Bankers blowing hot air

Nothing like some reassurance from bank bosses.  Seems to be the fashion at the moment. Not that the heads of Australia's Big 4 banks would be concerned about business conditions is it? 

Can the bankers really be trusted to proclaim that there is no problem in the markets which they profit from?

From ANZ (in respect of the New Zealand market but you can bet the thinking is the same in Australia):

ANZ chairman John Morschel has labelled New Zealand's new rules to cool its property market a "sledgehammer to crack a walnut", but conceded the Reserve Bank of Australia was potentially staring down a similar problem, in a wide-ranging speech today (here).

Then from the head of the big cheese, Commonwealth Bank helpfully suggesting the good times might not last:

Commonwealth Bank of Australia Chief Executive Officer Ian Narev, head of the country’s largest mortgage lender, said the nation’s banking industry needs to be watchful of house price increases to avoid a bubble.
While current home price gains are justified by supply and demand fundamentals, the impact of an extended period of low interest rates should be monitored, Narev told reporters after a speech in Melbourne today.
“We’ve got to realize that if we are in a sustained period of low interest rates, it is something we have to keep our eyes on,” he said. (here)

And then giving the game away perhaps is NAB head, Cameron Clyne begging for no interest rate rises (which could be a fair call but for other reasons related to hot money flows):

National Australia Bank chief executive Cameron Clyne said the central banks must adopt a neutral stance until it gets some clear evidence the recent lift in business and consumer confidence, following the election of the new Coalition government, is translating into real economic activity. 

So, Australia's supposedly strong banks might just be a bit worried about a coming housing slowdown.  Of course they wouldn't want to come out and just say it would they? 

Precious Aussie banks

Only a week after a series of headlines celebrating the renaissance of Australian banking with the major banks' high share valuations it is interesting to see signs that all is not well.

Firstly a downgrade from Moody's on certain subordinated debt:

GLOBAL credit ratings agency Moody's has followed through with a threat to downgrade billions of dollars in subordinated debt issued by Australian banks due to "bail in" risks, as global regulators take a harder line on bank bail-outs. 

After kicking off a review in June, Moody's yesterday downgraded the subordinated debt ratings and some junior subordinated debt ratings for Basel II-compliant securities of eight Australian banks.... 

The ratings of the big four banks -- the Commonwealth, Westpac, National Australia Bank and ANZ -- were lowered by two notches, while the regional banks -- Bank of Queensland, Bendigo and Adelaide Bank and Suncorp -- were cut by one notch.(here)

And meanwhile markets are pricing Aussie banks as more risky as well:

...over the past month, Australian bank CDS prices have jumped again and fast. As of Friday prices were back above 100 at 108. This has transpired within the context of the sudden jump in yields in everything from US Treasuries to Brazilian junk bonds. But it should be noted that Australian bank CDS prices have risen much further than those of comparable major banks in other developed nations, almost 50% in a month. This is a  legacy of our particular dependence upon offshore wholesale funding such a leap is in some measure also a reflection of the sudden realisation in global markets that Australia is not the miracle economy it thought it was, CDS prices being the reverse of what’s being expressed in the falling Australian dollar.(here)

Arguably two signs of the same coin with deteriorating conditions for Aussie banking? 

Times changing for big Aussie banks...

Some details about CBA and ANZ shifting their strategies to meet new challenges - CBA stripping back its balance sheet to meet stricter capital requirements (although question if a recent private wealth scandal had anything to do with it) and ANZ looking to expand beyond Asia.

But changing is hard to do and to what extent will problems in the core outweigh any escape attempts at the periphery? Mutterings of increasing mortgage insurance costs don't bode well.

Interestingly though there seems to be a divergence between those with a domestic focus at the moment (CBA and Westpac) and those focussing overseas (ANZ and NAB).  It was noted previously that CBA and Westpac have larger domestic lending books and as this article indicates they are busier than ANZ and NAB due to integration of their Australian subsidiary groups (BankWest, Bank of Melbourne, St George, Bank of SA).

In the event of Ozzie contagion could it be that ANZ and NAB survive better due to less local exposure? Could be worth a study of long/short strategies!

Ozzie banks vulnerable

Business press seized on comments from Moody's as to overexposure of Australia's banks to a housing crash:

According to the Financial Review, Australia’s biggest banks have been fighting over the mortgage market for too long and if property prices fall too far, we could be in for a US-style banking collapse.
With the exception of ANZ (ASX: ANZ), our top four banks are not exciting from an investing perspective and are too heavily leveraged on growth through their mortgage books. If Australia were to experience an unemployment boom, loans would struggle to get paid, leading to more defaults and eventually lower housing prices.
This would paint an ugly picture for our biggest mortgage writers like Commonwealth Bank (ASX: CBA) and Westpac (ASX: CBA) (here)

And worringly this is structutal - a function of the market and simply how the banks are:

Banks in Australia have the highest concentration of residential mortgages than any other type of institution in the world, making them vulnerable to a possible house price correction according to the analysis of a leading credit market economist.
Moody's Analytics managing director Tony Hughes says that house prices in Australia were overvalued which could pose a major concentration risk for banks.  The high exposure to residential mortgage represents a valid risk for banks and the Australian economy. (here)

Nothing like being so exposed in one asset that you become the market (when it plummets):

Australia’s banks have the highest exposure to residential mortgages of any financial institutions in the world, leaving them vulnerable to a “looming” house price correction, a leading credit market economist has warned.(here)

ANZ in a bind

Readers may have spotted commentary about ANZ had released results recently which showed it was under greater pressure than some of its rivals (including CBA which managed to scoop up Bankwest for a song).  And not surprisingly come the job cuts...

...Australia & New Zealand Banking Group Ltd. (ANZ), Australia’s third-largest bank by market value, plans to cut about 50 jobs in institutional and international banking as lenders trim costs amid weak credit demand....Australian banks have relied on staff and pay cuts to protect profit as they confront the weakest demand for home lending since 1977. In 2012, ANZ announced plans to shed 1,000 jobs by September of that year as part of Chief Executive OfficerMichael Smith’s efforts to offset slumping loan growth (here)

But in fact all banks are trimming...

...Commonwealth Bank of Australia, the nation’s biggest lender by market value, will freeze base salaries for people making A$150,000 or more in its institutional banking and markets division, an internal memo showed in July....Westpac Banking Corp. (WBC), eliminated more than 500 roles early last year. National Australia Bank Ltd., is scheduled to brief investors on its technology program and its cost management plans on March.13.

Tall tales

There is a level of confusion as to the state of the Australian economy and likely risks and even those at the top can't agree.

...Three of Australia's big four banks have given market updates this month. You'd be forgiven for wondering if they were discussing the same market....The discrepancy in viewpoints is partly explained by the different business models of the three banks. Commonwealth Bank is the country's biggest retail lender, which means it benefits most from rising consumer confidence....
.
..NAB and ANZ are both more exposed to business lending, where sentiment is weaker. A survey from East & Partners, for instance, last week found that demand for all types of business banking services fell between November and January by an average of 1.9%....Despite their differing outlooks, investors overall still seem to like Australia's banks, deemed to be among the most credit worthy in the world. (here).

Yet meanwhile the central narrative underpinning the actual (or purported) growth was in fact being unwound by the central bank, the RBA:

...The Reserve Bank of Australia (RBA) says the mining investment boom will peak sooner and at a lower level than previously expected.

The central bank also says that while commodity prices are likely to drift lower over the next few years, Australia will continue to benefit from China's economic expansion...."And as mining investment tails away, we'll increasingly move into the operational phase of the mining boom," he said.(here)

Just to spell it out - the mining boom has been and gone....and there is not so much to prop up the Oz economy...

Oz property is bust...

Some distance away from the squabble about rate cuts being passed on by the banks, a fairly significant assessment from the New York Times of the much broader picture, namely that the property market overall is slowing, and in quite a big way - not a panic yet, but few signs of optimism.

....Data released Monday by the Australian Bureau of Statistics showed that the number of home loans taken out in December had dropped 1.5 percent, the third straight month in which that number fell, and a five-month low....Annual growth in housing credit slowed to an all-time low of 4.5 percent at the end of 2012, a long way from the double-digit pace common in the previous two decades. Indeed, growth peaked at no less than 22 percent in 2004. ....“Most economic indicators remain far weaker than they normally are this far into an interest rate easing cycle, suggesting monetary conditions are still too tight,” Mr. Oliver said.....(here).

The failure to pass on rate cuts is an issue of the banks, but note that it reflects on the banks' own capital weakness.

....Lower variable rates would have a much bigger effect on housing demand, and there are signs that intense competition is driving banks to offer better deals....But the banks are reluctant to ease any further on their own, because much of their funding comes from deposits, rather than markets, and rates on those accounts remain relatively high.....competition for that money is fierce, making it costly. Rates on bonus saver accounts, with higher interest rates, have increased by 2.5 percentage points relative to the cash rate since 2009...