Mark Draper (GEM Capital) talks with Andrew Clifford (Chief Investment Officer - Platinum Asset Management) about the threat to Australian Banks from the new entrants to the payments system such as Paypal.

Andrew acknowledges the risks are real and outlines the signs that investors should be looking for.

Published in Investment Advice
Friday, 02 August 2013 03:59

New levy on bank deposits - not on banks

413401-130803-bill-leak-galleryExpect depositors to take the hit!

Media outlets reported on Thursday that the Federal Government was planning to introduce a deposit insurance levy on Australian Banks.  Details of the proposed change have just been released.

The levy is to be implemented by the way of fixed fee of 0.05% on deposits up to $250,000.  There are a number of possible reactions by the banks to such a levy. Banks will either (i) absorb the fee and deliver a lower profit to shareholders, (ii) source additional revenue through fees and higher mortgage rates, or (iii) reduce the deposit rates paid to investors.

Given the oligopolistic nature of the Australian banking industry, we think outcome (iii) is most likely.  Indeed, Australian Bankers Association head Steven Munchenberg said that he expects that the banks will pass the levy on to customers in terms of lower interest rates on their deposits.  Combined with an anticipated cut in official interest rates from 2.75% to 2.50% at the RBA’s meeting next Tuesday, Australian savers face the prospect of a one-two hit to their income stream in quick succession, after already suffering significant reductions in income streams following a series of successive interest rates cuts since October 2011.  The question investors need to answer becomes what should they do in the face of these changes.

Sacrifices in income levels and lifestyle are embedded in the lower returns from bank deposits, making alternative sources for yield more compelling. Take for example, the current Australian equity market yield of around 4.3% net. After including the full benefit of franking credits, the gross yield of the Australian share market becomes 5.7% which is more than double the RBA cash rate.

Finally - it must be remembered that this is not yet law, and it's outcome depends on the timing of the election, and who wins.

This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.

Published in Fixed Interest

A research report from UBS recently described Australian Bank share prices as a "bubble".

We ask this question of Kerr Neilson (CEO) and Andrew Clifford (CIO) of Platinum Asset Management.

They do not believe that Australian Banks are in a bubble - but believe that there are many other banks globally with superior growth characteristics at far cheaper prices.

Published in Investment Advice

With the constant symphony of politicians from all parties clamouring over each other to bash up the banks and accuse the Australian banking industry of profiteering from mortgage holders since the GFC, we examine the truth behind why the interest rates on home loans have risen more than the official Reserve Bank cash rate.

First some revision, where do banks source money to enable them to lend out to homeowners?  Banks can either attract deposits by offering term deposits and cash accounts or they can "buy" money from the wholesale market, largely from overseas.

The graph below shows the increase in the cost to acquire these sources of funding since the start of the GFC, courtesy of Commonwealth Bank's analyst pack at their recent results presentation.

The chart highlights that Australian banks have paid an additional 1.65% to obtain funds from the wholesale market and have had to pay cash account and term deposit holders 1.86% over what they were paying before 2007 to attract funds.  Those who watch term deposit rates would know this as term deposits are currently more than the RBA official cash rate of 3.5%, whereas prior to GFC banks paid around 1.5% below the cash rate for deposits (source RBA Bulletin March 2010)

Despite having to pay on average 1.78% more to acquire funds to lend out, CBA's increase to the standard variable home loan rate has been less than 1.5% which means that the bank has absorbed some of the pain of the increase cost of funding.

The bank bashers will not accept this and point to their record profits.  The banks higher profitability has come through acquiring several of the second tier lenders such as BankWest (CBA) and St George & RAMS (Westpac) so one would hope their profits are higher as their businesses are now much larger.

We readily accept that the cost to build a house has increased due to the increased cost of raw materials such as steel and timber, and yet when the cost of "raw materials" for banks increase we accuse them of gouging.

Australia should be proud of our healthy banking system and pay no attention to the ill informed politicians who are bank bashing to distract voters from their own inadequacies.




Published in Fixed Interest