Banks come back for more

In truly hospitable fashion, the dear old Australian Bankers' Association saw fit to describe your correspondent as "inaccurate" the other day in response to a story about bank profit margins.

This 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 BusinessDay 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". The 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 passé. 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 by 50 basis points since before the last two official rate cuts. In contrast, the average mortgage rate has declined by only 40 points.

Racking retail deposit costs up against wholesale bonds, the average online rate is only 3.05 per cent, the average cash management account deposit rate is only 1.9 per cent and the average term deposit rate sits at just 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 the article had outlined. Westpac and Commonwealth issued covered bonds at 160 and 175 over bank bills early last year that are now trading only about 55 points over.

The ASX hybrid instruments floated in the past year or so have also performed spectacularly.

The pinstriped ones will be hitting their whiteboards in earnest to workshop a new hardship line before reporting season but it won't be easy. It's a good thing that, via super and so forth - where shares are up 20 per cent since last year's nadir - we all share vicariously in this ample plumping of profit margins.

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.

The 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 opposition direction.

There is the odd reason to be bullish about the US, vis-à-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 $US7-$US8 an hour, while ours is double that, with weekend and holiday penalties hoisting it further.

The hollowing out of our 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 NSW Independent Commission Against Corruption. What a show. No one can take that away from us. This week we learnt of the lowest cost finance there is, a Bank Jones low-doc loan.

During testimony before the commission, it emerged that Greg Jones, the co-founder of RAMS home loans, gave his friend, the former mines minister Ian Macdonald, a $195,000 loan which 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 coalmine tender. Not looking rosy for Macca.

It was a big week for the 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 residential housing requirements. Lot of loans flying about, no doubt being well scrutinised by the Australian Taxation Office.

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 and enjoin all those mozzies in mortal combat 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 income.