A bank on the edge

Some interesting notes from Bank of Queensland, recovering from the first loss of an Aussie bankin two decades.  Good times ending anyone?

Bank of Queensland (BoQ) says it will be at least another year before it sees any benefits from a lower Australian dollar.

    While BoQ returned to profit in the year to August, after becoming the first Australian bank in two decades to incur a loss, it is taking a cautious approach to the year ahead.

    The bank is heavily exposed to the tourism industry sensitive Queensland economy, which in turn is influenced by movements in the exchange rate (here).

And interestingly there's a foretaste of the schemes Aussie banks will resort to when times get really tough (no different to Spanish banks in fact who put some tax credits into assets on their balance sheet):

    Meanwhile, the bank said it will team with other smaller lenders to lobby the federal government for changes in the banking sector, which is dominated by the big four players. 

Australian economy having a tough time

As said by Hugh Young of Aberdeen Asset Management in a recent interview.  Link here

"Horrendous"

Quite a strong adjective!  Used to describe Australia's latest PMI figures which some commentators are figuring are worse than crisis hit Spain.

The headline number fell to 42.0 from 49.6 a month ago.
Any number below 50 signals contraction.
“Manufacturers are telling us that, while the fall in the Australian dollar and the May interest rate cut have been extremely welcom, they have not yet been enough to turn around a very challenging business environment, locally and internationally,” said the Austrailia Industry Group.
The production sub-index tanked to 37.7, down 12.5 point from July.(here)

Drought for Aussie consumers

or how strapped consumers followed the international trend and moved down market to save cash:

The local offshoot of Anglo-Dutch consumer products giant Unilever, which sells everything from shampoo and ice-cream to tea and laundry powder, has been hit by a profit collapse of almost 50 per cent to $43.12 million as revenues flat-lined in 2012.

The souring profit and unresponsive sales performance comes as suppliers in Australia, both big and small, are facing increasing pressure from the supermarket giants to take margin haircuts and invest heavily in their own supply systems to improve efficiencies in the supply chain.

Unilever's heavy reliance on its empire of brands is also challenged by cautious consumer behaviour and the growth in popularity of unbranded private-label groceries at the supermarket checkout (here).

The $17 million kitchen... not Chinese...

Such could be a headline to do with the exit of Julia Gillard, who of late had been playing her gender cards on her sleeve, while readers from the UK and other less honest jurisdictions might expect a headline about exposed extravagance by the former prime minister.  Such would be not on the mark, but not far off point.

The Gillard exit has caused an uproar, the best manifestation of which could be the rant in the Senate by upper house member Michaelia Cash, very much in the mould of Australian rough and tumble politics.

To be sure it is a dramatic story, with Rudd facing a looming challenge to restore order and fight a rapid election campaign.  But interestingly there is quite a silence in the media on a far greater issue.  In a sense it doesn't matter who is in government, Australia faces a tsunami from China and in two ways.  First from the resources pull back.  Second from the shockwaves if the Chinese economy collapses.

On the first point there was a good overview piece in the FT which looked at Rudd's challenge and the scale of the slowdown for Australia's golden goose (resource projects worth $150 billion cancelled etc)  But more on that kitchen - a nice focal point:

Sitting in a warehouse outside Brisbane airport in Queensland is a kitchen designed to feed up to 2,000 mine workers a day. But it was never delivered to BHP Billiton, the world’s biggest mining company, because the project it was destined for was put on hold. The kitchen is now on the market for A$17m, local media say.

On the second point some pretty direct words of warning:

The risks are growing that China, which underwrites the Australian economy, will succumb to a financial crisis. This has not sunk in for Australian policymakers, perhaps because the implications are just too large, but it is the view that is forming among a large number of investors and economists who watch the data and investigate ground-level conditions closely.
There are huge uncertainties but, at face value, it looks like China is in the midst of one of history's great credit expansions – bigger than Japan's at the height of its bubble – and all that money is no longer generating growth in gross domestic product. The accelerator is pressed to the floor, the tank is getting low but the wheels are not getting traction like they used to. (here)

The above article refers to expert Victor Shih of Northwestern University.  A video of him explaining just how many trillions of bad debt are locked up in Chinese banks is here.

Similarly from William Pesek:

Australia has been called many things: Oz, the land Down Under, the lucky country. But the equivalent of a collateralised-debt obligation?
Canberra can't be happy to hear its AAA-rated economy likened to one of the reviled investment vehicles that blew up amid the 2008 global crisis. Yet the comparison is being made by some economists, who see the asset underlying Australia - demand from China - beginning to evaporate.
No country is more vulnerable to the much-dreaded slowdown in China than resource-rich Australia. The mining boom that fuelled nearly all of its recent growth is nearing a cliff of economic risk.
“Australia is a leveraged time bomb waiting to blow,” says Albert Edwards, Societe Generale's London-based global strategist. “It is not just a CDO, but a CDO squared. All we have in Australia is, at its simplest, a credit bubble built upon a commodity boom dependent for its sustenance on an even greater credit bubble in China.”
AdvertisementThere's a bit of hyperbole in this view. But highly-advanced Australia is about to pay the price for growing so addicted to a developing nation. Exporting natural resources led to the neglect and atrophying of other critical sectors.

Oh dear.  Where to from here?

  

Now back to the real economy...oh...

Things are not looking bright for corporate bellweather Telstra (the monopoly domestic telecommunications provider):

Telstra is poised to make deep cuts to its 30,000 strong Australian workforce, amid a slump in consumer confidence and falling mining investment.
The telecommunications giant unveiled a sweeping overhaul of the divisions that contain half its staff on Wednesday, in a move that could lead to substantial job losses. 

The announcement came as federal Treasury and the new Parliamentary Budget Office blamed both sides of politics for Australia's slide into a structural budget deficit - a deficit Treasury warns is now likely to remain for another six years. 

The news was a blow to government hopes that jobs growth would pick up outside the mining sector. Record low interest rates have so far failed to reignite the economy and the latest data will add to pressure for further rate cuts.(here)

Disappointment front-loaded

The Australian government is apparently moving into a September election with a budget which is unglamorous and electoral prospects fading into oblivion.  This excellent article by Ross Gittins points to a poor assessment of the Swan-Gillard era:

This is the weirdest budget you or I are ever likely to see. That doesn't make it bad - just very strange.
With just four months until the election, it's the most unlikely pre-election budget you could imagine, with loads of nasties and next to no sweeteners. It is  more like a post-election budget, particularly the kind you get after a change of government.
Usually when governments know they are going to lose, they  go for broke, offering electoral bribes they know they will never have to find a way to pay for, aiming to minimise their loss of seats.
Not this time. This budget is more likely to cost Labor votes than win it any.
No, the purpose of this budget is not vote-buying – it is reputation-rescuing, a last-ditch attempt to influence what history will say about the Rudd-Gillard government  as an economic manager (here).

While it has been a tough time globally, the article gives a sense of the extent of the budget failure:

This time last year, Swan boasted of budgeting for four surpluses in a row, as though they were in the bag. His surplus of $1.5 billion for the financial year just ending is now expected to be a deficit of $19.4 billion (but even that isn't yet certain). This year his boast of being able to get the budget back to a surplus of $6.6 billion in 2016-17 (again on the basis of Treasury's long-range projections) will draw understandable cynicism.

To this it should be added that the worst of the coming crises (property crash, domestic slowdown, slowing of foreign capital inflows and end of the China and mining booms) have not hit yet - when they do, how bad will it be?

Much, much worse.

CBA makes hay while the sun shines

A good set of results out for the Commonwealth Bank of Australia, now thanks to favourable encouragement from the regulator and the lopsided economy, one of the largest banks in the world:

In an unaudited trading update Wednesday, Commonwealth Bank reported net profit of 1.90 billion Australian dollars (US$1.88 billion) in the three months to Mar. 31, up from A$1.70 billion a year earlier. The lender is Australia's largest by market value. 

Cash profit, which smoothes out one-off items, was also A$1.90 billion, compared with A$1.75 billion a year earlier and A$1.85 billion in the immediately preceding quarter....

...Their shares have been among the best-performing on the Australian stock exchange as investors have flocked to their high-yielding stocks. Commonwealth Bank and Westpac topped the A$100 billion value mark this month, at one point making each worth more than the Australian listing of the world's largest mining company, BHP Billiton (BHP).(here)

But note some words of gloom looking forward for the sector:

But behind the headline results, Australia's banks are struggling to keep growing profit amid slowing economic growth. Together, the revenue of the big four banks was largely flat from a year ago, while much of the profit improvement came from cost cutting and a reduction in combined bad debt, which fell 17% from the previous half.

Credit Suisse analyst James Ellis said the lender's result was "supported by a cyclically-low bad debt charge" and pointed to worse times ahead for Australia's banks.

"For the sector the result suggests that the optimisation of bank earnings is reaching its limit, with bad debt charges as feasibly low as they can get, margin expansion and the pace of productivity improvements fading," he said in a note to clients.

The article also mentions declining business confidence, capital levels and the end of the mining boom as factors at play.

Meanwhile a new Occupy-style movement is reported to be stirring in the UK (http://breakupthebanks.org.uk/).  When things start to go wrong will there be significant protests in Oz against the banks? 

Learning to live with a deficit...

Optimistic Australians are taking some getting used to the idea that the good times are over.  At least those in government.  While it has been pointed out that being in a small deficit is no huge deal for a country like Australia, the huge disappointment due to misaligned expectations is indicative of a ruling class which is out of touch with the economic mood - needing to tighten instead of dreaming up grand spending plans:

Collapsing revenue from lower company profits has blown a $12 billion hole in the federal budget this financial year, Prime Minister Julia Gillard will reveal on Monday...What she will categorise as a ''significant fiscal gap'' has forced a Hobson's choice on the government as it crafts the budget to be delivered on May 14: either trim or delay expensive recurrent programs, including the $14 billion disability insurance scheme and the $6 billion school education reforms or, hand down an even larger deficit in place of what only months ago was confidently forecast to be a small surplus (here)

And it is only down from here:

Australia's economy is the envy of the developed world but there is a question lurking at the back of economists' heads: when will the good times end?One prominent economist warns we could be in recession within two years once investment in the resources sector - the great driver of the economy for much of the past decade - drops off.....Meanwhile Dr Robert Gay, a former senior economist with the US Federal Reserve now working in the private sector with Fenwick Advisors, says Australia faces the prospect of a "perfect storm" of economic dangers in the not-too-distant future.....He warns a fall in commodity prices could be the catalyst for a particularly unpleasant economic downturn. (here)

A Gough moment?

"Well may they say god save the surplus, but nothing can save the Prime Minister" was not said by former prime minister Gough Whitlam, but is the message from recent piece in the diplomat:

...Australia may be set for a record 22^nd straight year of economic expansion, but it will not save the federal budget or Prime Minister Julia Gillard’s job. That was the message from the latest economic data along with an election in West [sic] Australia state, where voters handed Gillard’s Labor Party another drubbing....

...while real (after-inflation) GDP met expectations, nominal growth only expanded by 0.5 percent in the quarter and 2 percent from a year earlier – well below the government’s previous forecasts....“It is unusual for nominal GDP to grow this slowly, and this continues to drag on the government’s revenue collections,” Swan admitted....(here)

Very low numbers...

A bit more on the low Australian property numbers, an SMH article making the point they coincided with the ending of a government subsidy scheme.  Like the Warren Bufffet favourite of a naked swimmer exposed by the receding tide (in this case receding government subsidies) what is key is that the ending of the first home buyer's grant is not part of the whole story.  

The accompanying recording of Dr Andrew Wilson of Australian Property Monitors is interesting, you get a sense of fear and uncertainty.  Likewise from Sydney estate agent Shannan Whitney:

...Yesterday the BresicWhitney principal Shannan Whitney was surprised at the extent of the first-home buyer collapse. "Those numbers are quite dramatic," he said (here).

AUD - breaking China's fall?

....The Aussie dipped below the 1.0400 level once again in Asian session trade today, after a report by the S&P suggested that China’s investment boom will have to cool considerably in the foreseeable future. According to S&P economists, who’ve come up with a model to determine the vulnerability of economies to an investment led collapse, China ranks number one on the list....(here).

Traders seized on the line stating the benign inflation outlook "would afford scope to ease policy further, should that be necessary to support demand.".....That was enough to send the Aussie dollar to an intraday low of US$1.0391 following the RBA decision from US$1.0448 before the bank announced its move (here)

...Retail trade fell 0.2 per cent in December, Australian Bureau of Statistics said, which was below market expectations of a 0.3 per cent rise. (here)