Moody’s Says Outlook For Australian Mortgage Backed Securities Stable
The collateral used to construct Australian residential and commercial mortgage backed securities has a stable outlook according to a credit ratings agency which made its assessment following Australian investment banking major Macquarie pricing a $750 million offer.
Global credit ratings agency Moody’s on Thursday said it would maintain its stable outlook for the performance of collateral used to construct Australian asset backed securities over the next 12 to 18 months.
The ratings agency also said that the surge in house prices would slow down, after data released by the Australian Bureau of Statistics suggested that house prices had spiked a stunning 18.4 per cent for the year ending June.
“We expect that the up-to-now strong appreciation in housing prices will slow down a bit, but undersupply — as well as net migration — will continue to support prices,” said Moody’s senior credit officer Richard Lorenzo.
Mr. Lorenzo added that the trend would more than likely limit actions on rating for RMBS.The uncertainties plaguing commercial real estate have declined over the past year, Moody’s said.
The ratings agencies outlook report came as Macquarie Securitisation today priced a $750m RMBS offer.
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CBA Says Bank Funding Costs To Head Higher
New regulations and poor sentiment could well push borrowing costs for banks even higher in the next few months. However according to CBA treasurer Lyn Cobley, the outcome would depend on the results of European bank stress tests.
Ms. Cobley who acts as treasurer for the largest bank in Australia, as measured by market capitalisation holds views that are largely similar to wider sentiments felt by her peers and investors, many of whom also believe that wholesale borrowing costs are likely to head higher to begin with, before receding.
Global investors of late have made demands for higher risk premia in response to the European sovereign default crisis, and almost everyone including Australia’s highest rated lenders have been affected, despite their AA ratings.
CBA says it is well placed to handle volatility in funding costs since it was well ahead of its funding requirements, but added that a heavy fund raising schedule for both governments and corporations expected to take place during the third and fourth quarters would also take its toll on the market Ms. Cobley said.
Ms. Cobley declined to comment on the possibility that higher borrowing costs would mean that lenders would be forced to raise their interest rates outside official moves by the central bank.
The problems affecting the European Union are likely to negatively impact pricing on local bank debt, despite the lack of exposure and solid fundamentals.
“We think there is a possibility spreads will go wider than they are now. Australian banks have been caught up by perceived increased risk in the market generally. Do I think it’s fair pricing? I don’t,” Ms Cobley said.
New global rules on the capital requirements and holding of liquid assets were also another area banks were feeling pressure. Lenders will be required to hold more liquid assets on their balance sheet whilst boosting capital buffers.
“It’s inevitable our liquid assets holdings will get larger and our costs will go up as a result of that,” Ms Cobley said. Australia’s four largest banks have a collective annual funding task of $140 billion, with CBA’s share $40bn to $45bn. About half is sourced from deposits.
Because of a limited domestic investor base, Australia’s banks borrow heavily offshore.
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Australian Banks To Begin Issuing US Dollar Denominated Securities
Australian lenders have begun the process of securitising their asset backed debt into US dollar denominated securities, which may have the impact of boosting competition in the market for mortgage lending.
Over the last week Macquarie Group and Members Equity have both begun selling US dollar denominated asset backed securities as they seek to attract European and US investors that are keen to have to exposure to Australian securitisation issues.
Analysts say that the strong reception the two deals received means that more deals are likely to be forthcoming, most likely from smaller non bank finance companies, which in turn could mean a more competitive lending market, given that securitisation is the primary source of funding for non banks.
The two deals are the first time Australian issuers have tapped the US dollar securitisation market since before the collapse of Lehman Brothers in September 2008.
Ilya Serov, an analyst with credit ratings agency Moody’s Investor Service says that international investors were extremely comfortable with Australian credits and if the deals end up being successful, then other issuers were likely to try and replicate them.
Issuers tend not to sell US currency denominated securities unless they are extremely optimistic about international interest, because it tends to cost a lot to issue debt in a foreign currency.
Issuers selling securities in US dollars, must absorb the cost of converting funds raised into domestic currency, which is also known as the cross currency basis swap. This swap rate blew up during the financial crisis and is still currently at about four times the level is has been over the last decade.
The wide swap rate essentially means that any profits would have effectively been erased.
Over the last couple of months many international investors amongst them Aberdeen Asset Management, one of the world’s largest fixed income investors have expressed interest in investing more in Australia.
At the same time, a $16 billion program by the Australian Office of Financial Management to buy RMBS has helped bring spreads in.
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Global Financial Market Instability Hits Australian Super Fund Returns
Volatile global financial markets that plunged in the aftermath of the European sovereign default crisis have consumed the highly anticipated bounce in super fund returns.
The drop in financial markets is likely to result in investment earnings falling below double digits for the financial year, ending at about 9.6 per cent.
The recent volatility has seen Australian super funds lose as much as 50 per cent of their valuations which provided the federal government with the impetus to ease rules on capital draw downs from pension funds.
As recently as two months ago, analysts were confidently predicting investment returns as high as 15 per cent. However in the last couple of months valuations have been hammered by renewed fears of the recovery in the global economy, which has produced a string of negative equity market returns in Australia.
The poor performance this year has resulted in lower rolling cumulative returns, with the median five year return now estimated to be 3.7 per cent, according to research firm SuperRatings.
Since the compulsory super was established in 1992, the median balanced fund has returned 6.8 per cent a year, illustrating the fact that a well diversified portfolio does indeed protect investors from catastrophic loss.
Balanced funds have both met and exceeded their long term objectives of outrunning the Consumer Price Index by an annual 3 per cent SuperRatings data shows.
Chant West, another research firm estimates that the median returns for investment funds who hold between 61 to 80 per cent of their portfolio in growth assets is exactly 10 per cent.
Superannuation industry figures look better when taken over the past seven years, but the record has been remarkably volatile.
After a shaky start to the decade, when many Australians fell behind compared to the returns of cash investments in the aftermath of the collapse of the tech bubble, Australians enjoyed a four year period of uninterrupted gains in their super, after which the onset of the first global financial crisis took hold.
Growth funds especially were hit in the financial years 2008 and 2009, posting negative returns of more than 6 per cent and 12 per cent respectively.
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Australian Regulators Warn Brokers To Be Suspicious Of Portfolio Manager Window Dressing
The Australian Stock Exchange, which with ASIC acts as a corporate regulator says it intends to monitor portfolio and mutual fund managers closely, as it seeks to stamp out the practice of window dressing.
Window dressing typically occurs at the end of the financial year and is a deliberate strategy managers engage in of price manipulation which dresses up the performance of the portfolio or fund before presenting the performance to clients or unit holders.
Belinda Gibson, deputy chairwoman of the Australian Securities & Investments Commission (ASIC) says that the practice of window dressing distorts the value of a portfolio at a time when it benefits the manager, at the expense of current and potential investors.
“Investors may not only be looking at their funds performance through rose-coloured glasses — they may also be paying higher performance fees than are necessary,” Ms Gibson said in a statement yesterday.
The regulator is poised to take over responsibility of supervising real time trading on licensed exchanges.
Ms. Gibson added that brokers and other indirect market participants should view clients who place their orders close to the end of business on 30th June with some suspicion that they intend to try to set the closing price for the security higher than it otherwise would be.
ASIC and ASX surveillance teams would be monitoring end of financial year trading and exchanging notes, she said.
Australian House Prices Reasonable Relative To Incomes Says RBA
The Australian central bank is downplaying suggestions that there is a housing bubble in the country, but added that the outlook for countries which are heavily in debt was bleak.
On Tuesday, Ric Battellino deputy governor of the Reserve Bank of Australia (RBA) said that house prices relative to incomes were fairly reasonable.
“People feel that house prices in Australia are quite high and that’s quite often because the ratio of house prices to income that are published for Australia tend to focus mainly on prices in the cities, and they are quite elevated. But, if you look across the whole country, the ratio of house prices to income is not that different from most other countries.” Mr Battellino said.
The RBA official went on to add that he was concerned over the events unfolding in Europe, because governments who fall into financial difficulty have no one to bail them out.
“So the developments in government debt are, I think, a worry because it’s not clear to me that they can be solved certainly any time soon. If they are going to be solved through fiscal tightening, that actually means some quite difficult periods ahead for some of these economies.”
He went on to make the point that Australia did not face the same problems as encountered by Eurozone countries, because its debt levels were low, though Europe’s problems were reverberating in Asia.
“Certainly Australia’s own government debt position is very good, we’ve one of the best (debt position) in the world. But all through the region where we are and our trading partners, government debt is not a problem.”
Mr. Battellino went on to say that though the Australasian region was the least affected by the European sovereign default crisis, he was unable to make any predictions about the seriousness of the effects.
“I really can’t say, it depends on what measures are taken to deal with these issues and where it heads to from here.”
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Australian Lenders Likely To Be Unaffected By European Sovereign Default Crisis
The European sovereign default crisis is not expected to hurt the Australian financial system, since the major lenders have very little exposure to euro-zone debt or links to potentially troubled lenders on the continent.
John Laker, the Australian Prudential Regulation Authority chairman on Thursday said that while the crisis has begun to ricochet through global financial markets, the effect on Australia was likely to be minimal.
Addressing the Senate Economics Committee in Canberra, Dr. Laker said that the fragile economic recovery in Europe was threatened by the current crisis, but he did not believe that Australian banks were major participants in the region.
“Australian banks have a very small exposure to countries in the euro area. Global funding markets, to date at least, have been much more discerning about the fundamental strength of our banks.” Dr. Laker said.
The chairman added that domestic financial institutions were more reliant on Australian and regional economic growth, both of which were strong.
“These developments augur well for Australia’s financial institutions. Over recent weeks, however, this positive global growth story has been obscured by the financial ash cloud over Europe.”
The major Australian banks have already funded their requirement for 2010, and are therefore largely immune to the large credit spreads that are currently being caused by the European sovereign default crisis.
APRA is also monitoring global and domestic equity market volatility on the life insurance and superannuation industries.
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Suncorp Doubles Size Of New RMBS Issue Due To Investor Demand
Banc-assurance group Suncorp-Metway is returning the residential mortgage backed securities market, in a further sign of growing confidence, pricing a $1 billion issue, after investor demand forced the company to double the size the original issue from $500 million.
Suncorp issued $630 million in Class A1 notes, which were priced at 100 basis points over swap. The company issued a further $300 million in Class A2 notes that were priced at 120 basis points over swap.
The Class A1 tranche was in line with initial guidance from Tuesday, while the Class A2 tranche was priced on the tight-end of guidance.
Investors failed to participate in the sale of the class A2 notes with the Australian Office of Financial Management purchasing that entire, longer-dated top tranche.
Earlier in the week, the AOFM revealed that it intended to buy specific RMBS deals at tighter spreads, as it seeks to help the recently stalled issuance of RMBS, allowing smaller lenders to be able to compete more equally on home loan origination.
Many analysts and investors have openly questioned the government policy of intervention, given the fact that the market has begun a recovery over the last ten months.
According to Suncorp, 14 investors took part in the deal, with the vast majority of its class 1 notes, bought by domestic fund managers.
The transaction was arranged by Suncorp, with Macquarie Bank and Deutsche Bank acting as joint lead managers and book runners.
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Westpac To Up The Ante In War For Australian Term Deposits
After a brief respite in the war for depositors, Westpac chief executive Gail Kelly is upping the ante amongst the big four lenders, by saying that Westpac intends to increase its reliance on deposit based funding for the year.
According to The Australian newspaper, Mrs. Kelly sent an email to managers, in which she said that wholesale international funding markets would continue to fracture even further as a consequence of the European sovereign default crisis ripping its way through international credit markets.
Mrs. Kelly added that following Westpac’s first half results announcement, international shareholders had questioned the lender on what its funding position was, and the source of its funding.
“Everywhere we went, Phil (Coffey) and I were asked about funding as well as proposed regulatory changes and their impacts on Australia. The importance of deposits is not a new theme for us and a vital part of what we need to do to earn all of our customers business. The competition for retail deposits is really ramping up and it’s clear that our competitions also have a similar focus. They too recognise the importance of deposits as a funding source.” Mrs. Kelly said.
Currently Westpac offers the highest interest rates on savings accounts in the market, with a current three month deposit special offer, that is 100 basis points higher than its nearest rival and 50 basis points higher than the official cash rate.
Westpac’s special offer on a three month deposit of up to $25,000 is 5 per cent, whilst its nearest rival NAB is offering a similar deposit with 4 per cent interest. CBA’s product offers 3.2 per cent interest, whilst ANZ’s is 2.5 per cent interest.
The bank is offering 5 per cent interest on deposits of up to $25,000, ahead of NAB at 4 per cent, CBA at 3.2 per cent and ANZ at 2.5 per cent.
Term deposit interests rates in Australia have fallen recently, offering a little respite from the increasingly competitive war for depositors. That fall in interest rates prompted the central bank to declare that the intense competition for depositors between the Big Four lenders was start to dissipate. Australian banks had increased their deposit rates to attract more deposits in response to the global financial crisis.
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Law Firm Initiates Legal Action Over NAB CDO Exposure
According to a report in The Australian, Maurice Blackburn, the law firm which has initiated the largest ever class action law suit against Australian banks, has opened up a new front in its campaign to obtain damages for claimants.
The law firm alleges that NAB shareholders lost a collective $450 million, when the lender failed to disclose its exposure to collateralised Debt Obligations (CDO’s).
According to the law firm, NAB’s delay in writing down the value of its CDO investments caused a sharp decline in the value of its stock price during the global financial crisis.
Last week the firm announced that it had filed a lawsuit against 12 banks including NAB in a $5 billion class action law suit seeking damages over exception feed.
A spokesperson for the firm said on Monday that it would initiate new proceedings, specifically against NAB for failing to write down its $1.2 billion CDO portfolio in a timely manner, in a Melbourne Federal court within six weeks.
The spokesperson said that more than 120 institutional and retail shareholders had already joined the new class action suit.
Investors are claiming that the lender failed to reveal the extent of its exposure in 10 CDO’s of asset backed securities held with a unit of NAB, nabCapital.