IN TRULY hospitable fashion, the dear old Australian Bankers Association saw fit to describe your correspondent as ”inaccurate” the other day in response to a story we had penned about bank profit margins.
The critique from the cartel’s peak body presented a most fine opportunity. It was akin to a gilt-embossed invitation on designer stationery: ”Dear Sir, you are cordially invited to give us a shellacking at the earliest opportunity.” The bankers said we had singled out ”covered bonds” as a source of funding whose ”spread compression” over the past year had been, in the words of a Westpac note to institutional clients, ”an extraordinary performance”. Our story did not recognise the ”pressures” in other sources of funding, they said.
Indeed this new source of funding, covered bonds, made possible by a kindly and somewhat furtive act of Parliament a year ago, had performed extraordinarily. But so had all forms of funding, be they deposits, hybrids, bonds or cash.
The banks, you see, have a conundrum. They are rolling in it. While they did their usual Oliver Twist routine and held a bit back at every Reserve Bank rate cut over the past year or so, their blended cost of funds has been dropping dramatically. How can they possibly spin it now? It’s tough out there? Surely the ”wholesale funding pressures” line is passe. Surely there is no place to turn but the dependable ”Australia needs a strong banking sector” angle.
Mind you, there is the dreaded ”competition”. Nasty thing, that competition, should be avoided at all costs. Roughly two-thirds of bank funding is deposits and there has hardly been a battle royale in deposit-land lately. Online and cash management deposit rates have dropped 50 basis points since the last two official rate cuts. In contrast, the average mortgage rate has only declined 40 points.
Racking retail deposit costs up against wholesale bonds, the average online rate is 3.05 per cent, the average cash management account deposit rate 1.9 per cent and the average term deposit rate 3.45 per cent. This is the best funding the banks can get, generally far cheaper than wholesale money.
And as for wholesale funding, both covered bonds and ordinary bonds have enjoyed a similar narrowing of spreads to the swap rate. The covered bond compression is actually greater than we had outlined. Westpac and Commonwealth issued covered bonds at 160 and 175 over bank bills in early 2012 that are now only trading about 55 points over. The ASX hybrid instruments floated in the past year or so have also performed spectacularly.
■ FOR all its debt and myriad social and economic challenges, the US has the wood over Australia on the banking front – from a consumer rather than shareholder perspective. US banks are genuinely competitive. They regularly have honeymoon lending deals where you get finance from zero to 1 per cent for a year or more. Long-term rates are 3-4 per cent. They are nowhere near as profitable as our four majors and their credit spreads are going in the opposite direction. There is the odd reason to be bullish towards the US, vis-a-vis Australia. Our cost structure is far too high, as evinced by the price of goods and services ranging 25-50 per cent above theirs, even after tips. The minimum wage in many states is between $US7-$US8 an hour.
The hollowing out of Australia’s manufacturing base, the devastations of a strong currency and high energy prices, surely render this country susceptible to a rocky landing when the commodities music stops.
■ BUT at least we have the Obeids and the New South Wales Independent Commission Against Corruption. What a show. This week we learnt of the lowest-cost finance there is, a Bank Jones low-doc loan.
During testimony, it emerged that Greg Jones, the co-founder of RAMS home loans, gave his friend, former mines minister Ian Macdonald, a $195,000 loan that Mr Macdonald never repaid … and $35,000 ”in cash and gifts”. What a top bloke. Then there was the $4 million Macca was set to receive from the proceeds of the rigged coalmine tender. Not looking rosy for Macca.
It was a big week for ICAC, though Eddie and the Obeid family are still up $30 million on the Cascade Coal deal. Roughly $15 million has gone to address the clan’s housing requirements. Lot of loans flying about, no doubt being scrutinised by the taxman.
■ FINALLY, it would be negligent to pass without comment on the brilliant Special Northern Economic Zone idea (not proposal!). Why go north of the Tropic of Capricorn when you can set up your own zone. Take Google Australia, which has opted to stay put and set up a Special Darling Harbour Economic Zone, enabling it to pay just $74,176 in tax on its estimated $1.1 billion in income.