THE DISTILLERY: Crowning Kelly

Jotters spill ink in praise of Westpac's results, and pore over the globally significant court ruling against Standard & Poor's.

Westpac Banking Corp shares jumped yesterday as reservations about chief executive Gail Kelly and the bank’s multi-brand strategy faded significantly with the latest set of results. Quite why there is such focus on Kelly is beyond this column, but Australia’s business commentators agree that she’s staring at clearer waters.
Meanwhile, some other writers are particularly taken by news Standard & Poor’s has lost a Federal Court case brought by litigation funder, IMF. This decision is likely to have global implications.
And finally, there’s an interest rate decision on. Happy Melbourne Cup Day!
But first, The Australian Financial Review’s Chanticleer columnist, Tony Boyd, argues Westpac's results show it has turned a corner.
"Kelly’s statement in relation to ROE is indisputably good news for bank investors, particularly those who are attracted by the prospect of fully franked dividend payments. For Westpac, there is the real prospect that, by this time next year, it will be able to start distributing about $1 billion in excess franking credits sitting on its balance sheet. The release of Westpac’s full-year results brings to an end the major bank profit reporting season, which this year was preceded by a strong rally in bank stocks – with one obvious exception. There is concern that the rally has captured all the value inherent in the sector but it would be wrong to conclude that just because we are living through a 35-year low in credit growth that banking growth is dead. Those with negative views will find plenty of friends.
Business Spectator’s Stephen Bartholomeusz writes that yesterday’s results basically put Westpac where it has wants to be, following the mortgage market binge it indulged in with rival Commonwealth Bank in the wake of the global financial crisis.
"With the memories of the crisis and the impact it had on wholesale funding markets, both in terms of access and cost, still very fresh the funding requirement created by the dash for growth represented a meaningful point of vulnerability for Westpac, given that the political sensitivity of home loans made it difficult to fully pass through the increases in wholesale funding costs that were flowing through the markets. Kelly abruptly changed tack and started focusing introspectively on Westpac’s balance sheet rather than chasing growth. Westpac, despite the flak it received, became the priciest home lender among the majors and then deployed that revenue advantage by offering the most attractive deposit rates as it pursued a more stable funding base."
The Australian’s Richard Gluyas argues that Westpac chief financial officer Phil Coffey’s less clinical discussion of the bank’s numbers revealed that things in are on the up for the Sydney-based lender.
"By the time Coffey had finished discussing a few ‘themes’, the mantle of ‘major bank CEO under most pressure’ had been removed from Gail Kelly and handed over to Cameron Clyne at National Australia Bank. The consensus was that Westpac, spurned for Kelly's profligate multi-brand strategy in an environment demanding austerity, had also delivered the standout result of the bank reporting season.”
Similarly, Fairfax’s Elizabeth Knight says Kelly took some "meaningful strides” to solidify her position at the bank.
"It was a gutsy call to tell shareholders that the all-important measure of return on equity would not fall below 15 per cent - having said that Kelly is making no promises that it will move wildly ahead of that in the near future. There was even a hint that if the current strategy went to plan shareholders may even see some form of capital management or a bit more action on dividends. But certainly no promises. However, even to make the statement about return on equity suggests the bank has its house in order and is confident that there are no nasty surprises. So, it's a fair bet that Kelly won't be going out on any strategy limbs. Rather, she will be maintaining course.”
Is the Distillery suffering from a wicked hangover, or is it strange that an executive of Kelly’s power, influence and youth is the subject of ongoing narratives about her tenure?
The Australian Financial Review’s Michael Smith tallies up the big bank winnings and reveals the top four Australian lenders have put away $25 billion in net cash earnings this year.
The other big story yesterday was IMF's Federal Court win over ratings agency Standard & Poor’s. This is a favourite topic of business commentators around the world and Fairfax’s Michael West starts us off with a brief primer.
"This judgement was a long time in the coming. The financial crisis, from which the world economy has yet to recover, was caused in part by the widespread sale of toxic and highly leveraged credit derivatives. Investment banks created this deceptive rubbish and the rating agencies lent their imprimatur. In the direct aftermath of the crisis in 2009 a Congressional inquiry in Washington heard testimony, which came to light in an email between S&P employees, ‘We’d rate a cow’, if paid for.”
Fairfax’s Adele Ferguson says S&P, Moody’s and Fitch will be preparing themselves for legal action in the Netherlands, Britain and New Zealand after yesterday’s decision.
"While the case yesterday was also aimed at an investment bank and a finance company, it was the first time a credit rating agency has been pinged in the courts anywhere in the world for the role they played in rating the complex derivatives, which later became worthless. Given more than $1 trillion was lost in the multitude of AAA toxic derivatives including collateralised debt obligations and CPDOs, there has been little fallout – yet.”
The Australian's John Durie explains there have been decisions landed against the ratings agencies, but not of this significance. In effect, it appears to be the same perspective as Ferguson that they haven’t been "pinged” down.
"Ratings agencies have been on the run since the global financial crisis hit, badly damaging their credibility. There have been other judgments against them, notably last year's decision in the Italian Parmalat case, where S&P was held to be negligent. IMF's case on behalf of a bunch of Australian local councils was significant because they were professional investors who were misled, not mug retail punters.”
Indeed, The Australian’s Glenda Korporaal explains how the ratings agencies have won a series of decisions that have allowed them to hide behind their ridiculous ratings in the lead up to the global financial crisis.
"Until yesterday, ratings agencies could sit comfortably behind a slew of decisions, mainly in US courts, that investors could not rely on the credit ratings issued by the agencies, as they were only opinions and not financial advice. There was no contract between the investor and the ratings agency, the courts have held to date, and thus no grounds for action against them by investors who relied on their big tick of approval for products no ordinary individual had any hope of understanding. Furthermore, most US courts have held the opinions issued by ratings agencies to be protected speech under the first amendment to the US constitution.”
The use of America’s brilliantly written first amendment (thank you Thomas Jefferson) is revealing. The freedom of speech amendment is invoked in two distinct situations.
Firstly, oppressed minorities clutch it when individuals, groups or organisations try to stifle their message. Secondly, it grasped by individuals, groups or organisations when they’ve been busted saying all kinds of unjustifiable bulls**t.
Guess which category the ratings agencies fall under!
Meanwhile, there’s a decision from the Reserve Bank today, but few have thought to touch on it. The Australian’Henry Thornton (a pen name for an "eminent independent economist") says the Reserve Bank "needs to do its bit to help stimulate the recovery, which is should do today with another cut to official interest rates”.
Firstly, a quick glance at, well, the world, shows Australia is in a formidable economic position. The word recovery has become effectively meaningless Down Under. How will we describe a rebound from a recession? A resurrection?
However, this is nit picking. Thornton’s argument stacks up pretty well. Although for a counter-argument, make sure to read Business Spectator’s Adam Carr this morning.
Secondly, and less importantly, Thornton is listed as the "nom de plume” of this eminent economist. For those playing at home, nom de plume is another way of saying pen name. In other words, nom de plume is a synonym for a pseudonym.
The Distillery: Where you can get drunk on unimportant nerdy details.
Finally, Fairfax’s Jennifer Hewett rips into Telstra for their improved customer service "standards” which appear to have improved in tone but not deliver.
"Call me old-fashioned, I just want it fixed. It’s true that Telstra representatives now sound unfailingly cheery as they tell me they hope I have a good day. That’s even when I tell them rather less cheerily that Telstra is ensuring a good day is not on my agenda.”


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