Banks cut rates in response to RBA decision
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With the RBA cutting rates by 0.25% in April to 3.00%, a 49 year low, the bank gave a clear indication the market is nearing its low in the interest rate cutting cycle.
The RBA is likely to lower the offical cash rate by only another quarter to a half percent before it reaches the bottom of the rates cycle. From that point it will only stay low for a short period it would seem until rates start rising if previous recessions are anything to judge.
In response to the bank cuts Westpac, St George, Commonweath Bank and ANZ all cut their rates by 0.10%, NAB failed to pass on the cut. The decision by the banks gives the RBA some additional margin to cut further in a time when the economy is about to start the early phase of what is expected to be a short and sharp recession.
While all the banks have been under considerable funding pressure the majors have all come through this with a massive increase in market share as the expense of the second tier banks and the non-bank lenders. The majors now have easliy in excess of 90% market share and margins considerly higher then previosuly. Despite the rise of loan defaults the additional margins by the banks have given them a tremendous position of strength that few global banks share.
One thing is certain that the Australian banks are world leading and banks like ANZ who are looking to expand now into Asia are doing so from a position of strength that will setup growth for the next decade.
RBA rate cuts slowing
Glenn Stevens has signalled the RBA will carefully consider future cuts in response to the stimulus package of the Government and recent RBA cuts that have lowered rates dramatically over recent months.
Economic forecasters are still expecting rates to drop to around 2.00% from the current 3.25% but future cuts will not be made unless economic conditions clearly deteriorate further. This is something Glenn Stevens indicated in his address in response to the global economic conditions affecting the world.
Australia is stil well placed comparative to other nations currently but a substantial decline in conditions cannot be underestimated and the RBA seem focused to respond quickly should the economy continue to falter.
Westpac suffer rise in bad debts
Westpac this week revealed a dramatic rise in bad debts in the first quarter as the economic gloom hits the domestic economy and arguably the best placed Australian bank to deal with the economic crisis.
Westpac revealed a rise from $144 million to $800 million for inpairment costs resulting from the economic crisis from levels a year ago. Westpac had an bad debts of $360 million alone from three major companies, $300 million alone was from Babcock and Brown.
Westpac revealed a strong rise in revenue in the first quarter amid rising deposits which have helped reduce funding costs. The focus in increasingly turning to which bank will be the first to cut dividends. Such a decision will be punished by investors as shareholders have become use to receiving increasing bank dividends year on year.
Westpac are still perhaps best prepared to at least maintain dividends but neither bank will want to dip into capital to fund dividend payouts in such an period of credit deterioration.
CBA announce $2.57 billion first half profit
The Commonwealth Bank announced a profit of $2.57 billion, a rise of 9% in the toughest banking conditions in two decades for the economy.
The first half profit was a surprising result considering the low expectations for the domestic banking sector which is outperforming the major banks of the world.
CBA have maintained a dividend of $1.23 but flagged that future cuts may be considered based on a deteriorating domestic economy in the second half. With a tier 1 capital of 8.75% the bank is in a healthy position which will enable it to maintain a solid balance sheet but that alone will not stop higher impairment costs going forward.
The result of the remaining banks will be interesting to see if the same message is passed on that dividends are under threat, perhaps Westpac may be in a position to give a succint and accurate assessment of it’s future prospects when it reports.
Suncorp boss Mulcahy falls on sword
If you thought things could not get worse for Suncorp well this week it did as John Mulcahy resigned and Suncorp flagged a deeply discounted share issue.
With Suncorp revealing a 25 times increase in bad debts from $16 to $355 million and a discounted share issue of 37% the damage was done.
Suncorp revaled a 1 for 5 rights issue to raise $1.3 billion at $4.50, a 37% discount to the share price before closing prior to the announcement.
Suncorp profit will duly fall to $250-$270 for the half year while the interim dividend has been cut form 52c to 20c.
At its peak Suncorp was $23.29 per share under Mulcahy and will likely sink from it’s last closing price of $7.13 to around $4.50 in coming days.
ANZ profit to tumble
The ANZ Bank announced that their profits are likely to tumble in the vicinity of 15% for the first half amid increasing debt provisioning and risks associated with derivatives.
The ANZ along with all the other banks are being hit with increasing levels of bad and doubtful debts which are causing a dramatic increase in debt provisions amid the global economic slowdown.
Where to on interest rates in 2009?
Well this is what most Australian’s want to know in 2009. How low will interest rates fall to prevent Australia from a hard landing well it would seem we may be aiming for a 2.00 to 3.50% target range in 2009.
The world recession continues to roll on and bad news is getting more and more each day. In fact it could be said the negativity in the market has dulled somewhat as people are getting used to hearing bad economic data every day.
Australia while still holding up well is certainly not immune, 2009 will likely show a healthy rise in the unemployment rate and we are likely to hit record low interest rates. Some economic forecasters are expecting the RBA to reduce rates to as low as 3.00%, that is a 1,25% cut from current levels.
This is excellent news for home owners and those entering the housing market but it must also been seen in the light of the harsh economic times ahead. For the RBA to lower to those levels things will have become considerably worse for the domestic and global economy.
I had forecast some month’s ago we were likely to hit 3.75% in 2009, it now seems almost certain we will go lower. In fact the money markets are forecasting a cut of 0.50% in February, this will lower the RBA rate to 3.75%.
On the flipside the funding costs for the banks are also decreasing so we should be seeing cuts from the big banks on their rates in the coming months outside of any reduction by the RBA. But without healthy competition in the matket I suspect this unlikely.
How do you think 2009 will pan out? How low do you think the RBA will cut rates?
Macquarie Bank follow ANZ & Westpac in bonds issue
Macquarie Bank became the third major Australian bank to issue bonds priced ar US$1.7 billion in the US Bond market as it’s rivals secured funding sources.
ANZ Bank earlier in the week issued bonds of US$1.75 billion, while Westpac followed shortly behind with a US$1.5 billion issue.
ANZ announce 800 jobs cuts
ANZ have announced plans to slash 800 staff, half of these are expected to be made in the weeks leading up to Christmas.
CEO Mike Smith announced the cuts yesterday at the ANZ Melbourne headquarters while forecasting that ANZ had to prepare for a crisis thar was unlikely to be fixed for at least two years.
The cuts of which half have been made will happen within the Australian and New Zealand operations and focus on middle management positions. It is expected branch staff cuts are unlikely to be made at this time.
NAB cut fixed home loan rates
NAB announced plans to cut their one year fixed interest home loan by 1% to 5.59%. The change takes effect on 1 December 2008.
The cut lowers the one year fixed introductory rate to 4.99% and the two year fixed home loan rate that also had a 1% cut to 5.59%.
The interest rate reduction from National Australia Banks comes ahead of the expected 1% cut from the Reserve Bank of Australia next week.