Bank wedge

A couple of recent developments are worth assessing with regard to the outlook for banks and their ability to manage interest rate margins. Some weeks ago this blogger wrote in reference to the floods and the RBA:

…  the world is quickly swinging from a GFC-deflation toward a recovery led by commodity price inflation … Australia’s commodity majors are moving to capitalise on this by pushing short term contacts for iron ore (and coal). When they succeed the national economy will face an explosion of cash…

Late last year, Glenn Stevens observed that Australian monetary authorities are vulnerable to the charge that they haven’t raised interest rates early enough in past business cycles … So, in the new normal course of events, we would expect to see rate rises flowing through as soon as the new commodity contracts see ore and coal prices soaring.

…[But] the RBA is also likely looking at accelerated declines in QLD asset prices in the medium term. And there will also be immense political pressure to not raise rates as suffering Queenslanders rebuild.

The RBA is facing a tough choice sooner rather than later. Raise rates and face opprobrium. Or, wait, and get hoisted on its own petard.

Happily for the RBA, the benign December inflation figure takes the heat out of this thesis for the time being.

However, it is not good news for banks. There are two issues of concern.

The first is that the same context of post-flood sensitivity also makes it difficult for the big four to raise rates unilaterally. CBA led the November round of rises and it is clear now (if it was not obvious all along) that it is paying the price in brand damage expressed through declining customer satisfaction, as the SMH reported yesterday:

The Commonwealth was pilloried for raising home loan rates 0.45 percentage points on Melbourne Cup Day. Other banks delayed their rate increases after the strong reaction.

The bank’s home loan customer satisfaction ratings for November and December fell 17.4 percentage points from their October level.

ANZ Bank’s ratings fell 8.2 percentage points over the same period, Westpac fell 7.6, and National Australia Bank fell 0.6.

The Commonwealth’s fall overshadowed NAB’s computer travails in November, which made it the biggest one-month loser in customer satisfaction rankings among the big four.

The result pushed the Commonwealth from second to third in overall customer satisfaction rankings among the big four and puts the bank below satisfaction ratings it received six months earlier.

ANZ was first, followed by Westpac, the Commonwealth and NAB.

The second bit of bad news is that it is a certainty that the RBA is now on hold, so for the time being the banks will have no official rate rises to piggy back.

It doesn’t take Einstein to put these factors together and conclude that if the banks were to raise rates unilaterally in the first half of the year customer satisfaction will descend to the seventh level of hell.

Whether the banks will pay attention to these circumstances is another question. The first rule of oligopoly business is never drop your prices (or, in this case, crimp your margins). But which bank CEO is going to risk leading another round of rises given the brand damage sustained by CBA?

One would guess it isn’t going to be Gail Kelly who, according to Banking Day, is already on thin ice.

Cameron Clyne’s NAB is already last despite his attempts to position the bank as a fee discounter. And that bank’s lack of any alternative strategic direction surely means he can’t afford to fall further behind.

That leaves Smith, who certainly has the chutzpah. But if this blogger was an ANZ shareholder, he would not feel good about ceding a leadership position in satisfaction.

You may recall that in November the other banks left CBA hanging in the wind for a week or two before following with similar rate rises. By doing so, they’ve now created a gigantic game of chicken for themselves and their brands. Competition of sorts; who will gouge the least.

In slightly better news for the big four, this blogger is still of the view that national commodity income is very likely to surprise on the upside over 2011 as China blows off. That means huge income flows to mining shareholders, as well as state and federal governments and strong ongoing business investment.

There is also the hope that, with rates on hold, the housing market finds a plateau (though the recent spate of bank capitulations described by Delusional Economics is worrying).

If that were the case, the second half may bring greater joy to the banks.

Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the fouding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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  1. this blogger is still of the view that national commodity income is very likely to surprise on the upside over 2011 as China blows off. That means huge income flows to mining shareholders

    So … you buying mining stocks then?

    If so, are you confident you could get in and get out before China implodes?

  2. I don’t offer investment advice.

    But no, I’m not buying equities. At 6.5% on fixed term deposits and even more to save paying down the mortgage, the equity bubble is not worth it…

  3. The Reserve Bank will be forced to lift rates in mid-late 2011 as the resources boom ignites the economy and creates a dangerous three speed economic situation. Inflation is rampant in some parts but less so in others. This is an impossible balancing act for the Reserve and the eastern states will be hammered, collateral damage in their war against mining boom induced inflation.and probably the first real test of. If employers add jobs at breakneck pace later in the year then the Reserve will lift at an equally rapid pace, crushing the housing bubble in the eastern states!

    Dank Castle
    Australian & Global House Price Crash Blogs

  4. As of this morning my entire equities portfolio (including ANZ) is gaaawn. IMO this QE and stimulus driven bubble is running out of fuel and the fundamentals still suck. I have ethical issues with bubble surfing and don’t have the nerves for it anyway, so riding the gold/silver/soybean/whatever bubbles isn’t an option. So cold, hard cash it is. Once this bubble is well burst and the dead wood cleaned out I’ll look for stocks in undervalued companies that actually produce something of value. I have no idea when that will be, though.

    Anyway, visited the folks yesterday and we got the whole “when are you buying a house?” talk (more like interrogation), again. Apparently taking out a $380K mortgage on a fibro dump is the second best financial decision we could make because now is a great time to buy and it’s about to go up again. A mortgage broker friend of theirs told them so…

    But the best financial decision we could make is to buy three investment units in Melbourne and sell two of them in 18 months time so that we’ll easily have a 20% deposit for the fibro dump from the capital gain. And the other unit can sit there losing money so that we can pay less tax. But that’s not a problem, because the capital gain will be so good.

    Seriously, I’ll be pissed if the coming terms of trade boom results in another temporary burst of air into our housing bubble and the above advice turns out to be good. I called a correction very in late 2007, then in 2008 prices dropped nearly 4% nationwide but 2009 saw prices (and debt levels) explode to new highs.

    • Melbourne has run so far and so hard since mid-2009, there’s Buckleys of any capital gain in 2011. Not to mention the weak education and manufacturing sectors in Victoria.

        • Endrortsonhousing

          I found the same pattern in Canberra Rob – I noticed some houses that went to auction on the same weekend just before Christmas mysteriously disappeared from the results, but were still for sale!
          I track the houses for auction each weekend in Canberra against the houses reported sold in the following week. Based on this method, over the last week the (unpublished) Canberra auction clearance rate was 50% – the worst in ages, assuming the published clearance rates are accurate.

      • Try telling that to my olds and just about every boomer I know.

        But yeah, Melbourne has rising prices, rising stock on the market and increasing time on the market. These combinations have signalled the top of the market and preceded the downturn of many a housing bust.

        Seriously, I’m sick to death of getting the pressure to buy a house by people who bought when inflation was high and prices were 2.5-3 times income. I’m far better educated, earn more than they did at their age, and have much better economic and financial literacy than they do,yet they assume they’re financial geniuses because the value of the houses they bought went up due to high inflation (of the 70s and 80s, which also helped them to pay their mortgages off early) and the debt explosion of the past decade.

        “You can’t go wrong” I’m told. Well, according to the Myers-Briggs personality types I’m an introvert (definitely!) but also fiercely independent, hold strongly to my values and am not swayed by popular opinion (another definite!) and I say this housing boom is out of steam. I’m still not expecting a US style bust, but buying right now is far too risky, IMO.

        With prices so high a drop of only four or five percent can make renting look like an investment (because you pay less in rent than you lose in the descent into negative equity hell), a rather simple point few people can understand because they’ve been brainwashed into thinking a mortgage is the best financial start you can make in life. Which is true in a rising market, but watch it drop just a bit and as Black Sabbath put it
        “Dreams turn to nightmares
        Heaven turns to Hell
        Burned out confusion
        Nothing more to tell”

        • Fully agree, Torchwood1979

          There are lot of boomers who think they are financial geniuses because they bought a house before 1992.

          Looking forward to their faces if/when it goes bust!

  5. To all the Macrobusiness bloggers:

    This is definitely a ‘must read’ blog – congratulations to each contributor. The site is freshly styled, easy to navigate and now replaces my morning reading of The Oz (in fact The Oz is looking remarkably dull of late – I think Macrobusiness has it’s collective finger on the pulse of current economic issues impacting Australia and should become a ‘must read’ for all journalists).

    That said, perhaps you could consider enlisting the talents of Bear Feller to inject a broader geopolitical perspective to the blog. I certainly enjoyed his blog but unfortunately he has recently bid farewell – at the very time his global prescience is well needed!

    Again, Macrobusiness, a big thank you and continue the excellent work.


  6. I think Australia is headed for more like ireland than US, when china goes down australia and its dollar and its economy will be seeing stars. Houses never go down keep at that house porn. LOL