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...!