By Gareth Vaughan
New Zealand’s Australian owned banks will be an important profit driver for their Aussie parents in 2011 for the first time in a decade, analysts at UBS say.
Sydney-based UBS banking analysts Jonathan Mott, Chris Williams and Adam Lee have issued a research report entitled New Zealand: A slice of banking heaven? after a recent visit across the ditch. In it they note New Zealand banks are now writing more than 80% of new mortgages at variable, or floating, rates.
Reserve Bank data shows 42.3% of mortgages by value were floating as of October, up 2% from September and closing in on the record high of 43.1% (since Reserve Bank records began in June 1998) recorded in January 2000.
The UBS analysts say the shift to floating from fixed-term mortgages is being driven by the first upward-sloping yield curve in 20 years. See all bank mortgage rates here.
“Variable rate mortgage spreads are 30-40 basis points higher than fixed rate spreads,” the analysts say. “This mix change supports margin expansion in New Zealand.”
Crafar sale 'critical'
Mott, Williams and Lee also argue the proposed sale of the Crafar dairy farms to Hong Kong-based Natural Dairy for about NZ$240 million is “critical” to rural asset values given the low recent volume of farm sales provides little transaction evidence to support banks’ provisioning levels.
“With 65% of NZ Agri credit being lent to the dairy industry, this transaction represents a crucial mark for the sector.”
The proposed Crafar sale has, however, hit a potentially fatal roadblock with the Serious Fraud Office investigating transactions between Natural Dairy Holdings and associate UBNZ. The 16 Crafar farms, New Zealand's largest family owned dairy business, were put into receivership in October last year owing about NZ$216 million to their lenders Westpac, Rabobank and PGG Wrightson Finance after interest.co.nz revealed animal welfare issues at the farms.
Meanwhile, in its bi-annual Financial Stability Report the Reserve Bank said last month farm prices may need to continue falling to see “substantial” buying interest reemerge and also warned that further falls could see dairy farmers, who took on debt to expand during the boom times, slip into negative equity. And the latest Real Estate Institute of New Zealand (REINZ) figures show there were just 46 farm sales in October, equal to the previous record monthly low of 46 recorded in January this year and down 42% from the 79 farms sold a year ago.
Solid earnings improvement
Mott, Williams and Lee say recent financial results from the banks – ANZ, ASB’s parent Commonwealth Bank of Australia, Westpac and BNZ’s parent National Australia Bank, showed the New Zealand divisions as stand outs for relatively strong improvements in results, both pre and post provisions.
They note that for the second-half of the 2010 financial year, the combined results from ANZ, ASB, BNZ and Westpac show pre-provision earnings growth of 2% from the first-half to NZ$2.086 billion, and a 33% rise in net profit after tax to NZ$1.251 billion.
And monthly net interest margins reached 2.16% in September, up from 2.05% in September 2009.
Kiwibank's 'meaningful' competition
Government owned Kiwibank remained a “meaningful” competitive influence on both deposits and mortgages. That said, the UBS analysts note Kiwibank’s annual cost to income ratio rose to 72.6% in the year to June from 68.7% last year, marking the first year in the eight it has been operating that Kiwibank’s cost to income ratio has deteriorated.
Furthermore the analysts say given Kiwibank has a sovereign guarantee on all its debt securities, it’s “heavily dependent” on New Zealand’s sovereign credit rating for its capacity to grow and compete effectively with its Australian owned rivals.
The UBS analysts also point out market participants emphasized to them how “progressive” the Reserve Bank continued to be, noting its “pragmatic” liquidity policy and core funding ratio and its recent consultation paper on plans to develop a legislative framework for bank covered bond issues.
* This article was first published in our email for paid subscribers earlier today. See here for more details and to subscribe.
9 Comments
From Money morning
For example, we're curious to know why NAB's ‘cash and liquid assets' position fell from $20 billion at the end of December 2008 to just $10.7 billion at the end of January 2009.
And that's exactly what happened. Because banks are so leveraged, their balance sheet is hugely impacted even by small falls in asset prices or by increases in cash withdrawals.
Is it just a coincidence that it covers the same period when NAB needed emergency loans from the US Federal Reserve? And possibly emergency loans from the Reserve Bank of Australia?
That's right, as the Australian Financial Review (AFR) reported on Friday:
"The RBA has not disclosed which Australian banks took the money."
We'll have a guess... Each of the Four Pillars, and probably the smaller players too. You don't need to be a central bank insider to figure that one out
The truth is, I don't know. Maybe it's a coincidence that NAB's cash position halved. But there doesn't appear to be any precedent for it in previous years apart from the December 2004 to January 2005 period which was the year following the NAB currency trading debacle.
All I know is, there's more to the story than has currently been revealed. Whether the full extent will ever be revealed of what the banks, central banks and government did during period is unknown.
But we were amused to read Westpac CEO Gail Kelly's submission to the "Senate Economics Committee Inquiry into Competition within the Australian banking sector".
Ms. Kelly's submission was released on the same day the Federal Reserve revealed how Westpac had borrowed over USD$1 billion from the Fed in 2007 and 2008.
The submission sticks two fingers up at the truth by opening with:
"Australia has a strong, reliable and resilient banking system, with all of its participants contributing to that strength in their own way."
So strong that two of the banks needed over USD$5 billion of emergency loans from 2007 to 2009, and other unnamed banks needed some of the USD$53 billion the RBA borrowed from the Fed on their behalf. But anyway, Ms. Kelly continues...
"In fact our banking system truly showed its worth through the crisis. The crisis remind the nation, and the world, how important it is to have a safe and strong banking system."
So safe and strong that two of the banks needed over USD$5 billion of emergency loans from 2007 to 2009, and other unnamed banks needed some of the USD$53 billion the RBA borrowed from the Fed on their behalf. And on she goes...
"As the crisis unfolded, Australian banks moved to reduce their reliance on wholesale funding (both domestic and offshore), not just because the crisis had made that funding scarcer and more expensive, but also to achieve a better balance between wholesale funding and customer deposits in the overall bank funding mix."
That's right, Westpac reduced "their reliance on wholesale funding" by sidestepping the wholesaler and going straight to the manufacturer - the US Federal Reserve.
What the release of data from the Federal Reserve reveals is that the Australian banking sector didn't avoid the worse of the financial meltdown at all. In fact it participated in exactly the same way as most other banks around the world...
It took taxpayer dollars and received central bank bail outs. That's something we've pointed out all along. Although even we hadn't figured on the fact that Aussie banks had gone cap-in-hand to the Federal Reserve, both directly and indirectly.
We'll keep following up on this, as our guess is there are many more bombshells to come. As for how we've gotten on so far with responses from APRA, the RBA and ASX, read on...
The first reply came from the RBA saying:
"The Bank does not comment on commercial institutions' business dealings or transactions."
And that was it. Nothing more.
The RBA simply doesn't comment.
Perhaps that's because the RBA knows much more than it's letting on. Such as the revelation that the RBA itself borrowed USD$53 billion from the US Federal Reserve. That surely makes it a taxpayer issue rather than a commercial issue.
As for the other agencies, nothing yet. But we're sure they're working on it!
And I'll keep you posted as more info comes to hand.
Cheers.
Kris Sayce
For Money Morning Australia
I don't know why the potential sale of the Crafar Farms to Hong Kong Diary is seen as essential for the underpinning of land asset value. The funds used in foreign transaction vs a local transaction have no parity. Hardly a level playing field.While the sale (if it ever eventuates) will influence values locally for GV purposes, The reality is that banks in NZ have little apetite for lending despite the spin they put out that it is business as usual. NZRB fiscal report Nov 2010 rural lending only .3%. as opposed to 2007-2008 22.1%. A bit like The Emperor With No Clothes. Understand that 300-500 million of the Cullen Fund is going to be used for land acquisition over the next 3-5 years, Why not use those funds to purchase the farms and reconvert them back to smaller dairy units and ballot the farms , so that young people can enter the industry and protect NZ's productive future ?
A "profit driver".....sounds like something Tiger wood use!.....anyone still doubt the Noddy economy is being farmed by the banks....the word on the land is the banks are holding back from forcing the sale on the huge number of vineyard failures in marlborough and no doubt elsewhere...they don't want the market to drop the values...were that to happen their balance sheets would run with blood....this is but one example of the bubbles being protected to save the banks...the rest of the economy pays for it....this is why the savings will not improve...peasants are working to keep the banks in profit. Bill thinks it's best and JK just loves it.
Wolly, I rang a Winery yesterday, instead of the usual person I found myself talking to a rather demanding intermediary, who do you want to talk to can you please tell me what about. Oh shit another dud.
Janette
Dont forget we already own Landcorp and you will be asking the Cullen fund to take a big cut in returns or are they expecting Capital gain, if so its going to get interesting as I dont think there is much room in NZ for Capital Gain with our currency so high,though it makes a capital gain tax interesting when the Cullen fund would have so much at stake. 300-500 million is not much when looked at monthly debt increases in 2007 close to 2 billion.
Personally I dont think the Cullen fund will get to invest in farming,someone spoke before engaging their brain, for one the returns are too low and two I think the world will have changed and returns could even be worse. However I admit our share market looks stuffed, maybe we should pay Weldon even more.
I still think our fundamentals are out of wack, Im looking at our $, 57.5 to the Euro,48.5 to the pound,oil at close to $90. those lovely french farms in the south west, with a lifestyle to boot look bloody cheap compared to a live hanging off cow tits even if the French go belly up I know they will do it in style.
The reality is there are too many dairy farms on the market, Crafars, 14Harts 26and now the Hubbard dairy group, which is the biggest supplier to Foterra (76 farms) alone . The redemption risk to Fonterra in terms of supply shares being cashed up if overseas buyers set up their own plants will bring Fonterra to its knees and could damage NZ's Dairy industry permanently. Also Fonterra would be obliged to supply milk to these new plants at nz Dairy farmers expense. Innovative thinking is needed to sort out the bloody mess. As a country we only have food production and tourism as our mainstay earners, We need to stick to our knitting.
The reality is there are too many dairy farms on the market, Crafars, 14Harts 26and now the Hubbard dairy group, which is the biggest supplier to Foterra (76 farms) alone . The redemption risk to Fonterra in terms of supply shares being cashed up if overseas buyers set up their own plants will bring Fonterra to its knees and could damage NZ's Dairy industry permanently. Also Fonterra would be obliged to supply milk to these new plants at nz Dairy farmers expense. Innovative thinking is needed to sort out the bloody mess. As a country we only have food production and tourism as our mainstay earners, We need to stick to our knitting.
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