Where to for Australian Interest Rates in 2010?
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Interest Rates have risen dramatically in recent months on the back of the RBA increasing rates by 0.75% upon stronger economic conditions in Australia.
What does 2010 have in store for the home owner and the average investor dependant on interest rates? Well one thing would appear certain, we are headed for higher interest rates again in 2010 as the economy looks set to continue the miracle of the last 20 years.
With the RBA rate set at 3.75% and the focus on moving towards a non-inflationary rate (around 5.00% at least as conditions improve) then we can expect to test 4.25-4.50% in the first six months of the year. A big early year trigger will be holiday consumption and Christmas sales figures that will influence any decision by the RBA in February.
Meanwhile, the banks appear hungry to increase rates in excess of the RBA rate as evidenced in the November rate increase. With banks keen to maintain or even increase margins to offset increased funding costs this will be another clear trend in 2010.
Expect interest rates to tick higher early in the year and as the world economy rebounds, the UK and US will be pivotal, the RBA will have little option to increase rates. All this means that 2010 will be tough year for homeowners and will give pensioners and those dependant on fixed interest rates some solace after the last few years of low savings account interest rates.
It is hard to see home prices showing any real growth in 2010, at the top end expect decent rises as the wealthy once again impose themselves on the top end of the property market after a restrained period in recent years.
What do you think 2010 has in store for interest rates and the Australian economy, share your thoughts?
Banks outperform the market
The recent performance of the Australian banks on the ASX has been impressive. All the banks have risen strongly off recent lows and while gains have moderated future share price gains look certain.
During the recent global downturn the gains in market share by the Australian Big 4 banks has been staggering. As the smaller lenders and part players in the market have either disappeared or been acquired by the big four the future gains of the big banks has been even further cemented.
The real issue in the Australian banking sector now is the lack of competition in the market. As the big banks have approximately 90% of the market share alternate market lenders lack the mass and capital to compete. This will lead to future out-performance of the banks and increasing lending margins that will impact home buyers much more than investors.
RBA strike with interest rate rise to 3.25%
The Reserve Bank Governor Glenn Stevens hiked rates today by 0.25% to 3.25% on the back of strengthening signs of economic recovery and rising concerns at the RBA of potential inflation risks from low interest rates.
The rate increase, the first since April 2009 when rates were decreased to 3.00%, signals a move by the RBA to limit the possibility of rampant inflation on the back of historically low interest rates. The move is not likely to be the end of the cuts with talk already of another increase on Melbourne Cup day in November.
All big banks are likely to pass on the rate increase promptly.
What do you think interest rates will go up to by the end of 2010? Share your thoughts in our comments section.
RBA keep rates steady
The Reserve Bank of Australia (RBA) kept rates steady at a near 50 year low of 3.00% yesterday amid increasing levels of positivity about the state of the Australian economy.
Glenn Stevens the Reserve Bank Governer indicated the RBA still had room to reduce interest rates should the need arise due to the marginal impact of inflation in the current forecasts. While Glenn Stevens indicated the RBA still had scope to cut rates the general tone was positive and the state of the Australian and global economies would have to further deteoriate for the RBA to consider a cut.
It is highly likely we have either seen the bottom or are with 0.25% of the bottom of the cycle. Some forecasters are already looking at an increase in early 2010 as the uptick takes hold.
Australia’s Big 4 AA Rated
Australia’s Four Pillars in the banking sector has stood up amazingly well in the face of the global recession with the Commonwealth Bank, ANZ, Westpac and National Australia Bank all maintaining AA rated despite the global slump.
The big four remain as only eight international banks rated AA in the world.
ANZ Share Purchase Plan
ANZ retail investors can invest in the ANZ Share Purchase Plan offering investors the chance to subscribe for up to $15,000 worth of ANZ shares.
Shares can be applied for in lots of $1000 at a discounted price of no more than $14.40. With the current share price around $16.00 this offers investors an instant profit of around 10% at current market valuations.
The ANZ share purchase plan is likely to be well subscribed and scaled back applications would be unlikely considering banks would be happy to accept as much capital as possible from the market at the moment.
The deadline for applications is 2 July.
Commonwealth Bank and Westpac dominate rival Big 4
The Australian publised a good article during the week indicating the amazing growth of retail deposits experienced by the merged CBA-BankWest which held a 40% share of retail deposits among the Big Four banks with a $137.1 billion deposit book, and the merged Westpac and St George banks had a 28% share with $98.6 billion.
Both Commonwealth and Westpac held a 68% share of the big four Australian banks retail deposits by March 2009 according to the review commissioned by Brandmanagement.
It was also revealed that the NAB has a $54.9 billion retail deposit book and ANZ a $56.4 billion book.
NAB surge in bad debts amid profit announcement
The NAB commenced the Australian bank reporting season with a surge in bad debts to indicate the recession is finally taking a big toll on the Australian economy.
NAB’s bad debts rose from $726 million to $1.8 billion as the worsening business and consumer conditions start to show considerable strain on the banking sector. Cash earnings fell to $2 billion (down 9.4%) with rising impairment charges and higher funding costs. The net profit was only down 0.9% to $2.66 billion.
The NAB also announced a dividend cut as previously foreshadowed, the cut of 24c per share took the dividend to 73c per share. The cut will preserve capital and the dividend will also be partially underwritten by a $500 partially underwritten dividend reinvestment plan.
NAB shares retreated 76c to $21.82, as the bank slashed its dividend by 24c to 73c to preserve capital, and backed it up with a $500 million raising through a partly underwritten dividend reinvestment plan.
The result did nothing to soothe the markets expectations of further pressures on the banking sector and accordingly NAB and the other banks were sold off amid concerns of continued hard economic times.
ANZ announce dividend cut, who’s next?
ANZ have been the first of the big four banks to announce a cut to their dividend as the banks start to feel some of the pain that has devastated the banking sector overseas.
ANZ announced a cut of 25% to their dividend which in direct response to rising corporate debt levels. This will reduce the annual dividend from $1.36 to a little over $1 and will save the ANZ approximately $500 million.
The announcement came as the ANZ delivered an update for the first four months of the reporting year revealing a update on their current operations.
The ANZ have boosted their provisions for bad and doubtful debts to between $2.4 and $2.5 billion, this is broadly in line with industry expectations. Cash earnings were up 18% on the same period last year but the increased impairment costs drove the cash earnings down 11%. ANZ revealed they have been a beneficiary of cash inflows as income growth grew 16%.
One point of note was the 125% increase in the Asian division which CEO Michael Smith has clearly identified as the future of the company. Although the Asian division is still only small the next couple of years will be pivotal in its Asian stategy and they will have to invest throughout the downturn to ensure building a viable market share.
So now the ANZ have cut dividends, who is next? The Commonwealth and Westpac have intimated they may need to cut but I suspect NAB will be next to the table flagging a cut. Either way the coast is now clear and expect all the banks to flag a cut between 10-30% in the coming weeks.
NAB reveal pain of economic slowdown
NAB provided a summary of their first quarter amid the toughening financial market that is affecting the globe. NAB announced a solid quarter but the result was most impacted by rising bad and doubtful debts.
NAB revealed bad and doubtful debts were $824 million for the quarter. NAB advised $521 million was for its exposure to three unnamed companies. Bad and doubtful debts for the fiscal year to 30 September was $2.49 billion.
NAB revealed its UK operations were still profitable but conditions had worsened. NAB has maintained tier 1 capital at over 8% revealing it’s solid capital position.