding that their funding costs are rising in response.
May is again likely to be a difficult month for the banks, particularly if they do not follow what is almost certainly going to be a rate cut from the Reserve Bank of Australia as they seek to protect their margins.
Business leaders have put pressure on the central bank to cut interest rates and help the economy get back on the path to growth. What seemed certain just a few days ago, now looks a little less likely after the March jobs report was released, showing the labour market holding steady.
The unemployment rate remained steady at 5.2 per cent, with as many as 44,000 new positions created. Economists had been predicting weak growth of just 5,000 new jobs, arguing the economy remained weak outside the mining sector.
The futures market is pricing in an 81 per cent probability that the central bank will cut the official cash rate by 25 basis points to 4 per cent when it meets in May, less than one week before the budget. Prior to the jobs report, the probability of a rate cut was estimated at 93 per cent by the markets, following fears that a new stage in the European crisis was unfolding.
Richard Goyder, chief executive of Wesfarmers said that the dual speed economy shows no signs of disappearing, and a rate cut would help the economy achieve growth.
“But I do think that the economy could do with some stimulus at the moment and . . . Australia does have some room on monetary policy,” he said.
“Consumers are really concerned at the moment so I would be hopeful that it won’t be too long before we get another interest rate cut.”
” I think it is an important thing to do. I would say not at all costs, not at the cost . . . of a further impost on business that actually grinds the economy down.”
Pressure Mounts On Central Bank To Cut Rates
The Australian central bank is facing mounting pressure to cut official interest amidst a back drop of worsening consumer and business sentiment, with global financial markets fearing the unfolding of the latest stage of the European sovereign debt crisis.
The futures market is pricing in a 25 basis point cut next month as being almost certain, with certain captains of industry suggesting that in response to a slower economy the RBA may slash rates by as much as 75 basis points by the end of the year.
An increasing number of business groups and unions are urging the central bank to be more proactive and cut the official interest rate by as much as 50 basis points.
Peter Anderson, chief executive of the Australian Chamber of Commerce says that in response to the slump in consumer spending, Australian businesses were desperate for a rate cut.
“The time has come for Australia’s central bank to move decisively to cut rates by a full half a percent, and for the retail banks to immediately pass it on,” he said.
Matthew Hassan a senior economist with Westpac says that poor consumer sentiment suggest that if the economy is to regain robust growth, at least one interest rate cut was needed.
Many economists have cut this year’s growth projections for the Australian economy, which is expected to expand by less than 3 per cent.
Most forecasters have cut their growth projections this year, with the economy expected to grow at less than 3 per cent.
“We have thought over the year that while there is the strength from the mining sector and the investment boom that a lot of the economy is deleveraging. The negatives in the economy are creating more of an impact that the positives. Our view is that interest rates should be lower to be providing additional support to the economy’s medium-term growth outlook.” Mr. Hassan said.
According to Mr. Hassan, a 50 basis point cut by the central bank is unlikely, since it would spook financial markets which would view the move as an emergency rate cut.
Link Between Lending Rate And Central Bank Rate A Myth
The link that is supposed to exist between the Australian central bank set interest rate and the rates charged by commercial lenders is a myth that is need of being busted according Phil Chronican who runs the ANZ’s domestic Australian business.
Mr. Chronican says that since the 2008 financial crisis, the funding costs of banks have risen and are increasingly disconnected from the interest rate set by the RBA.
Speaking at a luncheon organized by the American Chamber of Commerce, Mr. Chronican said that no automatic link exists between the rates that banks lend to one another overnight, and what is appropriate to charge for a 25 to 30 year variable rate mortgage.
“That linkage, if anything, only arose in the early 1990s and persisted in a period of extended stability in financial markets,” Mr. Chronican said.
“And I’ll be frank here. I think the banks let this persist because it was convenient for them.
“It saves having to explain why home rate loans are going up and down when there was an easy scapegoat to be had by always blaming the RBA.”
ANZ now looks at the costs of all its funding, and no longer simply considers the RBA cash rate. This means the cost of both international and domestic whole sale funding, and the cost of retail deposits need to be factored into its lending rate.
Mr. Chronican claims that another myth is that the higher cost of funding is the reliance on international wholesale markets. The major source of funding for banks is in fact domestic retail deposits, which have required higher interest rates as a result of intense competition.
Mr. Chronican went on to defend banker salaries, saying he was baffled by the fact that Australians have no problem with excessive pay of athletes, entertainers or entrepreneurs, but seemed to despise the pay of executives at banks.
He added that disclosure of compensation of executives who work at listed companies is important for transparency.
“Maybe we should look to extend the disclosure to other groups who are in positions of power in their community, including those who are managing public superannuation savings,” Mr. Chronican said.