Bankers crying all the way to the poorhouse
The critique from the cartel's peak body presented a most fine opportunity. It was akin to a gilt-embossed invitation on designer stationery: "Dear Sir, you are cordially invited to give us a shellacking at the earliest opportunity." The bankers said we had singled out "covered bonds" as a source of funding whose "spread compression" over the past year had been, in the words of a Westpac note to institutional clients, "an extraordinary performance". Our story did not recognise the "pressures" in other sources of funding, they said.
Indeed this new source of funding, covered bonds, made possible by a kindly and somewhat furtive act of Parliament a year ago, had performed extraordinarily. But so had all forms of funding, be they deposits, hybrids, bonds or cash.
The banks, you see, have a conundrum. They are rolling in it. While they did their usual Oliver Twist routine and held a bit back at every Reserve Bank rate cut over the past year or so, their blended cost of funds has been dropping dramatically. How can they possibly spin it now? It's tough out there? Surely the "wholesale funding pressures" line is passe. Surely there is no place to turn but the dependable "Australia needs a strong banking sector" angle.
Mind you, there is the dreaded "competition". Nasty thing, that competition, should be avoided at all costs. Roughly two-thirds of bank funding is deposits and there has hardly been a battle royale in deposit-land lately. Online and cash management deposit rates have dropped 50 basis points since the last two official rate cuts. In contrast, the average mortgage rate has only declined 40 points.
Racking retail deposit costs up against wholesale bonds, the average online rate is 3.05 per cent, the average cash management account deposit rate 1.9 per cent and the average term deposit rate 3.45 per cent. This is the best funding the banks can get, generally far cheaper than wholesale money.
And as for wholesale funding, both covered bonds and ordinary bonds have enjoyed a similar narrowing of spreads to the swap rate. The covered bond compression is actually greater than we had outlined. Westpac and Commonwealth issued covered bonds at 160 and 175 over bank bills in early 2012 that are now only trading about 55 points over. The ASX hybrid instruments floated in the past year or so have also performed spectacularly.
■FOR all its debt and myriad social and economic challenges, the US has the wood over Australia on the banking front - from a consumer rather than shareholder perspective. US banks are genuinely competitive. They regularly have honeymoon lending deals where you get finance from zero to 1 per cent for a year or more. Long-term rates are 3-4 per cent. They are nowhere near as profitable as our four majors and their credit spreads are going in the opposite direction. There is the odd reason to be bullish towards the US, vis-a-vis Australia. Our cost structure is far too high, as evinced by the price of goods and services ranging 25-50 per cent above theirs, even after tips. The minimum wage in many states is between $US7-$US8 an hour.
The hollowing out of Australia's manufacturing base, the devastations of a strong currency and high energy prices, surely render this country susceptible to a rocky landing when the commodities music stops.
■BUT at least we have the Obeids and the New South Wales Independent Commission Against Corruption. What a show. This week we learnt of the lowest-cost finance there is, a Bank Jones low-doc loan.
During testimony, it emerged that Greg Jones, the co-founder of RAMS home loans, gave his friend, former mines minister Ian Macdonald, a $195,000 loan that Mr Macdonald never repaid . . . and $35,000 "in cash and gifts". What a top bloke. Then there was the $4 million Macca was set to receive from the proceeds of the rigged coalmine tender. Not looking rosy for Macca.
It was a big week for ICAC, though Eddie and the Obeid family are still up $30 million on the Cascade Coal deal. Roughly $15 million has gone to address the clan's housing requirements. Lot of loans flying about, no doubt being scrutinised by the taxman.
■FINALLY, it would be negligent to pass without comment on the brilliant Special Northern Economic Zone idea (not proposal!). Why go north of the Tropic of Capricorn when you can set up your own zone. Take Google Australia, which has opted to stay put and set up a Special Darling Harbour Economic Zone, enabling it to pay just $74,176 in tax on its estimated $1.1 billion in income.
Frequently Asked Questions about this Article…
Covered bonds are a relatively new source of bank funding in Australia enabled by Parliament about a year before the article. The article says they have performed extraordinarily well, with spreads tightening sharply. For example, Westpac and Commonwealth issued covered bonds at about 160 and 175 basis points over bank bills in early 2012 that were trading closer to 55 basis points over, which helped lower banks' overall cost of funds.
According to the article, banks' blended cost of funds has been dropping dramatically because many funding sources — deposits, hybrids, bonds, covered bonds and cash — have all seen falling costs and narrower spreads. That compression in funding costs can boost banks' net interest margins and profitability, which is an important factor for investors who follow bank earnings.
The article notes retail deposit rates have fallen faster than mortgage rates after recent official rate cuts: online and cash management deposit rates have dropped about 50 basis points, while the average mortgage rate has declined roughly 40 basis points. The piece cites average rates of about 3.05% for online accounts, 1.9% for cash management accounts and 3.45% for term deposits, highlighting that deposits remain a relatively cheap source of funding for banks.
The article suggests that the 'wholesale funding pressure' argument is losing weight: both covered bonds and ordinary wholesale bonds have seen similar narrowing of spreads to the swap rate. In other words, wholesale funding costs have also eased, so investors should weigh whether funding pressure claims reflect current market conditions or are more of a defensive narrative from banks.
The article argues US banks are more competitive on the consumer side — offering aggressive promotional lending deals and lower long-term rates (around 3-4%) — and are generally less profitable than Australia's big four. For investors, that means Australian banks have been able to maintain higher profitability, but the article also warns Australia has higher cost structures and economic vulnerabilities that could affect future performance.
ASX hybrid instruments are hybrid capital securities issued by banks and financial institutions. The article reports that hybrids floated on the ASX in the past year or so have performed spectacularly, implying strong investor demand and tightening pricing for that form of bank funding.
The article recounts ICAC-related stories including testimony that Greg Jones, co-founder of RAMS home loans, gave former mines minister Ian Macdonald a $195,000 loan that was never repaid plus about $35,000 in cash and gifts; it also mentions a $4 million payment linked to a rigged coalmine tender and that the Obeid family were reportedly up about $30 million on the Cascade Coal deal. Such governance and corruption stories can undermine public and investor confidence in institutions and markets.
The article contrasts the idea of a Special Northern Economic Zone with a real example: Google Australia reportedly set up a 'Special Darling Harbour Economic Zone' arrangement and, as a result, paid just $74,176 in tax on an estimated $1.1 billion in income. The piece uses this example to highlight concerns about tax arrangements and corporate behaviour in Australia.
Call 1300 880 160
Start a chat
Schedule a call
