• There is strong evidence that the difficulty of switching accounts between banks acts as a significant barrier for customers in relation to deposit accounts. (click to view letter to Bernie Fraser from Wayne Swan)

• The main banks are anti ANP, due to the costs it will likely impose on financial institutions, employers and retailers, which would be passed on to consumers. (Click to view Treasury briefing into banking sector competition 21 February 2011)

RaboDirect is promoting discussion around bank Account Number Portability (ANP) ahead of a report being prepared by former Reserve Bank of Australia governor Bernie Fraser. The report, which will look at the viability of introducing ANP in Australia, is due to be delivered to the treasurer, Wayne Swan before June 30.

ANP, which allows consumers to keep their account numbers when they switch banks, is already offered by many banks overseas, including Rabobank in the Netherlands. It’s introduction would remove significant hurdles discouraging Australian consumers from chasing a better deal by switching banks.

RaboDirect’s General Manager, Greg McAweeney, said “Research into bank account portability in Australia has been on the cards for some time and RaboDirect is eager to hear the findings from the report over the coming weeks. Whilst financial institutions in Australia are against account portability due to the upfront costings, it would promote competition and reduce complacency, thereby benefitting consumers nationally.

“RaboDirect encourages competition within the banking sector and at 6.5 per cent; RaboDirect has a leading interest rate on savings accounts in Australia. All Australians deserve to be getting the best deal from their bank and switch accounts easily, if needs be. Without this freedom, we are allowing the big banks to trap consumers into the wrong type of account.”

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• The Reserve Bank has given a clean bill of health for the Australian financial system, highlighting the strength of domestic banks compared with their overseas peers.
• The Reserve Bank has indicated that the natural disasters earlier this year is unlikely to significantly impair bank assets and profitability. However the central bank did highlight that growth amongst domestic banks is likely to be more limited when compared to pre-crisis levels due to regulation.
• The central bank also commented on the improvement in wholesale bank funding, however it did note that banks have been less reliant on wholesale markets largely due to the increase in household deposits.

What does it mean?

• The Reserve Bank has effectively given Australia’s financial system the tick of approval highlighting that the recent natural disasters are unlikely to significantly hurt bank asset quality or significantly impair overall performance. Importantly the Reserve Bank believes that the underlying resilience of the domestic economy has kept the banking system in good stead. In fact the latest financial stability review goes so far as to suggest that domestic banks are still outperforming overseas peers.
• Even throughout and subsequent to the global financial crisis, Australia’s financial system remained in good stead. And looking forward it is likely that the banking will continue to be well ahead of its international peers. However the central bank did comment that nonperforming assets remain higher than a few years ago, but still low on comparison with international counterparts.
• The near term weakness in the domestic economy has largely been as a result of the rapid fire rate hikes and the resulting lift in consumer conservatism. However the string of natural disasters has also sapped momentum from the economy and it is likely to have a marginal impact on the banking sector. Also the Reserve Bank did warn that banks are unlikely to be able to grow at pre-crisis levels, largely due to tighter regulation and attempts to grow at those levels could induce risks.
• The central bank did once again weigh into the topic surrounding bank funding costs, commenting on the improvement in access to wholesale funding. However given the fact that consumers have been saving rather than spending, banks have been less reliant on the wholesale market, and “as a result their liquidity positions have improved further”. The central bank also did highlight that looking forward Australian banks are well placed to meet the new capital standards to be introduced under Basel III.
• Interestingly the Reserve Bank has once again highlighted that the level of conservatism being shown by households has resulted in improving household balance sheets. Additional savings and low unemployment should be beneficial in the longer run, resulting in stronger future spending. At the same time the Reserve Bank believes that the level of household debt remains historically high, and it would be helpful for borrowers to show further restraint.

• In the near term it is looking less likely that the Reserve Bank will need to raise interest rates. Inflation remains well contained, while several sectors of the economy including housing, construction and retail are showing signs of weakness. Monetary policy is already mildly restrictive and as such the Reserve Bank can afford to wait a few more months to assess data flow before once again moving on rates.
• Overall CommSec believes that the longer term fundamentals for the domestic economy remain sound. Employment growth is likely to remain healthy, while activity levels will pick up in the second half of the year. More importantly the Asian region continues to grow at a steady clip and as such the demand for commodities should ensure that the “once in a century” terms of trade boost remains part of the economic landscape. The additional flow of income which is currently being saved by businesses and consumers will drive up future spending adding further momentum to the domestic economic growth story.

Key points from the Reserve Bank Financial Stability Review:

Global banking System: “Confidence in the banking systems of major countries has generally improved since the previous Financial Stability Review.”

“The major international banks have continued to report profits and strengthen their balance sheets. Some banking systems are still under considerable strain, however, notably in parts of Europe, where recovery is being undermined by market concerns about sovereign debt sustainability.”

Banking system: “The Australian banking system has continued to perform better than those in many other countries, consistent with the relative strength of the domestic economy over recent years. Non-performing asset levels remain higher than a few years ago, though they are low in comparison with those in the major economies. Their largest component – nonperforming business loans – was beginning to show slight signs of improvement towards the end of last year, and the flow of loan loss provisions has already fallen significantly.”

“Australian banks are well placed to meet the new capital standards, particularly given the significant bolstering of their capital positions in recent years.”

Funding costs: “Australian banks have maintained ready access to wholesale funding markets in the past six months, but they have also had less need to raise wholesale funds over this period as growth in deposits continues to outpace growth in credit. This shift towards deposit funding has enabled banks to further reduce their reliance on short-term wholesale debt. As a result, their liquidity positions have improved further. Banks’ capital positions have also been substantially bolstered in recent years”.

Household balance sheets: Households “continue to exhibit a more cautious approach to their borrowing… reducing the growth in their debt outstanding to a rate more in line with income growth. Household indebtedness remains historically high, however, and recent increases in interest rates have lifted the aggregate debt servicing requirement. While indicators of financial stress are relatively subdued, a continuation of this recent borrowing restraint would help build additional resilience into households’ balance sheets.””

What is the importance of the economic data?

• The Reserve Bank issues its Financial Stability Review half-yearly. The RBA says that “these Reviews assess the current condition of the financial system and potential risks to financial stability, and survey policy developments designed to improve financial stability.”

What are the implications for interest rates and investors?

• A strong financial system is crucial for sustained economic growth. And the Reserve Bank’s positive assessment of Australian banks should provide investors with further confidence in the economic recovery currently underway.
• The financial stability review suggests that the Reserve Bank is more comfortable with the position of the domestic banking sector and the state of household and business balance sheets. But we continue to expect that the next hike is unlikely to take place before mid year.
• Our equity analysts have Westpac, ANZ, and National Australia Bank on a HOLD rating. This reflects the expectations of earning stability and fair valuations at present.

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• Their overweight home loan portfolios
• Their regional outlook
• Their recent dividend performance

Sydney-based international equities manager, Insync FM, does not hold any banks in its 25-stock portfolio of the Insync Global Dividend Growth Fund. Why is that?

For Insync FM, banking stocks simply do not make the grade for investment at this stage. The key reasons are:

• Banks have too much leverage  – Insync FM can get the same return from a stock like Nestle with no leverage without buying a bank that is running at 10 – 20 times leverage
• Banking is a commodity business – it is hard to differentiate their products from each other. Thus, where is the pricing power? How will it add to their share price or dividends?
• Consumers are deleveraging and therefore banking profits won’t be benefiting from a quick uptick in consumer borrowing
• More Government regulation for banks means higher capital and liquidity requirements which will eat into profits. Have we seen the full effects yet of Basel III on bank profitability? We think not.
• Banks can face liquidity troubles well before insolvency issues become a concern for an economy, e.g. Ireland and Iceland. Therefore investors need an above average return to compensate for the added risk.

“Many banks are well run but there are better international companies for a global portfolio at this time. You could not look at any developed market banks, particularly Australian banks, and comfortably add them to a high-conviction global portfolio given their risk profiles and their recent cuts to dividends. Anyway, it would be difficult to rate any Australian banks as truly global given their overweight home loan portfolios and their regional outlook,” said Mr Monik Kotecha, CIO of Insync FM.

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• Ireland has gone from financial market darling to a challenging credit in the space of three years. With a similar concentrated banking system that has a high exposure to the property market, could Australia become another Ireland?
• The rapid rating decline of Ireland has various lessons for investors: not to rely on ratings; and that state support for banks is not necessarily a panacea.
• Sovereign guarantees to banks may defend them to an extent but ultimately it may only transfer the risk from the banking system to the sovereign.
• While Ireland’s problems could be partly mirrored in Australia, various factors should mitigate some of the causes that were central in Ireland.
• Ireland should provide a salutary lesson to Australian investors that relying upon the status quo is unwise.
• Australia did weather the financial crisis effectively due to a variety of factors, but if these factors reverse, Australia’s safe haven status could be dented.

Introduction

Ireland has rapidly deteriorated from financial market darling to a challenging credit needing a bail-out. The extent of the turnaround is such that the factors that caused this need to be considered in regards to other economies. In particular, could this happen in Australia? The Australian economy is considerably more robust and diversified than Ireland’s but the systemic exposure to banking has noticeable parallels, suggesting that complacency about Australia’s economic strength may need to be challenged.

Of the European states that have so far experienced severe challenges and much public consideration, Ireland stands out to Australians because of a greater similarity in banking systems, with both having a small set of major banks which are very focused on the domestic market. It is therefore informative to compare the situations of the two nations and more particularly the banking systems.

To do this, we first examine the events in Ireland and then compare them with Australia so as to determine if there are lessons for Australian investors.

The Irish situation

Ireland has been in the headlines in the last few months for all the wrong reasons. A bail-out by the European Union (EU) and International Monetary Fund (IMF) is now in progress and the creditworthiness of the state is continually deteriorating. Four years ago, it all seemed so different: prior to the GFC, Ireland was a shining star, attracting financial institutions around the world to the new financial hub of Dublin. Low taxation, a knowledge-based culture and a convenient location made Ireland a hive of activity.

What went wrong?

Ireland was badly affected by the financial crisis of 2007 and 2008. Many of the institutions operating there contracted in size and often the Irish operations were scaled back or closed. The Irish economy had transitioned from being primarily an agricultural exporter to being a ’knowledge centre’ but unfortunately this ’knowledge’ was often centred on more innovative products such as Structured Investment Vehicles (SIVs) which were the most vulnerable to the liquidity squeeze caused by the global financial crisis (GFC).

To meet the rapid growth up to 2006, Irish property was in strong demand from genuine and speculative buyers, causing house prices to more than double between 2000 and 2006 (as shown in chart 1). Commercial property was squeezed and developers borrowed heavily to meet the increased demand.

When growth stopped, the banks were left with large books of commercial and residential real estate and extensive loans to developers. Since 2006, house prices have fallen nearly 40%. Commercial property has been performing even worse with Investment Property Databank Ltd. estimating a 60% slump in the values of shops, offices and warehouses in the three years to September 2010.

The Irish banking system

Four main banks operate in the Republic of Ireland: Bank of Ireland, Allied Irish bank, Anglo Irish bank and the Ulster Bank. Ulster Bank is a subsidiary of Royal Bank of Scotland (RBS). On the night of 29-30 September 2008, two weeks after the collapse of Lehman Brothers, the Irish Government issued a guarantee of Allied Irish, Anglo Irish Bank, Bank of Ireland and three building societies. To address European Commission concerns, the guarantee was extended on 9 October 2008 to Ulster Bank and five other institutions which had non-Irish sponsors.
In January 2009, the Irish government nationalised Anglo Irish Bank. At the time of writing, it appears quite likely that Bank of Ireland and Allied Irish will also be nationalised.

Recent developments in Ireland

The population of the Republic of Ireland is about 4.5 million people. Unemployment has risen from a low of 4.4% in November 2006 to the current level of 13.6% (as shown in chart 2). With limited prospects of improvement, the size of the bank debt problem has, despite political resistance, forced the EU and IMF to intervene. Effectively an €€85 billion package has been established of which between €€35 and €€50 billion will be used to prop up the banks with the remainder to support the Irish state.

Ratings downgrades

Since the crisis started, the ratings of Ireland have deteriorated rapidly. For over seven years up to March 2009, Ireland was a solid triple-A rated state with ratings as good, or in some cases, better than Australia’s1. Now Moody’s and Fitch have lowered the sovereign into the triple-B rating grade and at A (Negative Watch), S&P is expected to follow shortly.

Bank ratings have been even more adversely impacted. The Irish banks are all rated in the triple-B range or below and subordinated bank debt has now been downgraded into the weaker end of sub-investment grade if not to default.

An Australian perspective

Effect on investments

For Australian investors, Ireland seems a long way away and direct exposure to Irish entities is likely to be limited for most.

The contagion effect to other challenged European sovereigns may possibly increase the significance of Ireland’s problems for investors, and portfolios need to be monitored to control the extent of impact.

Loss of faith in governments and banks

Perhaps the most significant contagion effect is a loss of faith in the creditworthiness of major banks – even when strongly supported by the government. Although the Irish government has indicated that senior bank paper is ‘money good’, some commentators are questioning whether it is possible to achieve this. Certainly, any hope that Tier 2 paper is very resilient has been dimmed, if not extinguished, by the action of Irish authorities on their banks’ subordinated debt as well as by ECB legislation that is intent on clarifying and ensuring the loss protection purpose of all subordinated debt.

The rapid rating decline of Ireland has various lessons for investors. The first of which (if not already learnt) is not to rely on ratings. The next lesson is that state support for banks is not necessarily a panacea. It might appear that the Irish state has been weakened by the explicit guarantees that it gave for the banks, but probably the more pertinent point is that these guarantees were forced upon the Irish government, since without them the collapse of the banking system may well have been much earlier.
Australia was fast to follow Ireland into guaranteeing bank debt. This action was not a casual decision and emphasises the systemic importance of the banks within Australia. The subsequent events in Ireland highlight that sovereign guarantees do not eliminate the risk but instead transfer it from the banking system to the sovereign.

Could it happen here?

This raises the more intriguing question for Australians: could it happen here especially with a similar concentration of key banks, all of which have high exposure to the property market? It should, however, be noted that the four major banks are serving a country with about five times the population of Ireland.

Australia has had a relatively gentle GFC compared with the US and Europe and the banking system has remained largely unscathed especially when considering the major banks. The cost of funds has increased for all banks, but the competitive landscape has eased with many of the smaller competitors being squeezed out. The reduction in competition has allowed the major banks to protect their margins, especially in the mortgage and small and medium enterprise (SME) markets.

This protection of margins has helped maintain the credit quality of the major banks but it has created political problems, as borrowers see their interest rates being increased by more than the official Reserve Bank of Australia rate rises.

The four major banks have increased their balance sheets over the last few years substantially as competing lenders have gone by the wayside – although the growth has not reached the level predicted in early 2009.

Australian banks have always had a heavy property focus and in the early 1990s some banks nearly collapsed due to their exposures. Since the advent of the GFC, the banks have been steadily managing down the more challenging commercial property exposures and this sector should not impact Australian banks to nearly the same extent as the Irish banks, but residential mortgages remain a key exposure. Although Australian house prices increased slightly slower than Ireland’s before the financial crisis, they have continued to increase and convincing arguments can be made that prices are in a bubble. (Chart 3 emphasises the extent to which the Australian housing market has continued to perform.) Possibly, the biggest risk is if unemployment in Australia rises significantly as it did in the Republic of Ireland.

However, unlike Irish banks, Australian banks have had a broader range of assets with much of corporate Australia traditionally relying on bank loans as their main, and often only borrowing avenue. With the banks’ increased borrowing costs and investment money beginning to build up both domestically and offshore, corporate bond markets are now competing with relatively attractive borrowing rates and issuers are being lured away from the banks.

Caution may be needed if the banks’ exposure to stronger Australian corporates continues to be eroded and the banks’ balance sheets become overwhelmingly focused on just SMEs and mortgages. That being said, there is a long way to go before we reach that situation.
Beyond the banking sector, other factors definitely distinguish the two countries. Unlike Ireland, Australia has its own currency which enables it to use more levers in controlling economic issues. However, the fact that Ireland shares the euro places a strong incentive upon other euro participants to find a solution and hence is not a complete negative.

Finally, the situations of Australia and Ireland are very different: Ireland is an agricultural producer that reinvented itself as a ’knowledge centre’. In Australia, although agriculture is a main export earner, commodities are a dominant earner and with the relative geographic advantage, in terms of proximity to Asia, Australia has been fortunate in continuing to find buyers of its exports, and while trying to become more of a focus in the financial world, it has not relied upon this.

For Ireland, the exposure was to a downturn in demand for ’innovation’ but Australia is much more exposed to a downturn in demand for agriculture and commodities. This important variation means that the causes of any Australian crisis will most likely be quite different from those of the Irish crisis. However, the similarity of banking systems suggests that the banks, as a transmission mechanism for a crisis, may be similar even if the stronger nature of the Australian banks results in the end effects being less dire.

Conclusion

Australia is not Ireland and, as the discussion above suggests, while Ireland’s problems could be partly mirrored in Australia, various factors should mitigate some of the causes that were central in Ireland. However, with the corporate market attracting strong credit names away from their traditional bank markets, the banking system is moving towards the Irish in its concentration on property and this trend should be monitored.

More importantly, however, than any similarities of the two countries, Ireland should provide a salutary lesson to Australian investors that relying upon the status quo is unwise. Australia did weather the financial crisis most effectively due to a variety of factors. But if these factors reverse (e.g. the Chinese market for commodities reduces) then Australia’s safe haven status could be dented. In such a case, the banks and their dominant position in Australia would become a core focus and they may be more vulnerable than currently thought.

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The latest in a series of securitisation deals for asset financier Capital Finance means the company is now Australia’s largest issuer of A$ denominated non-RMBS securitisations  in 2010. The deal brings the total of securitisation funding raised by Capital Finance in the past 13 months to A$1.6 billion.

 According to Capital Finance Managing Director, Bernie Campbell, the deal cements the company’s position as the largest independent financier of motor vehicles and equipment outside the big four banks and provides a firm foundation to pursue plans for further growth in 2011.

 “We have been 100 per cent committed to growing our core motor dealer and equipment finance business and have done so despite the global financial crisis, during which we held on and actually grew the business while others were closing their doors,” said Bernie Campbell.

 “So, for example, we’ve seen around a 15 per cent increase in new motor retail business customers in the two years since 2008, which translates to a growth in the motor retail book in the order of $300 million along with a near doubling of profit in that period.  And, in the business overall, despite a slight dip in customer numbers between 2008 and 2009 as at November 2010 we’re looking at a net steady customer growth and profit increase of over 60 per cent.”

 According to Mr Campbell, the significance of the deal goes beyond the numbers – as pleasing as they are.

 “The real significance to us is the wider implications and benefits of completing deals such as these,” said Mr Campbell.

 “They further boost our capability as a speedy source of funding that offers businesses a real alternative at a time when competition – or lack thereof – in the mainstream banking sector has been flagged as a serious potential inhibitor of economic activity.”

 The deal in question is the third securitisation on Capital Finance’s books in just over a year, and totals $500 million. Known as Bella 2010-2 it will raise some $408 million in funding for Capital Finance. The final book comprised 14 investors, five of which are new, divided equally between banks and fund managers.

 “What’s particularly pleasing about this latest deal is that it was originally an AS367.5 million deal but we were able to upsize it due to keen interest,” said Mr Campbell.

  “This is a strong positive sign for 2011, when we see real opportunity to extend our securitisation capability to also include our equipment finance portfolio.”

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APRA, Challenger Limited, Ernst & Young, the Institute of Actuaries of Australia, Suncorp Metway and Westpac Bank jointly sponsored the research project. The project, chaired by leading actuary Tony Coleman, considered the potential for market distortion or arbitrage due to current inconsistencies in standards, and the potential for systemic risk arising from the current frameworks.

The research was aligned with the current international agenda for proposed future regulation of banks and insurers. In a recent keynote speech on this subject, Adair Turner, Chair of the Financial Supervision Committee of the Financial Stability Board, noted the need for regulation to be “sufficiently consistent across sectors to guard against regulatory arbitrage” and for a “continually updated” regulatory understanding of the inter-connected nature of the financial system and systemic risks that may result.

“The aim of our research is to make a meaningful contribution to ongoing work aimed at better understanding differences in regulation between banks and insurers, while using the opportunity offered by the G20 process to identify situations where regulatory arbitrage, market distortion and systemic risk could arise,” said Tony Coleman. “In some instances, inconsistencies may result in a product provider choosing to manage a product from a part of a group where lower capital standards apply and therefore where a higher return on equity could be achieved,” he said.

The paper finds that materially different regulatory capital requirements currently exist in the area of term deposits and term certain annuities. In this case, both products provide a similar outcome for consumers (i.e. effectively an assured return of income and capital) but annuities have significantly higher capital requirements because they are provided by life insurers rather than banks. Higher capital requirements have the effect of lowering the overall return and relative attractiveness of term certain annuities. This outcome needs to be considered in the context of broader public policy.

In another instance, at a framework level, provisioning is treated differently between banks and insurers, despite conceptually seeking to achieve a similar purpose.

“The research also sought to recognise that any proposed regulatory reforms focused on greater consistency must also consider the inter-connected nature of the financial system and potential for systemic risks,” Mr Coleman said.

Ernst & Young noted that achieving consistency between sectors is not straightforward. In particular, APRA is constrained by history and by international regulatory developments that do not necessarily have the same objectives. However, APRA’s proposed conglomerate reforms provide an opportunity to achieve a higher level of consistency where appropriate.

The research also found that banking and insurance sectors would benefit from increased transparency in the calculation of provisioning and regulatory capital as this would:

• Allow a better understanding of the impact of current regulatory reform by providing clarity around the extent of potential increased conservatism of Basel III and the overall impact of insurance reforms
• Highlight areas of potential regulatory arbitrage by identifying the most capital efficient entity for bearing a given risk
• Enhance decision making by increasing awareness of best practice across internal modeling and highlighting areas of regulatory inconsistency
• Give a greater understanding of the quantum of capital buffers which would assist in risk/reward decisions

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• In delivering testimony to the House of Respresentatives Economics Committee, the Reserve Bank Governor has given clear signals that interest rate settings are on hold for now.
• The Governor didn’t want to dissaude people of the view that while rates could rise in the future, it would “not imminently” occur.
• The Reserve Bank Governor was asked about market views about where rates will be in a year’s time and responded: “I’m not sure myself actually”. But he did note that there was value in getting rate hikes out of the road “so you can sit and rest for a while”.

What does it all mean?

• Australia’s top economist – the Reserve Bank Governor – has candidly remarked that he wasn’t sure where rates would be in a year’s time: “I’m not sure myself actually.” Of course no one does know with certainty where rates will be in the future, although some economists regularly give the impression that they do have a more accurate crystal ball than the Reserve Bank. The Reserve Bank Governor said “the fact is I can’t tell you with certainty about what we will be doing in six months time.”
• But while not providing numerical forecasts for rates over the coming year, the Reserve Bank has certainly given plenty of hints that they have done enough for now.
• Governor Stevens noted that official rates were now a little above normal. And while he noted that recent rate decisions were “finely balanced”, he thought that most people would be happy to get the rate hike out of the road “so you can rest for a while.” And while he acknowledged criticism of the last rate hike (RBA “criticised for being trigger happy”), the RBA Governor defended the decision, noting that there wasn’t too many times when you look back with regret that you lifted rates too early.
• The Reserve Bank Governor and the Bank’s Assistant Governor Guy Debelle observed that while economists expected cash rates to be around 5.50 per cent, market pricing tipped rates of 5 per cent mid next year. The Governor suggested that market pricing regularly changes but he didn’t want to dissuade people of the view that in the future there would be gradual increases in rates and not sufficiently close together.
• Overall, the Governor suggested that market pricing was about right – that is, that there could be a rate hike before mid next year and perhaps another increase late in the year.
• The Reserve Bank Governor has confirmed that inflation was likely to remain in the target band over the coming year, no doubt underpinning the view that he could now pause on rates for a while: “Over the coming year, we think that inflation will be pretty close to where it is now, consistent with the target.”
• The Governor noted that a “normal” cash rate was 5.50 per cent, but banks had lifted rates a percentage point above the cash rate. “Most recently, as you know, the Board decided to lift the cash rate by 25 basis points. Many lenders raised their loan rates by more than this. These moves have left the overall setting of monetary policy a little tighter than average, as judged by interest rate criteria.” The Governor noted that the Board judged at the last meeting that “it was prudent to take an early Economic Insights Reserve Bank Governor signals pause on rates modest step in the tightening direction.”
• Governor Stevens has referred to the “sea-change” in consumer behaviour with people now cautious to spend and borrow. He acknowledged that while this is tough for retailers, noting that consumption was below average at present, but said it was likely to persist for a while longer. He noted that the trend would be helpful given that significant investment was planned: “I suspect a little more caution on consumption is not a bad thing if we are to fit it all (investment) in.”
• The Reserve Bank officials have highlighted supply side deficiencies with Assistant Governor Philip Lowe noting the need for investment in transport, education and health. The Reserve Bank Governor also said that increased investment in electricity, water and urban infrastructure “would be desirable.” Further, Stevens noted that if the amount of new private sector investment were to be efficient, it would need to be accompanied by public sector investment.
• Certainly the Reserve Bank is laying down the challenge to government to do its part in keeping down inflation and the level of interest rates by correcting supply side deficiencies.
• The Reserve Bank Governor rejected concerns about the size of Australia’s public debt: “we do not have a problem of public debt sustainability.” He further noted that government debt “is not a material problem.”
• The Governor sought to highlight changes in banking over time, noting the reduction in bank operating costs and reduction of the net interest rate margin. He also sought to correct perceptions that banks were given free access to the Federal Government’s AAA rating to raise wholesale funds, stating that the Government “sold the guarantee at quite a nice price” and would collect $1 billion per annum in fees from banks as a result.

What are the implications for interest rates and investors?

• Investors will welcome the relative candid comments by the Reserve Bank Governor on interest rates, and the economy more broadly. Glenn Stevens reckons that rate settings are appropriate to keep inflation in the target band over the coming year. Certainly he acknowledges that no one knows the future with certainty, but Glenn Stevens must be pretty happy with a situation where the economy is recording good growth and where inflation is within the target band – especially when other economies are struggling with weak growth, high unemployment and deflationary risks.
• Many economists, analysts and media commentators will attempt to put their own spin on the RBA Governor’s comments. We would simply suggest that people get a transcript of his testimony and read it yourself. The messages are fairly clear – especially for a Reserve Bank that has been accused in the distant past of being quite opaque.
• Monetary policy can now be described as “tight” – not markedly so, but rates are between a quarter and a half a per cent above “normal”. As we noted when rates were lifted earlier in the month, the RBA has effectively taken out insurance by lifting rates – the hope being that you do a little now and a lot less in the future.

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J.P. Morgan Treasury & Securities Services has today announced it has completed the successful migration of direct and master custody clients from ANZ Custodian Services. ANZ Custodian Services was acquired by J.P. Morgan in November 2009.

Completed on time, within one year of the acquisition, this migration has increased the assets held under custody by J.P. Morgan in Australia & New Zealand more than 20 per cent. With more than 150 ANZ Custodian Services staff in Melbourne and Wellington accepting roles with J.P. Morgan, the firm’s footprint has been dramatically increased in these two key financial services hubs.

Jane Perry, CEO of J.P. Morgan Treasury & Securities Services, Australia and New Zealand, said the strategic acquisition of the ANZ Custodian Services business builds on J.P. Morgan’s service offering as the only local firm to provide the full range of global, domestic, direct custody and fund administration services to local and international institutions and fund managers.

“As custody continues to move towards a scale-driven business model, we will continue to ensure that our clients benefit from our integrated solutions, our global platform, and our deep local expertise in the local market. We remain committed to enhancing our on-ground coverage in key Australasian financial centers such as Sydney, Melbourne and Wellington, and further broadening the wide range of innovative solutions available to our clients,” said Perry.

The completion of the ANZ project follows J.P. Morgan’s recent announcement of the expansion of its direct custody and clearing capabilities globally, with the first phase build-out of the offering covering Australia and New Zealand, Taiwan and India in Asia Pacific, along with the United States, United Kingdom and Russia. The firm already offers a globally integrated custody and clearance service backed by a unified technology platform to institutional investors in more than 100 markets.

“Direct custody is a natural extension of our existing business and is part of J.P. Morgan’s expansion plans globally. A direct custody service enables us to meet the needs of clients with cross-border investments in Australia and New Zealand, and to add new clients seeking local custody and clearing services and grow these relationships globally,” she added.

“The migration of ANZ’s Custodian Services clients, combined with our enhanced direct custody network, mark a milestone for the Treasury & Securities Services business in Australia & New Zealand. We are excited about the future opportunities in the direct custody and administration space and we look forward to better servicing the needs of our existing and future clients.”

The provision of direct custody in Australia & New Zealand is part of the Asia Pacific growth plan for the Treasury & Securities Services business, with the firm expanding its local on-ground presence, enhancing its range of market leading products and elevating its client servicing capabilities year-to-date, J.P. Morgan Treasury & Securities Services has hired an additional 500 financial professionals in Asia Pacific to broaden its regional coverage and further develop its partnership with clients. J.P. Morgan Treasury & Securities Services provides solutions to corporate and institutional clients across the region.

The post J.P. Morgan completes migration of ANZ custodian business appeared first on AdviserVoice.

• In recent weeks investors have no doubt found it difficult to sort fact from fiction in the public discussion about company balance sheets. Some commentators have questioned whether banks are generating
  above-normal profits. Others have questioned whether some companies such as BHP Billiton are making profitable use of capital or whether a portion needs to be returned to shareholders. And still others have focussed on the sustainability of high dividend returns from companies such as Telstra.
• To provide a base for the discussion, CommSec has compiled a set of tables on various measures for the S&P/ASX50 – the 50 biggest companies on the sharemarket. The tables are generated from data available from financial research firm, Morningstar.
• In 2010 while major banks’ posted solid profits, their return on equity ratios were largely in line with the average of S&P/ASX50 companies. And their return on assets ratios were at the bottom of the pack. By contrast Telstra reported market-leading return on equity and return on capital ratios in 2010.
• Over the past decade, seven S&P/ASX50 companies had negative shareholder returns including Telstra. Shareholder returns were close to average for CBA, ANZ and Westpac but returns for NAB were below the average of S&P/ASX50 companies.
• Resource companies dominate the results of average shareholder returns over the past decade.

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James joins St.George Private Clients from Bank West Private Banking where he was East Coast Director and prior to this role, State Director QLD. He has also worked in the private banking teams at Macquarie Bank and ANZ.

“James has more than 18 years experience in the banking and finance industry, demonstrated ability to execute successful business plans and proven leadership and enthusiasm for delivering on the private banking proposition,” Ms Lim said.

“His experience as a state manager and private banker perfectly positions him to deliver on St.George Private Client’s strategy to provide holistic support across all our clients’ financial needs, including banking, lending, wealth, insurance, taxation and estate planning.

“James’ genuine passion for the people he leads will ensure his private banking teams are absolutely focused on delivering for our customers, in the true St.George style, with warmth, friendliness as well as great technical skills and industry knowledge.”

Ms Lim said James’ appointment completes the recent restructure of the business, with local leadership for distribution teams in each state driving a stronger focus on customers in each key region.

“St.George Private Clients provides a private banking alternative to the major banks and international players, with strong regional focus in each of Queensland, Victoria, Western Australia and, of course, New South Wales – St.George’s heartland,” she said.

“There is huge growth potential for private banking in Australia, with Australia’s private wealth market among the largest and fastest growing in the world. St.George Private Clients is well placed to deliver on this opportunity, with the St.George focus on customer service, together with the strength and capabilities of the BT Financial Group.”

James’ appointment is effective 22 November 2010.

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