Banks

coolcup said:

The yields are starting to look great on the banks, particularly NAB given proximity to the ex date. The question is when to get in. I suspect when they turn around, they will rally pretty hard so maybe it is not a bad time to catch a falling knife?

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So do you think banks will gain and go upwards from now on?

I suspect the fall in the Aud$ will be pushing up their off-shore borrowing cost. This is probably a contributing factor to the sell down in the Aussie Banks. At some stage the yield/price/Aud$ ratios will make the banks attractive to other off-shore investors as well as local fund managers. Only problem is determining when???

nulla nulla said:

I suspect the fall in the Aud$ will be pushing up their off-shore borrowing cost.

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I hadn't considered this.

Good time to buy into ANZ? dropped to around $26 last week now slowly rising again.

Banks looks to be respecting a long term support zone as shown in the chart below of the XXJ index. I'd be looking for a rally above recent resistance at 6,200 before getting in though.

So the new proposed levy to create a bail out fund...does anyone think this will just encourage banks to take riskier moves?

No. The levy is nothing to do with the banks' risk profile.
All to do with Labor trying to fill their budget black hole.
One commentator today suggested that the levy at the currently proposed rate would take 100 years of accumulation (and that's assuming it won't be siphoned off into general revenue) to bail out a crash of a second tier bank.

Julia said:

No. The levy is nothing to do with the banks' risk profile.
All to do with Labor trying to fill their budget black hole.
One commentator today suggested that the levy at the currently proposed rate would take 100 years of accumulation (and that's assuming it won't be siphoned off into general revenue) to bail out a crash of a second tier bank.

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i agree. horrible policy. hardly the stuff to encourage savings.

wondering if i should start moving all my AUD offshore and sticking it in singaporean bank accounts as a contingency measure in case this thing actually comes to pass?

Julia said:

No. The levy is nothing to do with the banks' risk profile.

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I could be wrong, but there might actually be some truth to this... Both S&P and Fitch have come out saying that the Australian banks get an extra notch or two because of the government guarantee (i.e. AAA instead of AA or AA+)

Now the obvious conclusion to draw from this would be that the lower the credit rating, the higher the rate on any loans the company takes out... But being a bank, I thought they borrow at OCR+0.25% (and this is why I say I could be wrong...)
If anyone knows the system well, could you please confirm what a credit rating would mean for a bank (other than looking good to potential customers)?

And apologies if I am wrong.

Klogg said:

I could be wrong, but there might actually be some truth to this... Both S&P and Fitch have come out saying that the Australian banks get an extra notch or two because of the government guarantee (i.e. AAA instead of AA or AA+)

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This is my take on the situation. I don't know if I'd go so far as to say an extra notch, but it clearly has ramifications on their risk profile if a significant portion of their deposits are guaranteed by another party with a AAA rating.

There are definitely cost implications for the government in providing this guarantee, and they should rightly be passed on to the banking sector. IMO the guarantee is not required though. I'd rather see depositors diversifying their cash deposits throughout the banks, and it should be seen as a competitive advantage if a bank can encourage a public perception that it has a safer business model than its competitors. Why shareholders are given preferential treatment/attention over depositors has always dumbfounded me, and the government guarantee only distorts this further.

As to the timing of the levy coinciding with a decline in the books ...

Julia said:

No. The levy is nothing to do with the banks' risk profile.
All to do with Labor trying to fill their budget black hole.
One commentator today suggested that the levy at the currently proposed rate would take 100 years of accumulation (and that's assuming it won't be siphoned off into general revenue) to bail out a crash of a second tier bank.

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Funded deposit insurance schemes are the norm for much of the world. In most of the EU for example, there is an explicit guarantee of 100% of the first €100k of retail deposits. The purpose is to prevent an isolated failure of a single bank from becoming a systemic problem by causing a bank run. To be a member of the schemes, banks pay a fee measured as a percentage of deposits (or eligible deposits) into a separate fund that can be used to repay the insured portion of eligible deposits following a bank failure.

Some deposit insurance laws permit risk-based premiums being levied against banks, but in practice (almost) no country has implemented anything other than a uniform % fee. There is moral hazard here, however it can’t be any worse than the moral hazard generated by a government guaranteeing 100% of all deposits which not only creates massive moral hazard, but is also unsustainable.

Agree with Zedd's comments re competitive situation in banks.

The following is from an analysis by David Crowe in The Weekend Australian:

The economy will survive this deposit levy just as it survived the cost of the guarantees during the GFC. To put this change in perspective, remember that the guarantee on wholesale funding and big deposits cost banks and savers $4.1 billion.

This new levy will raise just $350 million a year instead.

Banks make the valid point that collecting that money for a dedicated emergency fund will not provide enough to save customers if a bank fails.
To them there is no need to hit savers when the prospect of a bank collapse is so unlikely.

While it sounds comforting to have a Financial Stability Fund for a future crisis, it would take 100 years for the levy to raise the cash needed to bail out the custoomers of a second tier bank.

In practice a bank failure would cause a huge drain on public finances and would be funded by a levy on surviving banks (an arrangement already in legislation.)

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Without going over old ground, but why is it the depositors that will end up paying for this?

Why isn't it the indebted mortgage holders? Without the depositors, the banks would find it difficult to loan money into an over indebted sector - residential housing.

Why discourage saving?

I for one would like to see a group formed that with enough numbers could have leverage against the banks through the threat of removing their deposits simultaneously.

Find it quite amusing that we need to guarantee deposits, thought the banks were safe as houses and ran strong balance sheets. Time banks served the people instead of their own interests.

Cheers

satanoperca said:

Without going over old ground, but why is it the depositors that will end up paying for this?

Why isn't it the indebted mortgage holders? Without the depositors, the banks would find it difficult to loan money into an over indebted sector - residential housing.

Why discourage saving?

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I agree with you that it shouldn't just be depositors paying for this, but in the current state of subdued credit growth, they're not going to discourage mortgage applications any more than they have to.

In addition to this, the banks are very close to being adequately capitalised for the BASEL 3 regulations (even though they've been delayed), so they don't need to promote deposits as much.

Should those two factors turn around, you could see the cost shift to the borrowers... unlikely though.

(As mentioned in an earlier post, I have a limited understanding of banking, so if I'm wrong, please do correct me)

satanoperca said:

Without going over old ground, but why is it the depositors that will end up paying for this?

Why isn't it the indebted mortgage holders? Without the depositors, the banks would find it difficult to loan money into an over indebted sector - residential housing.

Why discourage saving?

I for one would like to see a group formed that with enough numbers could have leverage against the banks through the threat of removing their deposits simultaneously.

Find it quite amusing that we need to guarantee deposits, thought the banks were safe as houses and ran strong balance sheets. Time banks served the people instead of their own interests.

Cheers

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Agree, but Klogg has provided a sensible response here.

The reality of the government's levy is exposed when you do the basic sums as provided in my earlier post, showing it would take 100 years to accumulate enough to bail out just one second tier bank. It's way more about helping the government's black hole than any realistic fear about our well capitalised and well regulated banks.

Hi Julia,

I totally agree with what you are saying, but with interest rates going again lower today, it is time depositors teamed together to show how vulnerable the banks actually are to a bank run.

We are at the stage where our deposits in the banks arn't even keeping up with inflation after taking tax into consideration.

Housing affordability is going to get worse as house price rise once again. This country is no longer competitive on the world stage, this I should know as I move more and more of my business offshore. My design team and PA are employed in Asia, my manufacturing and suppliers are all in Asia. This allows me to keep my overheads low in order to weather the storm that is brewing. I have moved most of my funds offshore now as a hedge against the falling $AU.

I feel for those who are retired, they are getting little to no return on their investments and will become more and more reliant on the govnuts.

Cheers

Interesting, satanoperca. Is it just the low dollar that's prompting your moving much of your business off shore?
Would a change of government influence what you do at all?

I was hearing today several small business owners saying that essentially business has just dried up.
No one wants to do business, given the overall climate of uncertainty.

The same uncertainty might well apply to any potential success of today's interest rate cut. Will it actually stimulate borrowing to invest, or will it continue to reflect lack of change following previous rate cuts with mortgage holders pocketing the difference, and potential spending by retirees and other savers further made unlikely?

There has been wide coverage on the ABC radio networks about today's rate cuts, including the political ramifications. Not once have I heard any reference being made to the disadvantage for savers.
Instead, just endless rhetoric from both sides about how great low interest rates are for borrowers.
Never mind that there are substantially more people with savings than with mortgages.

satanoperca said:

... This country is no longer competitive on the world stage, this I should know as I move more and more of my business offshore. My design team and PA are employed in Asia, my manufacturing and suppliers are all in Asia. This allows me to keep my overheads low in order to weather the storm that is brewing. I have moved most of my funds offshore now as a hedge against the falling $AU.

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By this I presume you mean that, due to the wonders of globalization and labor arbitrage, you can now employ Indian, Chinese or whatever labor at a fraction of the cost of employing someone locally. True enough, we can't compete with people who can be exploited by paying them subsistence wages, often in substandard working conditions we would never except, in their home country all done under the guise of being "competitive". What of the decimation of people's jobs and futures locally in the name of ever greater profits? Such is the essence of capitalism where profit motive overrides all other considerations.

Sorry for the diversion off topic but satanperca, you are just contributing to the very problem you are highlighting here. Sounds like you have essentially offshored your business already with just a satellite office in Aus. How many local jobs were trashed in the process I wonder? How many loyal, hard working local staff were told to train offshore workers to replace themselves prior to being sacked? What's the human cost of your business decision? Care to share that part of your business success story?

Hi Julia,

It would seem the system is geared towards the borrower. That is the game today.

My decision to move business offshore has been a long term process after being a manufacturer in this country many years ago, international free trade saw the demise of manufacturing here, I am just going with the flow.

It is in part a decision based on the political climate here, but both parties offer the same. In reality it is based on the fact that the cost base of doing business in Australia has become way to high to compete, the internet has changed everything. While our RBA and govnuts are convinced that high property prices generate wealth without the need for productive industries to prosper I will continue to grow my business by off shoring both my services and products. Our wages are to high, cost of living to high. Asia is but a milli second away in virtual terms and a sleep away in physical terms (9 hours and your are there on a plane)

I don't think the average Australia really understands the international competitive world we live in today. Why should I pay a graphic designer $75K here when I can employee three for that price in Vietnam, all trained by our own institutions, RMIT. How does a bookkeeper demand $35 an hour when I can have a suitably trained person in Malaysia for $15, or an IT person $100K when I can have a team for that in India - ah the cost of living and supporting property prices. Service based industries will all go overseas, manufacturing has left our shores, but as keeps being rammed down our throat, borrow and borrow big and invest in property. I laugh, as soon you will not have a job to pay the mortgage. I feel Ireland will become all to familiar.

Our politicians need to wake up to the fact (actually grow some balls), we compete internationally and high property prices are just a drag on our productive society. Digging up dirt is just akin to a band aid solution without a greater game plan in action.

Keeping punishing savers will result in the failure of the system.

I ask you this, while we have a central bank determining interest rates and not the market, how will it end well for the average Australian. Never understood the fact, that while times are tough interest rates are low ( risk is high) and when the economy is strong (risk low) we punish people with high interest rates. Would you loan your hard earned money to someone in this climate for <5% return.

I am also against the acceptance that inflation should sit somewhere between 2-3%. We need to strengthen this country not weaken it. Why is it that Rudd has come back into popularity when even he has made some many mistakes and wasted so much money, money this country doesn't have.

We need to make tough decisions, but I feel no one has the guts. I think we have lost the spirit that made this country great.

Cheers

Not unexpectedly, the RBA has reduced interest rates by 9.09% from 2.75% to 2.5%.
And if you think 9.09% is a typo, do the Math: 0.25 is 1/11th of 2.75, and 9.09% is 1/11th of 100%.

So, think about it in this context: Debt has just become 9.09% *) cheaper than it was yesterday.
No wonder that Labor seems to believe we can afford more and more of it...

Of course, the flip side of the equation: Saving becomes less attractive because every saver's "wages" have been cut by 9.09%. Making matters worse, we now have to pay an additional "insurance premium" to protect ourselves against loss of income.
"How so?" you ask?
If you're a self-funded retiree and rely on the interest as your "wages", the new deposit guarantee levy amounts to precisely that: An additional premium to make sure the Banks don't "lose" your capital. Surely as death and taxes, the banks will pass that impost on to you, their customer.

And how is all of this likely to affect the Sharemarket?
I'd rather expect the XJO to rise because, as most of the Top 200 companies pay a dividend, their yield, compared to bank interest, has now to compete against a benchmark that has dropped by 9.09%.

"Traders, rejoice!"

*) OK, so not everybody has been borrowing at 2.75%; so the 0.25% or whatever the banks will pass on, doesn't come off quite as low a figure as 2.75%. But even using 5% as the starting point, it's become 5% cheaper. And conversely, saving becomes less rewarding by a similar, more likely even bigger, margin.