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Banks face tough times ahead Premium Content

australian_banks By Chris Becker The banking sector is facing tough conditions in the medium term as a variety of macro factors intersect: a declining demographic profile exarcebated by rising unemployment in the medium term, lower private credit growth in the form of disleveraging (that has the potential to fall into outright deleveraging, like business finance), structurally high funding costs, competition over deposits, a Federal Government going to surplus in record time and of course, the ongoing house price melt from 2010. But this has not stopped investors embarking on a chase for juicy, sweet...
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Analysts debate NAB’s provisions

debt-300x232 From Banking Day: Citi Research issued a note in response to the announcement, saying: "We see this as primarily a reflection of ongoing UK economic weakness and shortfalls in collective provisioning relative to peers. It is not a broader sector problem." Credit Suisse took a similar line, saying: "NAB faces the risk of persistent earnings downgrades throughout the likely multi-year UK repositioning process. We would have preferred to see a much larger provision charge to immunise its UK exposure." However, Morgan Stanley said that the increase in provisions reflected problems that could...
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The BoQ canary chirps for QLD

canary-in-a-coal-mine-maybe3-150x150 Followers of my previous blog may remember that I have a bit of a penchant for worrying about the Queensland banking system due to the on-going weakness of the local residential and commercial property markets particularly in key areas where regional banks were very active. The bank that has been at the back of the pack for some time now is the Bank of Queensland, as I noted on MB a year ago. At that time I mentioned that although the CEO was giving an optimistic message for the future, provisions were still on the rise and the future really didn't  look that bright: The acting chief executive...
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Kohler’s Panglossian banks

Happy_smiley_face Alan Kohler has an interesting take on Australia's banks today, both from an investment and national viewpoint. He begins: The banks will be big winners from the Reserve Bank’s decision to buffer the Australian economy from the end of the mining boom and to try to bring down the dollar, by bringing interest rates down to GFC lows, and probably lower – because for that plan to work, credit growth needs to resume. ...In fact it’s probably not going too far to say that the industry in which Australia is truly the world leader is not resources, it’s banking – not the sort that caused the...
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Deposit insurance is fighting the last war

be-wary-of-the-human-tendency-to-fight-the-last-war It is revealed today in an FOI release that bank regulators have considered imposing fee upon banks for deposit guarantees. From Banking Day: Regulators canvassed a range of scenarios, with the mooted annual fee ranging from two basis points to 23 basis points of insured deposits...One scenario that recurs in the documents is how to achieve an insurance fund size equal to 0.5 per cent of covered deposits. A fee of 10 basis points would reach the target within six years and a fee of 20 bps would reach the target within three years...A fee of 23 bps would take 10 years to generate a fund equal to...
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RBA tells households to keep saving

Capture The RBA's FSA is out today. It focusses heavily upon European risks and improvements in Australian bank stability. Though I'm not sure why, given we already had the most secure and well regulated financial system in the world. The whole document would send you quickly to sleep but there is a quite useful breakout box that makes for some fun reading. First the good news is the obvious improvement (that wasn't needed) in many financial system funding metrics: But another table also shows the ongoing problem: As you can see, on just about every criteria in this hand-picked table we are...
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What does your support for the banks buy?

Picture 4 If you've ever wondered what your support for the banks (guarantees, surpluses, RMBS purchases, RBA cash for coconuts etc) buys you then here it is in a nice little chart form a Moody's presentation that goes with its recent stress test of Australian banks (which Deep T. will be critiquing in due...
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APRA is pushing up the Australian dollar

5733482-ski-resort-in-the-high-mountains-with-ski-lift Whilst the RBA and politicians dance around addressing the strength of the Australian dollar, crushing many productive sectors of the economy, APRA and Mega Bank use policies that pass massive risk to the taxpayer and inflate the level of the AUD. How so? The traditional and “official” view is that if a financial institution or ADI borrows offshore in a foreign currency, then the lowest risk position is to fully hedge the FX exposure, by using the FX to buy AUD and swapping the future repayment obligations of the FX into AUDs. This view is incorrect and in Mega Bank’s case results in a...
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Westpac: Offshore borrowing too risky

Tom-Cruise-Risky-Business-Ray-Ban The AFR has really good article today about bank funding. It begins: The favoured euphemism for Australian credit growth is “anaemic”....despite the pressure this puts on bank earnings, it should be good news for the ranks of usually foreign analysts who fly over Australia at 30,000 feet and put out reports about a housing bubble, banks desperately vulnerable to offshore funding markets and an economy about to blow as China returns to a pre-Deng society. Another of these reports surfaced last week. Before you stop reading, this 'hyperbowl' actually introduces some very good analysis by the...
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Q2 RMBS arrears mixed

Final demand letter being read under a spotlight From Moodys: Sydney, August 31, 2012 -- The prime 30-plus arrears rate remained steady in the second quarter at 1.66% in June, and unchanged from March. In addition, the rate has not moved much from the same period last year when it was at 1.67%. While the overall index is at 1.66%, considerable variation exists within the market. Historically, major bank deals have performed better than those of non-major bank ADIs (i.e. other ADIs), which have, in turn, outperformed non-ADIs. The prime 30-plus arrears rate for the major banks is at 1.23%, other ADIs at 2.10%, and non-ADIs at...
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Hotshot mortgage brokers head for Playboy Mansion

playboy-logo From Banking Day comes a story you wouldn't read about: A soiree at the Playboy Mansion in Los Angeles this week for gun brokers affiliated to the Australian Finance Group has become a talking point in the industry. The event also serves to highlight the tension fostered by "sponsorship" by the banks of one of their most important stakeholder groups over and above commissions paid for loans. ...Spokespeople for ANZ, Commonwealth Bank and Westpac all advised that their banks did not sponsor the mansion event and their staff did not attend. ...AFG set individual brokers (who work for...
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CBA to buy Standard Chartered?

fish3 Last night FTAlphaville speculated on a truly remarkable possibility. The cross post is below: As fantasy banking M&A goes — this isn’t such an outlandish idea, we reckon. But see what you think: Following their strong share price performance in 2012, an obvious question arises as to how the Australian major banks can use their premium valuation, particularly given a subdued growth outlook. While attractive acquisition opportunities are scarce, following STAN’s recent derating it is increasingly becoming a viable target for the majors. While we attach a low probability to any of...
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Very expensive banks Premium Content

bigdiamonds1 There is a growing degree of scepticism about the banking sector amongst analysts and it is not surprising. As UBS points out Australian banks' market capitalisation has now reached US$305bn, for which you could get: US Bancorp; Goldman Sachs; Standard Chartered; Deutsche Bank; and the entire UK domestic banking system. The scepticism can be seen in the neutral rating by Macquarie on Bendigo Bank despite arguing that it has the "best balance sheet in the sector". "Capital continues to grow, with core tier 1 capital at 8.09% helped by post balance date capital actions such as the IOOF sale and sale...
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After holes, is it back to houses?

Ian_Narev Last week while I was in bed with flu, Commonwealth Bank CEO, Ian Narev, declared that the bank is in favour of a new Wallis Inquiry into the financial system. So long, that is, as it's focussed on the following, from the AFR: Commonwealth Bank of Australia chief executive Ian Narev has warned that the country’s big banks may not have enough money to lend if economic conditions improved, putting pressure on the government to hold an inquiry into the financial system. Mr Narev commented yesterday after CBA defied the global economic gloom to post the biggest annual profit yet for an Australian...
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Moody’s warns on mutuals sector

challenges_ahead Adding to the poor Bendigo Bank result today (which Macro Investor subscribers will be enjoying) comes a warning from Moody's: Sydney, August 20, 2012 -- Moody's Investors Service says that Australia's mutual financial institutions have strong balance sheets, as reflected in their asset quality and funding profiles, but slower credit growth and strong competition from banks for deposits will put pressure on the sector's profitability in 2012 and 2013. Moody's detailed its latest analysis of the industry -- which includes credit unions, mutual building societies and mutual banks -- in a...
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BIS says Australian banks are too big

money-bin-scrooge David Uren at The Australian this morning picks up on BIS comments about Australia's enormous banks: The performance of Australia's banking sector is seen by world investors and our own authorities as one of the great sources of our economic strength since the global financial crisis. However, research by the Bank for International Settlements suggests the dominance of Australia's finance industry contains the seeds of economic vulnerability. Finance has grown too big around the world and cross-border lending too large, according to BIS chief economist Stephen Cecchetti. "Experience shows...
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Fitch stress tests RMBS

Capture From Fitch today: Fitch Ratings-Sydney-15 August 2012: Fitch's stress tests of Australian residential mortgage-backed securities (RMBS) show the resilience of the ratings even through a severe sustained recession and house price deterioration. "Fitch conducted three scenarios stressing interest rates, unemployment and property price declines as the key drivers of defaults and losses. Concurrent increases in all three were run over a three year period, as well as removing the benefit provided by lenders mortgage insurance to show that Australian RMBS transactions, on the whole would remain...
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Who’s responsible for the risk?

or_risk_red_dice The life of a banking system analyst can be lonely indeed. One tends to both offend and support all various interests at different times. I've been accused on MB of being a supporter of both Karl Marx and Ayn Rand whilst being a rent seeker for the non-Mega Bank Australian ADIs. I can honestly say I’m not a follower of any particular economic theory or have a barrow to push for any particular vested interest. I simply analyse how the financial system works with a view to identifying weaknesses and strengths. I’m not aligned to the dogma that is associated with every movement whether...
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Australia’s banks now worth more than Europe’s

ScreenHunter_01 Aug. 16 07.17 By Leith van Onselen Following on from the Prince's post earlier in the week, the Atlantic last night published an interesting article that attempts to explain why the market capitalisation of the Australian financial sector - i.e. the total value of securities on issue - is now worth more than the market capitalisation of the eurozone's financial sector: A big chunk of this shouldn't surprise us. European banks loaded up on subprime debt. Australian banks didn't. European banks made their own bad real estate loans. Australian banks didn't. And European banks are sitting on top of piles of...
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Swiss bank regulations see the light

swiss flag By Chris Becker I missed a very interesting article came across the Bloomberg recently, my head down and proverbial up as earnings season gets into full swing, but I caught it on the rebound on my lunch break when our friends at interest.co.nz posted their Top 10 at 10 (NZ time!) - one of my few must reads of the day (Macro Morning being the numero uno). It comes in at No.9, but I reckon following the unfolding subprime dilemma it deserves to be placed at the top of the pile. Read on: 9. Switzerland trying to cool housing market - Bloomberg reports the Swiss National Bank (SNB) is...
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Megabank or Eurobank?

Re-think By Chris Becker With the National Australian Bank (NAB) division of Megabank reporting flat 3Q trading results this morning, via Pragmatic Capitalism comes this interesting chart from Bank of America:  Given the fact that the Euro crisis is never ending (thanks to a lack of political compromise) it’s unlikely that the timing on this one will be anything remotely similar, but this statistic just jumped out at me as a sign of incredible skew in a large market.  It’s food for thought and as always, certainly not an investment recommendation, but a very nice 30,000 foot view of the collapse...
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Bank gloomsters are from Mars

video The Australian today offers an interesting debate among some insiders on the underpinnings for a new Wallis Inquiry. It actually turns out to be quite interesting thanks to Adam Creichton who delivers some home truths about moral hazard and inflated asset prices. The others, of course, react like he's from Mars, which is worth the price of entry alone. Enjoy! (And BTW, well done to The OZ for embedding its videos. Something the wider media is yet to...
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APRA castigates banks on hidden arrears

the-dirt-under-the-carpet From the AFR comes heavy-duty confirmation that all is not as it should be in Australian bank arrears: The banking regulator has warned lenders they are not doing enough to accurately report overdue loans in relation to home borrowers who are granted hardship concessions. ...Hardship concessions granted by banks when someone is ill or unable to work due to serious injury, typically allow for a reduction in the interest rate, lengthening of loan maturity, or full or partial deferral of interest for a temporary period. ...“APRA has seen some instances of ADIs [authorised deposit taking...
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Protecting the banks

Stability According to Banking Day: Momentum may be gathering regarding a delay in banking regulation reforms, with a planned inquiry into the financial system by an incoming Coalition government of the means of shepherding through any changes to policies that have already been adopted by the industry regulator, APRA. On Saturday, The Australian newspaper reported talk within the industry that a Liberal and National government "would protect the nation's banks… by linking up with other countries that enjoy the benefits of robust banking systems." In the past, industry representatives have voiced...
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Lenders say no on dodgy docs

article-new_ds-photo_55_247_fotolia_5947733_XS From Banking Day: Lenders are refusing to give borrowers copies of the loan application documents, according to a report in The Australian. It said Bendigo and Adelaide Bank has told borrowers they are not entitled to copies of their applications, while other lenders have told borrowers that such documents have been destroyed. In many cases, the borrowers affected took out low-doc loans. The issue is related to a campaign by a consumer group, Banking and Finance Consumers Support Association, claiming that lenders falsified loan documents to provide inappropriately large loans to certain...
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