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What do the banks know that we don’t?
Topic Started: 12 Aug 2014, 07:24 PM (812 Views)
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What do the banks know that we don’t?

July 29, 2014 by Jon Giaan

The big-banks have started slashing their fixed-rate mortgages, so what do they know that we don’t? I reckon they’ve seen how the chips lie, and know that a interest rate cuts are pretty much a sure-bet from here.

CBA sparked a bit of a rate-cutting and media frenzy last week when it announced that it was cutting the rates on its fixed home mortgages to below 5%.

And the majors have all since followed suit.

What’s going on? Are we entering some golden age of competition between the banks as some people have suggested? Or do the banks know something that we don’t?

Call me a sceptic, but when the big four banks control 85% of the mortgage market, I’m not holding my breath for ‘rigorous and healthy’ competition. I think the best we can hope for is some sort of muted oligopoly – and that kinda seems to be what we’ve got – punctuated by shameless bouts of collusion and rent seeking.

The sceptic in me also thinks that this might also be more about media and PR than any fundamental change in bank business. CBA saw the writing on the wall, and so seized the first-mover advantage. It now gets the kudos of being the ‘market leader’ every time the media reports it.

And when you break it down, 70 basis points sounds like a lot – close to three regular rate cuts – but it’s not actually all that amazing. CBA’s sub 5% rate only applies if you bundle in your other banking with them, and there’s an annual fee of a couple of hundred dollars as well…

And for whatever reason, Aussies just don’t seem to dig fixed-rate mortgages. In NZ and Britain, they account for almost half the market. Here’s it’s like one in 5, tops. 18% of CBA’s book is fixed rate. ANZ is like 11%

But even then, I’ve seen some estimates say that 5-year fixed rates are an even smaller percentage again – something like 1% of their books.

So a cut to 3 and 5-year fixed rates is going to have a minimal impact on their business (and from a marketing perspective, is probably money well spent!)

The other point is that the banks can afford it. Their wholesale cost of funds has been falling for over a year now. There’s this cute notion that someone in your neighbourhood puts money in the bank, and then the bank lends it out to you, and that’s how banking works.

Maybe back in the stone-age. Now, banks borrow money on international money markets and lend it to you (though deposits also have a role to play).

And the price banks pay to borrow from these international money markets has been falling.

Like this chart here shows that the 3 year swap rate, has fallen from 3.3% towards the end of last year, down to around 2.8% now. That’s a full half a percent.

Screen Shot 2014-07-29 at 2.55.27 pm

In fact, some analysts are saying that banks are currently enjoying the cheapest capital on offer since before the GFC.

(You might have noticed that the banks haven’t passed these discounts on to you…. How’s that competition working out for you?)

And so a few basis points here and there, tied in with some backhanded packages and fee hikes is no skin off anyone’s nose.

What is interesting though is what this means about the banks’ longer-term view of interest rates.

That is, the banks certainly don’t see rates rising any time soon. In fact, they’re probably going lower still.

Even the most bullish commentators aren’t expecting rate hikes until the middle of next year at the earliest. But even they’re in the minority. Most people are expecting more cuts.

And markets seemed to have priced in at least one, maybe two rate cuts over the next year.

And it’s not because the Australian economy is looking wonky – though there are some questions about how the transition away from the mining boom is going to go.

No, it’s all about the global outlook, and what’s happening with interest rates around the world. The US, Europe and Japan all have their interest rates tied to zero. Policy is getting a little tighter in the US, as they unwind quantitative easing, but they’re still a long way from raising rates.

And that means there’s still a yawning interest rate differential between us and the rest of the world. If we hike rates and the gap gets bigger, then Aussies assets are paying more of a return, people will want Aussie dollars to buy Aussie assets…

… and extra demand will push the Aussie even higher.

And we know what a thorn in the side the high Aussie has been.

In fact, with markets having already priced in one or two interest rate cuts, they’ve got the RBA over a barrel. The current exchange rate – already a hefty 94 cents – factors in the expectation of more rate cuts to come.

So if the RBA doesn’t deliver the promised rate cuts, the exchange rate suddenly looks cheap, and it’s not a much of a leap from here over the parity mark.

So the RBA would be testing the markets patience if they held those rate cuts back for too long. But if they raised rates?

Forget it. The markets would quickly punish us, and we could be looking at a crippling exchange rate of $1.10 or $1.20. That’d would be a pain in the arse.

The banks know that the market’s got Glenn pinned down. And so betting on further rate cuts – which is what their adjustment to the fixed-rate is – seems like a pretty safe bet to me.

Say what you like about banks, but they’re no fools with their money.

Read more: http://knowledgesource.com.au/what-do-the-banks-know-that-we-dont
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goldbug
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Better to have a trickle of income than massive defaults coming in the door. The big 4 banks are the most sound businesses in Australia. Not because the morgage market is healthy or because their assets are sound. But because their business model allows them to all but pack up shop and still see profit.

They sold off all their properties a decade or more ago and only lease now.
They have successfully outsourced their major component to mortgage brokers.
They can sack off most of their other staff at a moments notice.
They have guaranteed bailout facilities at the RBA that will transfer any liabilities to the Australian public at a moments notice.

Well done I say.
Shadow was hopelessly wrong about the Gold Bull Market.
What else is he wrong about?
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peter fraser
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goldbug
12 Aug 2014, 07:46 PM
Better to have a trickle of income than massive defaults coming in the door. The big 4 banks are the most sound businesses in Australia. Not because the morgage market is healthy or because their assets are sound. But because their business model allows them to all but pack up shop and still see profit.

They sold off all their properties a decade or more ago and only lease now.
They have successfully outsourced their major component to mortgage brokers.
They can sack off most of their other staff at a moments notice.
They have guaranteed bailout facilities at the RBA that will transfer any liabilities to the Australian public at a moments notice.

Well done I say.
Their business model is served far better by cashing in their property holding and renting, and using those funds to satisfy their tier one needs - but their model is unique. Most other business models are not served as well by not holding real estate. In fact it's become obligatory for small business to be backed by bricks and mortar.

Any expressed market opinion is my own and is not to be taken as financial advice
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goldbug
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I don't know about that peter, woolies and coles are very successful businesses and as far as I know they too mostly lease.


http://m.theaustralian.com.au/business/markets/woolworths-spin-off-sca-property-group-rises-on-asx-debut/story-e6frg916-1226524504109?nk=3d97f7b73875be70c78c94178f4199f2

In this story of a couple of years ago woolies spun off a lot of what they did own I presume. Big businesses know what lies ahead for all forms of RE, it's why they are big. The banks got out of property right before the top of the commercial property bubble and now others have had to weather those losses.

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"With Woolworths increasing its shopping centre presence in emerging markets that are yet to stabilise, we highlight there is concentrated leasing and rental growth risk across some of these assets," Macquarie's Rob Freeman said in a note to clients.


Small businesses are a dying breed. Most rent property but of those who bought, many of them are up to their eyeballs in debt as a result anyway. I know you are a mortgage broker and want to see small business buying property so that you can make profits but don't confuse that with the reality that there is a vast oversupply of commercial RE in this country and that prices are continuing to fall as businesses continue to go to the wall and leave more vacant.
Shadow was hopelessly wrong about the Gold Bull Market.
What else is he wrong about?
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peter fraser
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goldbug
12 Aug 2014, 08:26 PM
I don't know about that peter, woolies and coles are very successful businesses and as far as I know they too mostly lease.


Both Woolies and Coles have had some hard years in recent times.
http://www.theaustralian.com.au/business/opinion/how-mcleod-turned-coles-around/story-e6frg9wx-1226832052587

Retailers need flexibility. A booming location today may be dead in the water tomorrow, so renting makes sense to them, but they are public companies, not small business's. Public companies if profitable can raise money with a share issue, your local dentist can't so he needs property to borrow against to open the next surgery in an adjoining suburb.

Quote:
 
In this story of a couple of years ago woolies spun off a lot of what they did own I presume. Big businesses know what lies ahead for all forms of RE, it's why they are big. The banks got out of property right before the top of the commercial property bubble and now others have had to weather those losses.

The banks had to change their model to meet the challenge of overseas banks under Keating and a completely different monetary system as we moved off the gold standard and adjusted to a floating dollar. It has little to do with the property itself.


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Small businesses are a dying breed. Most rent property but of those who bought, many of them are up to their eyeballs in debt as a result anyway. I know you are a mortgage broker and want to see small business buying property so that you can make profits but don't confuse that with the reality that there is a vast oversupply of commercial RE in this country and that prices are continuing to fall as businesses continue to go to the wall and leave more vacant.


Lots of small business own property, I wouldn't say that it makes them less successful. If small business owners choose to rent then an investor will buy the premises to rent to them, why would that be of concern to me personally? A buyer is a buyer.

Any expressed market opinion is my own and is not to be taken as financial advice
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Ex BP Golly
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Down to 1.8% is, and has been my prediction.

We are headed to zirp, and might even get there.
WHAT WOULD EDDIE DO? MAAAATE!
Share a cot with Milton?
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ggriff
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Sourcing cheap offshore capital seems like a no brainer until the AUD falls...
then the big 4 won't be reporting such large profits :)
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peter fraser
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ggriff
13 Aug 2014, 01:14 AM
Sourcing cheap offshore capital seems like a no brainer until the AUD falls...
then the big 4 won't be reporting such large profits :)
They are made to go offshore for term funding by APRA.

The funds raised are fully hedged so movements in the $AUD won't matter to them.
Any expressed market opinion is my own and is not to be taken as financial advice
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