Saturday 28 December 2013

Themes of 2013

A couple of stories setting the tone into 2014.  First to the layoffs at tinned fruit company SPC, killed by the high Aussie dollar and competition from China - much like the rest of Australia's non-resources economy, but also involving inefficient workplaces, stifling regulation and political interference:

FEDERAL cabinet has demanded new assurances from Coca-Cola Amatil to justify taxpayer aid for its fruit processing division in another sign of Tony Abbott's hard line on industry assistance.... 

....Cabinet remains broadly reluctant to give the company the cash it seeks and there is "no sense of urgency" to completing the deal, The Australian was told after yesterday revealing the deep concerns about the company's request for public funds (here)
....
...Over the next three years, Simplot will revamp Devonport and upgrade Echuca so that both plants are also efficient. Simplot managers and workers must also adopt the most flexible practices to make this work....So why wouldn't Coles and Woolworths do this for SPC? The simple problem is that the management and workers at SPC are not up to it, and their management and work practices belong to a totally different era. Worse still, SPC makes canned fruit, which consumers no longer want.
A substantial investment is therefore required in a new plant to package fruit in the way supermarket customers want to buy it....The government has appointed some excellent people to look at the SPC problem, but the panel includes Greg Combet. While the deep-seated problems at SPC are not Combet's fault, he played a role in the ALP industrial relations legislation that compounded SPC's problems. (here)
The other news item for which there may be more happening is the overvalued Aussie banks and the question of how much they will need in reserves going forward.  This week, suggesting likely future difficulties, the regulator APRA required the banks to increase their capital reserves.  This was mostly to do with implementation of Basel Committee on Banking Supervision requirements and may not be enough in the event of a sharp downturn:

"It'll be a relief," said Ric Spooner, a Sydney-based trader at broker CMC Markets. "And the actual buffer increase was probably at the lower end of expectations."(here)



Monday 16 December 2013

End of Days

All around you see corporate Australia in trouble.  Big names taking hits QBE Insurance profits down, QANTAS bonds rated as junk and the car industry imploding. 

...More than $5 billion has been wiped off QBE's market value in two days, as investors punish the company for repeatedly disappointing and analysts warn that further pain could follow this week's profit downgrade.
In another blow to the insurer, Moody's on Tuesday downgraded its credit to Baa2, two notches above the rating it gives ''junk'' or speculative assets. It cited a weaker outlook for profits and higher debts.(here)
and meanwhile it seems S&P forgot to factor in the likelihood of possible future adverse macro events when they tried to bring some positive spin to current events...
Credit rating agency Standard & Poor’s has said the troubles faced by two of Australia’s most iconic brand names, Qantas and Holden, should not be regarded as a sign that the nation’s economy is derailing. [note it absolutely IS a sign!]
In a rare comment piece, the global rating agency said its decision to downgrade Qantas was a reflection of the competition the airline sector, which hit its earnings, and not the result of a change in consumer sentiment, and therefore it does not reflect broader economic conditions.
A drop in sentiment could further stall the much-needed pick-up in business and household spending. As it is, Standard & Poor’s currently forecasts ongoing subdued economic growth in 2014, with the fall in mining investment not fully offset by a very slowly re-emerging non-mining sector,” the agency said.(here)
And note this is also optimistic because it appears a lot of companies are fiddling the books - misstating their accounts to paint a more healthy picture (see this announcement by ASIC about its concerns of what is essentially degrees of fraud, or at least not complying with the spirit of accounting rules and principles).

 Part of the blame must surely lie with the resource curse - the substitutional effects the mining and resources economy has on the rest of the economy and a point well made in Britain's Telegraph:

The country is exhibiting clear signs of the “resource curse” as other sectors of industry whither on the vine, literally in the case of struggling vineyards. The beautiful wine-growing region of Hunter Valley is being “ripped apart” by coal mines, according to local activists. (here)

Monday 2 December 2013

Pure comedy

"He says bank directors have assured him that lending standards are being maintained"
Of course they are : )

So said chairman of the bank regulator, APRA, John Laker in a lecture.  John is to be commended for paying attention to risk of deterioration in lending standards as Australia's property boom explodes, but based on history how successful will he be? Link here

And in case you had any doubts as to how sensible Aussie banks are now being how about one which has chosen to expand into a sector which is facing the worst decline in a half century? 

Commonwealth Bank of Australia (CBA) is stepping up lending in shipping, a top bank official said, just as European rivals cut capital exposure to the seaborne sector.
Shipping has weighed heavily on its financiers, with the industry facing one of its worst downturns in decades.
Ship owners ordered large numbers of new vessels between 2007 and 2009, just as the global economy sank into its biggest crisis since the 1930s.
CBA, Australia's top lender by market value, is one of a few banks looking to expand its presence in shipping as it scents opportunities for business (here).
You couldn't maersk this up!
 (For those who missed the pun)

A bank on the edge

Some interesting notes from Bank of Queensland, recovering from the first loss of an Aussie bankin two decades.  Good times ending anyone?
Bank of Queensland (BoQ) says it will be at least another year before it sees any benefits from a lower Australian dollar.

    While BoQ returned to profit in the year to August, after becoming the first Australian bank in two decades to incur a loss, it is taking a cautious approach to the year ahead.
    The bank is heavily exposed to the tourism industry sensitive Queensland economy, which in turn is influenced by movements in the exchange rate (here).

And interestingly there's a foretaste of the schemes Aussie banks will resort to when times get really tough (no different to Spanish banks in fact who put some tax credits into assets on their balance sheet):
    Meanwhile, the bank said it will team with other smaller lenders to lobby the federal government for changes in the banking sector, which is dominated by the big four players. 

The great withdrawal

Does anyone remember the late 90's when banks were fleeing their communities in savage cost cutting exercises? With the raging of the radio shock jocks as bank chiefs were quoted asking what people were complaining about (and this was before online banking had taken root)?

Well the shrinking of Aussie banking is starting again, this time at the fringes of the (now slowing) mining boom:

In order to lessen the chance of borrowers defaulting on their loans, Australia’s major banks are reassessing their exposure to risky mining towns as rental yields in some areas have become “not sustainable”.
During the height of the resources boom, demand for home loans and rental properties was enormous, however, as construction spending declines and the miners become more cost-effective with less working capital, that demand for accommodation drops making yields unsustainable (here).

Risky banks with lousy service

Some big numbers being mentioned regarding a large class action over Australian banking fees - the biggest ever class action in fact - following a path which saw the UK banks' overdraft fees challenged a few years ago, Aussie banks are now in the spotlight:
THE $57 million class action against ANZ Bank could turn into a multibillion-dollar claim against the nation's banks.
The three week Federal Court hearing involving 43,500 ANZ customers must decide whether the bank's fees of $25-$45 for over limit, late payment and other issues were illegal and unconscionable penalties disproportionate to its actual costs (here).
 And let it not be forgotten the banks are wringing the last drops out of the mortgage boom:

A BOOMING residential housing market, particularly in Sydney, is firing up mortgage applications at Australia's banks, with Westpac to enjoy some of its strongest mortgage applications for several years.

However, in an interview to mark two years since the creation of the AFS division, Mr Hartzer said that business confidence around the nation was still elusive.

"The kind of confidence that Australia needs is commercial confidence," the Westpac chief said (here).
While not doing enough to mitigate risk:
Australia’s biggest banks, whose lending standards helped the nation avoid a property crash during the global credit crisis, are raising concern with home loans helping to fuel record house prices.

The proportion of mortgages that represented more than 80 percent of a home’s value -- the loan-to-value ratio -- rose in the third quarter to the highest since the second quarter of 2009,data from the banking regulator show. Mortgages in which borrowers pay only interest also increased to the highest in at least five years, according to the figures (here).

Monday 25 November 2013

Thursday 14 November 2013

Steve Keen takes on the banks

A lot of people are debating Australia's property markets and whether they are in a bubble.  None more entertaining than that between banking mogul John Symond of Aussie Home Loans and controversial economist Steve Keen.  The amusing video is here.

It is worth taking note of Keen's work - ahead of the curve throughout and before the crisis Keen has consistently pointed to the flaws leading up to the crisis and in the response and rightly identified the largesse which would be consumed by the banks and withheld from the functioning economy post 2008.  As noted in this article he has called the bubble in property and predicted  likely crash - as well as calling for unconventional measures which could actually have an impact like a debt jubilee (something being tried by the Occupy movement in America currently).  

Keen gets a mention in this article about a foreign central banker debating Australia's bubble (here). Stay tuned! 

Ozzie Banks to get Cyprussed!!

That's push back on deposit guarantees from the prudential regulator and more...!
Huge news for the Australian banking industry today from Standard & Poor’s, which is rethinking its approach to the implied government guarantee that gives major banks and Macquarie a ratings advantage over smaller players in the Australian financial landscape.
At present, Standard & Poor’s essentially assumes that the majors and Macquarie are too big to fail. As a consequence, the agency assumes “extraordinary government support” for those organisations, and boosts their ratings by 1 notch.
But APRA is considering a new approach to crisis management that would force creditors of troubled banks to write off some of the debt they are owed, allowing banks to avoid bankruptcy without taxpayers having to step in.Standard & Poor’s has not made a final decision on the ratings impact yet but its report, released this week, suggests that it is seriously considering a change.
This has huge implications for the Australian economy, the cost of borrowing in the economy, the attractiveness of Australian assets and the level of the Australian dollar if Standard & Poor’s decides to take the path of downgrades. (here)

Some more links on overpriced banking and housing sectors...

...Two markets are at risk of significant overvaluation – Australia’s $4 trillion housing sector and the $405 billion big banks that furnish most of the funding we use to buy homes... (here).
...Bubble-like conditions in the nation’s most populous city have pushed average Sydney house prices to arecord A$718,122 ($666,858) compared to $806,000 in New York City and $536,237 in London, according to data compiled by Bloomberg News.
One in five Sydney suburbs now boast a median home price above A$1 million, up 31 percent from a year earlier, according to APM data.
While the United States and United Kingdom saw their housing markets sold off during the global financial crisis, Australian home prices have not fallen by more than 10 percent in any single year from more than 40 years... (here).

Lunacy

Notwithstanding the amount of money Australians have invested in the big 4 banks and their smaller cousins this appeal for more funds is just plain scary!

'I can't help thinking that the investment mantra of 'diversification' has cost me money and I would have been a lot better off being just a little bit naughty by ignoring it and holding more banks" (here). 
That's choosing to allocate more to an overvalued asset with bad risk and reward profiles...Watch out Australia!!

Monday 28 October 2013

ASIC under fire again...

A leading consumer activist claims the corporate regulator has not only failed to investigate hundreds of cases of loan fraud put before it but, as a consequence, has covered up a systemic banking failure.(here)

More farewells to manufacturing and jobs...

The future of more than 500 people in Orange who work for Australia's last refrigerator manufacturing plant may be decided on Thursday night (AEST) at a company boardroom in Stockholm.
A spokesman for Electrolux which employs 544 workers at the Orange plant said its future was ''high up on the agenda'' for discussion at the board meeting in Sweden. It is expected the board will decide whether to close the plant which injects an estimated $33 million into the local economy each year.
(here).

But not to worry there's more froth to be added to the housing bubble with keen rival MacBank ready to crash the party (Macquarie eyes a slice of Australian banks' home mortgage pie).  At a time when teenagers and toddlers are having houses and apartments bought for them in panic !

Monday 21 October 2013

A must read for all investors

Those not subscribing to the largest hedge funds in the US would do well to heed the voices of Wall Street as to the Australian economy and in particular the banks which announced record profits.  The following interview piece, in respect of expat fund manager Matthew McLennan explains just why the banks are risky and with low capitalisation (amongst record high private sector debt levels):

Asked if he had invested in Australian banks, which are highly profitable by overseas standards, Mr McLennan said he was put off by the major banks’ lofty leverage, which averages 27 times their underlying equity capital, and their exposure to fickle wholesale bond markets. 
“We haven’t been investors in the Aussie major banks, because the raw equity-to-asset ratios . . . are lower than our comfort zone,” he said. 
While the banks have profited from a “fair amount of cumulative credit growth over the last generation” Mr McLennan said their “reserves-to-loan losses” appeared to be “pretty low in the scheme of things”. 
He warned the Australian economy, which was dubbed by The Economist magazine as the “wonder Down Under” for 22 years of uninterrupted growth, may soon start to struggle.(here).
More on those lofty banks here

Sunday 13 October 2013

Everything is not alright - Australian businesses

So the Chinese economic miracle has come to Australia?  In the form of the mining boom and... the real economy bust... or was that fair competition:
STRUGGLING Australian fruit processor SPC Ardmona has urgently appealed to the Coalition government to give it $25 million promised by Kevin Rudd four weeks ago or risk watching the company go broke. 
SPCA chief executive Peter Kelly said that it was already "five minutes to midnight" and that the Shepparton-based business, despite being owned by giant Coca-Cola Amatil, could not keep going much longer. 
He said SPC, as one of the largest food processing businesses in Australia, had a much brighter future than the moribund Australian car industry and needed much less government assistance. But Mr Kelly bluntly warned yesterday that time was running out. 
"The pain is wearing thin; if this business wasn't owned by CCA we would be shut already," a defiant Mr Kelly said.
"Without ($25m from government) we are in trouble; and that's not just a problem for SPC but for our people, the town, the region and the nation."(here)
One interesting point from the article is the political aspect - who survives depends on who has political connections.  An interesting game indeed!

Everything is going to be alright - JP Morgan

See the below and attached link to judge for yourself the pronouncement from JP Morgan.  Let's all hope their right (but see the next post): 
THE major banks are well placed to endure the end of the mining investment boom, with a new report finding no smoking gun from the hit caused by Western Australia's cooling mining market on small businesses. 
The report by JPMorgan and Digital Finance Analytics (DFA) also says the economy's transition away from mining investment growth will be "bumpy" but less painful than expected. 
The findings, which downplay fears of a big spike in bad debts for the banks, came as business confidence last month surged to a more than three-year high, reducing the chances of interest rate cuts by the Reserve Bank this year (here).

Bankers blowing hot air

Nothing like some reassurance from bank bosses.  Seems to be the fashion at the moment. Not that the heads of Australia's Big 4 banks would be concerned about business conditions is it? 

Can the bankers really be trusted to proclaim that there is no problem in the markets which they profit from?

From ANZ (in respect of the New Zealand market but you can bet the thinking is the same in Australia):

ANZ chairman John Morschel has labelled New Zealand's new rules to cool its property market a "sledgehammer to crack a walnut", but conceded the Reserve Bank of Australia was potentially staring down a similar problem, in a wide-ranging speech today (here).
Then from the head of the big cheese, Commonwealth Bank helpfully suggesting the good times might not last:

Commonwealth Bank of Australia Chief Executive Officer Ian Narev, head of the country’s largest mortgage lender, said the nation’s banking industry needs to be watchful of house price increases to avoid a bubble.
While current home price gains are justified by supply and demand fundamentals, the impact of an extended period of low interest rates should be monitored, Narev told reporters after a speech in Melbourne today.
“We’ve got to realize that if we are in a sustained period of low interest rates, it is something we have to keep our eyes on,” he said. (here)

And then giving the game away perhaps is NAB head, Cameron Clyne begging for no interest rate rises (which could be a fair call but for other reasons related to hot money flows):

National Australia Bank chief executive Cameron Clyne said the central banks must adopt a neutral stance until it gets some clear evidence the recent lift in business and consumer confidence, following the election of the new Coalition government, is translating into real economic activity. 
So, Australia's supposedly strong banks might just be a bit worried about a coming housing slowdown.  Of course they wouldn't want to come out and just say it would they? 

Wannabe regulator No. 2 - Introducing ASIC

Many people around the world will be familiar with the storied ASICS trainer, the Japanese produced shoes being widespread in many sports famous for their quality, performance and reasonable prices.  The same cannot be said for the similarly named Australian securities industry regulator ASIC (short for Australian Securities and Investments Commission) which in the last week has faced an array of criticism on many fronts.  Given the looming slowdown and the need for a strong regulator to coordinate the Australian investment markets, recent releases do not seem to bode well for the medium term.

So first up the ASIC head Greg Medcraft defending the body's handling of foreign bribery allegations involving a large Australian construction firm:
Last month, Greens deputy leader Adam Bandt said his party would ask ASIC to explain to Federal Parliament why it had "failed to investigate serious and repeated claims of illegality within the RBA's corporate activities".
ASIC has also been criticised for not investigating allegations Leighton Holdings used bribery to win an oil pipeline contract in Iraq.
In a fiery speech titled Setting The Record Straight, chairman Greg Medcraft on Friday said it was the role of police to investigate such matters and hit out at "ill-informed" media coverage of the regulator's role investigating the allegations.(here).
And then, there was that story about investors not having knowledge of an ASIC investigation (not that it would be for investors to get information in a timely manner or anything).  Link here.  But of more concern perhaps is the exemption ASIC granted for big banks reporting their derivative transactions - a reasonable allowance or a weak regulator?  Certainly it is likely the regulator is to face more criticism if the state of the markets worsens. 

  

Monday 16 September 2013

RBA responds...with a damp squib

Readers may recall recent action taken by the Reserve Bank of New Zealand to counter rising property prices in New Zealand and prevent a housing price bubble which could throttle the economy (link here).  And not to be outdone, the central bank of Australia, the RBA has responded with...some strong words! (or as we call them, a damp squib!):

the RBA has told the big banks that a housing price boom is currently its "greatest fear" as prices are already high by most world standards (here).

Meanwhile growing calls for real action in the form of loan to value restrictions could lead to the RBA doing something concrete.

And it should not be forgotten the opposing forces in play - how likely is the RBA to raise interest rates to kill the property bubble if that pushes the economy into terminal decline and only exacerbates the inflows which fuel the speculative property bubble?  

Taper victims

Chances are if you've been looking at the news recently you may have heard something about the likely slowing of bond purchases by the US Federal Reserve.  Referred to as the "Taper", financial commentators have been speculating as to what will be the likely impacts, progression and victims of the US central bank changing the course of markets as it removes the support of its bond buying program which has been providing liquidity to global markets since the financial crash (now 5 years old).

Hedge fund managers have been looking for likely victims however and Australian banks fit the bill (even without the Taper they remain overvalued relative to the domestic Australian economy and their overseas operations, but why deny the hedge funds their fun?!).  As the Australian Financial Review has noted:
Foreign hedge funds are ­betting Australia’s banks will suffer big share price falls as a slowdown in emerging markets spreads here....Major banks’ shares have surged this year to record highs, prompting several investors and analysts to speculate they are in bubble territory.
International fund managers and Australian companies attending an investment conference in New York last week were told that some big hedge funds were convinced the major banks were overvalued and would inevitably fall to more normal levels....“I should warn you I was in London last week and one of the bigger questions I got was ‘why the hell are the Australian banks performing so well?’” Bank of America Merrill Lynch chief global equities strategist Michael Hartnett told his bank’s conference.
Global investors are bracing this week for a meeting of the US Federal Reserve, which may decide to modestly or aggressively scale back the $US85 billion-a-month bond purchases known as quantitative easing that have driven up share prices around the world. (here)

Wednesday 11 September 2013

Trolley savers..

Although it may be derailed by any deterioration in financial markets it appears that a new raft of competitors may be due to enter Australian banking.  Following their peers in the UK, finance website the Motley Fool detailed reports of moves by Australia's big 2 supermarket groups, Coles and Woolworths to start offering fuller service banking services:

Wesfarmers (ASX:WES), the parent company of supermarket retailer Coles, will need to set aside at least $50 million if it wants to be successful with its application for a banking licence.
 
Coles wants to offer savings account to its customers under its own name, rather than in partnership with a bank, according to the Australian Financial Review. The Australian Prudential Regulation Authority (APRA) has strict rules for companies wanting to hold a banking licence or operate as an Authorised Deposit-taking Institutions (ADI), including holding at minimum of $50 million in Tier 1 Capital. 
But it could have a major impact on Australia’s banks, by increasing competition for savings – an increasingly important source of funding for the major banks – as well as competition for mortgages and personal loans, should Coles role out the full ‘Tesco model’. The big four banks, ANZ Bank (ASX:ANZ), Commonwealth Bank (ASX:CBA), National Australia Bank (ASX:NAB) and Westpac Banking Corporation (ASX:WBC) get around 60% of their current funding from deposits, and control an estimated 80-90% of the mortgage market.(here)
As this blog has argued for more competition in Australian banking, this is a welcome development... 

Thursday 5 September 2013

Precious Aussie banks

Only a week after a series of headlines celebrating the renaissance of Australian banking with the major banks' high share valuations it is interesting to see signs that all is not well.

Firstly a downgrade from Moody's on certain subordinated debt:

GLOBAL credit ratings agency Moody's has followed through with a threat to downgrade billions of dollars in subordinated debt issued by Australian banks due to "bail in" risks, as global regulators take a harder line on bank bail-outs. 
After kicking off a review in June, Moody's yesterday downgraded the subordinated debt ratings and some junior subordinated debt ratings for Basel II-compliant securities of eight Australian banks.... 
The ratings of the big four banks -- the Commonwealth, Westpac, National Australia Bank and ANZ -- were lowered by two notches, while the regional banks -- Bank of Queensland, Bendigo and Adelaide Bank and Suncorp -- were cut by one notch.(here)
And meanwhile markets are pricing Aussie banks as more risky as well:

...over the past month, Australian bank CDS prices have jumped again and fast. As of Friday prices were back above 100 at 108. This has transpired within the context of the sudden jump in yields in everything from US Treasuries to Brazilian junk bonds. But it should be noted that Australian bank CDS prices have risen much further than those of comparable major banks in other developed nations, almost 50% in a month. This is a  legacy of our particular dependence upon offshore wholesale funding such a leap is in some measure also a reflection of the sudden realisation in global markets that Australia is not the miracle economy it thought it was, CDS prices being the reverse of what’s being expressed in the falling Australian dollar.(here)

Arguably two signs of the same coin with deteriorating conditions for Aussie banking? 

Monday 2 September 2013

Banking regulation a damp squib

Heard the one about the regulator which loosened regulatory standards after pressure from industry lobbyists?  Sure you have!

Now presenting another example of regulatory capture, this time from the Australian Prudential and Regulatory Authority (APRA), responsible for setting banking standards and one of the three financial market regulators, along with ASIC and the RBA.  Or more accurately banking unstandards.  At a time when the Australian property bubble is bursting its last frothy bubbles and the securitisation industry attempts muted growth (having been responsible for the 2007-8 crisis), what better idea than to suggest that Aussie banks fill up their coffers with the toxic rubbish?!

Australian banks have stepped up their investments in residential mortgage-backed securities after regulators appeared to endorse their use towards a liquidity buffer. 
Bank treasuries have shown an increased interest in mortgage-backed bonds since August 8, when the Australian Prudential Regulation Authority published a discussion paper on Basel III liquidity reforms. 
Crucially, the paper stopped short of recommending that banks increase their holdings of high-quality liquid assets - limited to Australian government and semi-government bonds, as well as cash held at the central bank. 
That effectively gave banks a green light to increase their investments in higher-yielding assets that they can then use as collateral to access a cash facility at the Reserve Bank of Australia.(here)
And what do industry participants have to say about this move?

One banker in Sydney said regulators were being "quite soft" by not pushing lenders towards greater holdings of Australian Commonwealth Government bonds and semi-government paper... 
"If there is one thing Australian banks know, it is the domestic mortgage market.... So, banks feel very comfortable holding its RMBS," said the banker.

Oh dear! Let's hope they do a better job than Freddie Mac, AIG, Fannie May, Bear Stearns, Lehman Brothers, JP Morgan and Citibank...! 

Wednesday 28 August 2013

RBNZ acts, RBA where are you?!

Sharp criticism from Stephen Koukoulas at Business Spectator:

There have not been many instances in the past decade or so where economic policy changes in New Zealand have presented a template or lead for Australia. After all, New Zealand is only just recovering from a recession that Australia never experienced, it’s per capita GDP is more than 40 per cent lower than in Australia and it has net government debt at 36 per cent of GDP compared with Australia’s 12 per cent.Confronted by an uncomfortable house price surge at a time when the economy is only just gaining a foothold after the recession and when the New Zealand dollar is significantly overvalued, the Reserve Bank of New Zealand has a dilemma. It clearly is reluctant to hike interest rates as this would obviously risk choking off growth and reflating the Kiwi dollar, but it needs to stifle housing demand as the house price surge is threatening to become a troublesome bubble.(here)

The real winner from the elections?

While election season accelerates into full swing ahead of polling day on 7 September, the Guardian has a nice piece about the entrenched players in the Australian economy which wield a disproportionate amount of pricing power:

Whatever happens on 7 September, we already know who rules in Australia. We like to think of ourselves as an open and equal country with appropriate checks and balances but in truth, power is highly concentrated within our nation.
Let’s start with banking and finance. According to an IMF report last year, "Australia’s four major banks hold 80% of banking assets and 88% of residential mortgages," making Australia one of the most concentrated banking market in the world – more so than, for example, China or the US. (here)

Monday 19 August 2013

The cricket analogy

Fresh from another unsuccessful Ashes series against England the Australian team may be licking their wounds and economy watchers may feel salt is being rubbed into those aforementioned wounds by Larry Elliot of Britain's Guardian newspaper who sees a clear and comparable trend in failure on a big scale ahead for Australia:

It may prove to be a similar story with the economy. Australia was one of the few developed economies to emerge from the global recessionlargely unscathed. Growth has been good for a quarter of a century, public debt is low, the banking system proved resilient during thefinancial crisis and it is one of only a handful of countries that still retains a AAA credit rating.
Australia now bears all the hallmarks of a country where its industrial base has hollowed out. The decision by Ford Australia to close its manufacturing plants at Broadmeadows and Geelong is evidence of what economists call Dutch disease: a natural resource boom drives up the exchange rate and makes all other exports deeply uncompetitive....
...As the economist John Llewellyn has pointed out, household debt in Australia rose sharply in the 1990s and 2000s and now stands at 150% of GDP. Noting that the housing market may already be in bubble territory, he adds: "Depending on a strong pickup in housing as a means to sustain growth and rebalance the economy would therefore appear to be fraught with danger.....The Reserve Bank of Australia is now cutting interest rates and talking down the currency in an attempt to rebalance the economy. That is easier said than done when your economy amounts to a large hole in the ground ringed by some expensive property.(here)

Thursday 15 August 2013

Factoring in the China slump

Election season in Australia kicked off with announcements that the mining boom was over - perhaps a good opportunity to align voter's expectations prior to starting on the campaign trail.  But there does seem genuine concern of the risks to Australia from a China meltdown, not only from the RBA but also from ratings agency Standard and Poor's:

Australian banks' credit ratings would be cut by up to two notches and house prices would fall by as much as a quarter if China's economy were to slow sharply, Standard & Poor's says.
In a report assessing how Australia's financial system would respond to a ''hard landing'' in China, the credit rating agency says a dramatic slowing in Asia's growth engine would have severe ripple effects on the domestic economy.
S&P sees a hard landing in China - where growth slows from about 7.5 per cent now to 5 per cent - as unlikely, attaching only slight probability to this scenario.
But if growth did slow this sharply, it says Australian banks would face credit rating cutsbecause of their heavy exposure to the domestic economy and the $1.2 trillion mortgage market. (here)

Monday 12 August 2013

A great paradox

If Australia's banks are doing so well with so much cash on hand why is the Federal government introducing a backstop liquidity regime? 

On the one hand there is giant CBA of the big four announcing big profits and dividends:


COMMONWEALTH Bank is expected to post a record $7.6 billion full-year cash profit and potentially reward shareholders with a special dividend as the reporting season kicks into gear this week. 
With the chase for yield pushing the banks' share prices to record highs, CBA's capital management will be closely watched ahead of quarterly trading updates from rivals ANZ on Friday and National Australia Bank next week. ANZ, like NAB and Westpac, has a September 30 year-end date.(here)
But the international media smells a sector which is overvalued, overexposed and lacking growth potential:
Higher payouts signal confidence, but they also imply managers have no better use for the cash. That leaves the big four trading at a whopping two times book value. CBA, by far the largest and now seventh-biggest in the world by market capitalisation at $107bn, is trading on 2.7 times book, which can only be considered extreme for a bank with four-fifths of its loan book in its home market, where economic growth is slowing and government finances are worsening.
Australia’s banks have for five years been a great bet, with price gains of two-fifths compared with a tenth for US banks and a one-third loss in Europe. But the best is past. Returns on equity over that time have slipped by a sixth while those lumpy loan books – which have not been tempered by a housing market downturn, cannot deliver the profits growth implied by their rating. The return of capital implies the banks themselves cannot see value in seeking growth, either.(here)
While Australian regulators seem to be preparing for a liquidity crunch while analysts point to a possible trigger for recession from China.  Anyone with some alternatives?

Money running out in WA?

Or are politicians just playing politics with the budget ahead of elections? Either way the state at the centre of Australia's now bust former mining boom looks in trouble already:
The West Australian opposition has accused the state government of unleashing a "$28 billion debt monster", with the latest state budget showing ballooning liabilities. 
Opposition Leader Mark McGowan immediately took to social media to respond to the once-boom state's balance sheet. 
He labelled the second-term Liberal government "economic vandals" for adding a projected $10 billion to the state's net debt over the five years to 2016/17.(here)

Tuesday 6 August 2013

RBA takes the initiative sqeezes banks into gear?

This column has dwelt before on the RBA and the fundamental dilergence between the inflated Treasury information it is given and conditions in reality.  For some time now we have argued that the RBA was in denial about impending weakness in the economy, the banking system and the mining boom.

In case you missed it the contrarian view was that despite appearances, the economy is weak, the banking system is undercapitalised and the mining boom evaporating more quickly than most realised.

After previous speeches essentailly committing Australia to an ostrich policy of head in the sand isolationism, RBA Governor Glen Stevens, as this macrobusiness.com.au article explains performed an about turn and signalled accomodative monetary and fiscal policy.  Or to put it another way after denying the currency war and gathering global slump would affect Australia, Stevens now took aim:

This is a remarkable statement. Although its content is ambiguous about how effective the RBA sees its power to lower the exchange rate, the import of the analysis is that only a lower currency can deliver a ‘sustainable rebalancing’. Truly this is an epic volte-face by the central bank which was, until recently, still encouraging Australians to think of a high exchange rate as a historic boon that was here to stay. It’s not done for the central bank to say it was wrong but it sure is implicit.
...The point is it’s an economy operating at stall speed, with rising unemployment and falling business investment. Into this mix we must throw one more probable outcome....
There is a significant risk that the terms of trade will fall further and faster than Treasury forecasts (here)
And across town the banks are being squeezed hard.  Not only with a deposit levy (a form of negative interest rates to an extent, to encourage spending?) which will likely impact on capital, but also in a seeming prodding of banks to come good on interest rate cuts.  Unusually (and perhaps for the first time ever seen by this reviewer) one of the major banks has passed on and then exceeded a rate cut - could this even be too risky by the banks?  Who knows?  Certainly the dressing of the step us as "showing confidence" is absolute baloney! (here)

An optimist reassessed

It has been very interesting to read the changes in tone from respected Ross Gittins in his publications in the Sydney Morning Herald.  Gittins is a respected economist and long term contributor to the Herald and often takes an alternative viewpoint on issues.

So it was not surprising that as recently as June Gittins was still in the boom times camp (or boom times are coming again camp):
In other words, it's wrong to imagine the boom's about to leave us high and dry. Mining production and exports have a lot further to grow in coming years. Even the fall in imports (which constitutes a reduction in their negative contribution to growth) is linked to the boom: reduced investment in new mines means reduced imports of capital equipment (here)
An observer looking globally would conclude that in fact the boom is about to leave and right now is leaving all emerging economies high and dry as has been seen by the plunging currencies and poor statistics of high growth favourites like South Africa, India, Mongolia and Brazil being reported recently.

What a change then a couple of months makes:
Stevens warned that, in our efforts to get economic growth back to its trend rate of about 3 per cent a year - which is necessary to stop unemployment continuing to worsen - ''the challenges ahead are substantial''. What's more, those challenges will continue for ''the next few years''.
His speech explained those challenges. You know the basic problem: ensuring the rest of the economy takes up the slack as the stimulus from the mining investment boom tails off...
It turns out that, in our present circumstances, low interest rates don't pack the punch they used to, so we're not going to get as much increase in activity as usual.
Why not? Because, Stevens reminds us, we're not just coping with the aftermath of one boom, but two. The other is the end of the ''credit boom''.
… we should not expect a return to the sorts of growth seen in the 1995 to 2007 period' (here).
Now that's a turnaround!  If the Australian economy could rebound to such a degree (in the opposite direction), it would...oh no it won't!

Thursday 1 August 2013

Debt junkies

An excellent analysis by Leith van Onselen on the reported comments by NAB head Cameron Clyne as to the need for more debt.  While it is true Australia's public debt markets are small (and this is a product of the history of Australian government funding), it is spot on of Leith to point out the hypocrisy of a state guaranteed bank sitting on a private debt book which Moody's and other rating agencies have expressed concern to shout for more.  As Leith notes private debt in countries like US and UK can be a big risk:

That said, there remains a vulnerability that virtually nobody on either side of politics, the mainstream media, or the mainstream economics profession will acknowledge – one that is far more pervasive than concerns about public debt: Australia’s heavy private debt load. As shown by the below chart from McKinsey Global, while Australia’s public debt levels are low, our household debt is amongst the highest in the developed world, with most of that invested in pre-existing housing (here)
If Australian banks are anything like their international peers then they gorge on cheap government funding and speculate while holding out little to their depositors (and to become less when they price in the cost of the levy).  But still they ask for more...

The new reality...

Word on twitter is there is due to be an announcement of a budget shortfall by the Federal Government and while not all the revenue raising measures are intrinsically bad (eg raising money for a bank deposit insuance scheme), it does suggest the government is struggling to contain the downturn.  And it makes a mockery of the previous obsession with surpluses...and sticking with a theme here note it is bad for banks in the short term (though they may appreciate a bailout at some point...!)


Treasurer Chris Bowen is expected to reveal a $30 billion black hole in revenue when he releases Labor's economic statement today in Canberra at 1300 AEST. 
The economic statement will include a new levy on the banking industry, an increase in tobacco excise and reportedly more help for the car industry. 
Confirmation that the statement will be released today has heightened speculation that Prime Minister Kevin Rudd could call the election this weekend. 
The nation's banks are set to cut interest rates paid to savings accounts to soften the hit from the planned new government levy on deposits. 
The levy would build a fund to protect deposits with the level set at $100,000. Presently, banks pay the government a fee to guarantee deposits over $250,000.(here)

Wednesday 31 July 2013

"Horrendous"

Quite a strong adjective!  Used to describe Australia's latest PMI figures which some commentators are figuring are worse than crisis hit Spain.
The headline number fell to 42.0 from 49.6 a month ago.
Any number below 50 signals contraction.
“Manufacturers are telling us that, while the fall in the Australian dollar and the May interest rate cut have been extremely welcom, they have not yet been enough to turn around a very challenging business environment, locally and internationally,” said the Austrailia Industry Group.
The production sub-index tanked to 37.7, down 12.5 point from July.(here)

Tuesday 30 July 2013

What a commodities slowdown looks like

Kudos to the BBC for sending a correspondent into the mining regions for some images which many Australians may be familiar.  An eerie silence in the background as Linda Yueh how long growth will last as China slows (here).

The highlight was the digger loading up $1 million of iron ore an hour.  How much longer will it continue to run profitably? 

Households teetering on the edge?

So Ozzie's personal finances show a high level of debt, but not to worry as it's being reduced and it's backed by investments in...housing?!

AUSTRALIAN household debt is still high by world standards, but it is not affecting the stability of the financial system. 
In 2012, the mean average debt level for Australian households was $151,488, a report from the Melbourne Institute showed. 
Commonwealth Bank senior economist Michael Workman says there are a number of factors why the high level of debt is not necessarily a problem."Some commentary on Australian household balance sheet positions conveys the impression that household debt levels are too high, leaving many households with unmanageable debt servicing commitments. 
...Australia's average debt-to-disposable income ratio, was at 147 per cent in 2012, a 28 per cent increase from 10 years earlier, the Melbourne Institute's 2012 Household Income and Labour Dynamics in Australia (HILDA) report showed.However, the average debt-to-assets ratio was a respectable 17.6 per cent, showing that most of that borrowing was high value assets like owner-occupied or investment housing (here)

Banks fine if miners default?

...senior executives at Australia’s largest banks are expecting an increase in bad debts from mining and mining services companies as the value of commodities continue to fall amidst the decline in growth in China.
According to The Australian Financial Review, the survey found that the bad debt situation in mining over the next 12 months is expected to “deteriorate somewhat” with Chinese authorities now becoming more concerned about China’s growth prospects.
The looming threat didn’t stop ANZ from offering up $1 billion in finance to Gina Rinehart last week however, in order to bridge her Western Australia iron ore project. Whilst the prospects of the mining sector have remained quite bleak in recent times,(here)

Wednesday 24 July 2013

Drought for Aussie consumers

or how strapped consumers followed the international trend and moved down market to save cash:
The local offshoot of Anglo-Dutch consumer products giant Unilever, which sells everything from shampoo and ice-cream to tea and laundry powder, has been hit by a profit collapse of almost 50 per cent to $43.12 million as revenues flat-lined in 2012.
The souring profit and unresponsive sales performance comes as suppliers in Australia, both big and small, are facing increasing pressure from the supermarket giants to take margin haircuts and invest heavily in their own supply systems to improve efficiencies in the supply chain.
Unilever's heavy reliance on its empire of brands is also challenged by cautious consumer behaviour and the growth in popularity of unbranded private-label groceries at the supermarket checkout (here).

Times changing for big Aussie banks...

Some details about CBA and ANZ shifting their strategies to meet new challenges - CBA stripping back its balance sheet to meet stricter capital requirements (although question if a recent private wealth scandal had anything to do with it) and ANZ looking to expand beyond Asia.

But changing is hard to do and to what extent will problems in the core outweigh any escape attempts at the periphery? Mutterings of increasing mortgage insurance costs don't bode well.

Interestingly though there seems to be a divergence between those with a domestic focus at the moment (CBA and Westpac) and those focussing overseas (ANZ and NAB).  It was noted previously that CBA and Westpac have larger domestic lending books and as this article indicates they are busier than ANZ and NAB due to integration of their Australian subsidiary groups (BankWest, Bank of Melbourne, St George, Bank of SA).

In the event of Ozzie contagion could it be that ANZ and NAB survive better due to less local exposure? Could be worth a study of long/short strategies!

Learning how to make stuff again...

Australia's manufacturing industry has been decimated by a high currency, weak consumer demand, distorted tax and incentive systems and crowding out by the resources sector.  With a weakening currency, falling commodity prices, and talk of further interest rate cuts that is shifting however the game has changed and this time Australia is going to have to work for its growth.

Why so?  Well the Oz economy can no longer rely on the internet or rapid increases in the terms of trade to lift Australian's incomes.  As set out in macrobusiness it happened before, but now it's back to basics:

 the surge in incomes over the 2000s was extraordinary – driven primarily by the once-in-a-century lift in commodity prices – and that income growth will be much slower going forward. Indeed, to the event that the terms-of-trade continues to retrace back towards its longer-term average level, it will detract from household income growth, unwinding much of the gains enjoyed over the 2000s. 
In the years ahead, Australians will have to get used to much slower income growth than they have become accustomed to and will instead have to earn pay rises the old fashioned way: via improved productivity.(here)  
What is productivity? Making or doing things better and more efficiently.  This is why Kevin Rudd has been sounding out on the issue.  So Australia may not necesserily be making more stuff, but needs to be doing it smarter.  And when New Zealanders start to gloat about this - something needs to change!