Sleight of hand from the banks

Banks have clawed back billions of dollars by not being fully transparent with fixed-term deposit customers.... 

The Australian Securities and Investments Commission (ASIC) warns depositors that when an initial term ends, the interest paid can automatically roll over from a high advertised rate to a much lower one.... (here)

The Cyprus connection...

Australia is not Cyprus.  Professor Ross Garnaut said as much during an interview with the ABC's Tony Jones this week (more on that later).  Of course Australia is not a small country tied into an unpalatable and unfunctioning monetary union like a Mediterranean peripheral country.  So why the headline.

Well Australia is tied strongly to China and... is very dependent on offshore financing.  Since the GFC started in 2007 Ozzie banks were exposed for the relatively small deposit bases - something they have been remedying in recent years (though not without using this as an excuse to gouge depositors).  This in itself is not particularly remarkable - the Aussie dollar and bond markets have swelled with surging inflows as worldwide investors have galloped in for healthy returns and interest rates in Australia's booming economy.

But therein lies the risk - should a sudden reversal of sentiment cause a 180 degree turn and a rush of money out of the country, how exposed will #Ozeconomy be? It's hard to say but one tweet by respected economist Stephen Koukoulas raised an eyebrow.  Though justifying the current strong position there does seem to be a hint of possible future vulnerability for Australia:

All is fine for now but worth remembering that confidence is precious...

UPDATE - Bloomberg has an article indicating that foreign interest in Australian bonds is falling:

...Banks held A$76.2 billion ($79.5 billion) of securities issued by regional borrowing authorities, or 37 percent of the outstanding debt, at the end of 2012, according to data from the statistics bureau. That’s up from A$71 billion, or 35 percent, at the end of the third quarter. The share of foreigners’ holdings fell to 32 percent, the lowest level since June 30, 2009....(here)

All calm for now?

BANK shares, making up a record percentage of the stockmarket after their run to record and multi-year highs, show few signs of slowing as the global hunt for yield powers on, despite concerns about their valuation and investment risks (here).

...Australia’s bond market is benefiting from strong international demand for assets in the nation’s currency, Debelle said today. Sales of sovereign notes by Japanese investors have been “more than compensated for” by other asset managers boosting purchases, and the market has become more attractive to foreign borrowers, he said....

...“Kangaroo issuance has been supported by the broad-based reduction in spreads, the attractive basis, and foreign investors looking beyond AAA instruments for Australian dollar exposure,” he said. “These foreign investors have been notably active and Asian investor participation in particular continues to grow.” (here)

Cash in the attic...

...will be better than cash in the bank after 3 years...

....HOUSEHOLDS face losing up to $109 million from their family savings as the Federal government moves to seize cash from inactive bank accounts....After legislation was rushed through parliament, the government will from May 31 be able to transfer all money from accounts that have not been used for three years into their own revenues....

"It is very hard to see why this needed to be rushed through but there have been suggestions it was done more for the government's own financial circumstances rather than customers needs," he said.....Mr Munchenberg warned that unaware customers face having accounts frozen and could face months of delays trying to reclaim their won money from ASIC.....This cash grab comes as economists warn the government is on track to hand down a $15 billion budget deficit in May as company tax receipts collapse....(here)

Cost of funding - cheap and risky?

More on Oz banks' low cost of funding - it's due to nice instruments called covered bonds, invented in the former European state of Prussia in the 18th Centure and rolled out globally in the 2007-8 financial crisis:

....Now the evidence is in. Covered bonds have brought down bank costs even further. In a confidential note to its institutional clients, Westpac describes the fall in wholesale funding costs over the past year as ''extraordinary''.....No longer can the banks rely on that hoary old chestnut of ''high funding costs'' to pass off their failure to match the successive cuts in the official cash rate....Margins are fatter than ever, veritably bulging, and there is scant proof that borrowers are getting their grimy fingers on a single cent of it. It's a good thing for shareholders though, some cautious at the listless growth in credit....(here).

But like all good things in banking, risks are appearing...

....BlackRock Inc. said using loans to small- and medium-sized companies, or SMEs, to back the securities rather than safer real estate or public-sector debt may devalue the asset class. Pacific Investment Management Co. said the first European deal, being marketed now by Commerzbank AG, may call into question SME issues as true covered bonds if it fails to qualify for indexes benchmarking performance....(here)

More evidence of bank gouging...

...The country's big four lenders now generate about 88 basis points of net profit on each new mortgage they sell--the highest rate since UBS began keeping records in 2004, analyst Jonathan Mott said Monday. As recently as a year ago, the nation's lenders were losing money on new mortgages....

...."Writing a new wholesale funded home loan has never been more profitable," he said in a note to clients. "If the conditions in debt and deposit markets continue to improve the banks will be in a position to pass through out-of-cycle rate cuts. If the banks do not follow suit, then the risk of 'political interference' in the sector is large."... (here)

Profitable certainly, but not without risks.  If Britain's banking sector's recent history is anything to go buy, gouging and profiteering will not protect from the coming downturn...

Flipside of depositholder gouging

The Reserve Bank of Australia has continued its campaign to shame Australia's large banks to pass on interest rate cuts by pointing out that the banks' argument of rising funding costs is baloney.  On the flipside however, it is interesting to note that wholesale funding costs are not getting cheaper and that this only highlights the dependence Australian banks have on overseas funding - not a great position to be in entering a currency crisis.

...The big four banks, ANZ Bank (ASX: ANZ), Commonwealth Bank (ASX: CBA), Westpac Banking Corporation (ASX: WBC) and National Australia Bank (ASX: NAB) have repeatedly cited wholesale funding costs as one of the prime reasons for not being able to full pass on the RBA’s cuts to the official cash rate....Additionally, in an election year, the banks may come under sustained pressure to pass on in full the RBA’s cuts to mortgage borrowers. RateCity estimates the banks have passed on 1.33% of the RBA’s 1.75% cuts to the cash rate since November 2011 (here).

....There has been speculation in recent months that a recent slide in wholesale funding costs would give Australian banks room to cut mortgage lending rates in 2013.....But, in its quarterly Statement on Monetary Policy, released on Friday, the RBA said bank's overall funding costs were relatively unchanged, compared to late 2012....The RBA said although the cost of unsecured and covered bonds had fallen in recent months, making it cheaper for banks to source funding though those avenues, banks were still paying higher rates for previously issued bonds (here).