PUBLISHED: 4 hours 46 MINUTES AGO Christopher Joye
Groundbreaking research by Commonwealth Bank chief credit strategist Steve Shoobert has unearthed a new financial benchmark that can be used to value Australia’s banks.
While this analysis has been missed by Australia’s media, it is causing ripples at the top end of town. This is because it provides investors an alternative prism through which to assess bank profitability, and value their debt and equity. And the new tool implies that “Westpac has the best bank franchise”.
Australia’s four major banks have a combined market capitalisation of $300 billion. They are worth about a fifth of the nation’s gross domestic product, or 25 per cent of the total value of the S&P/ASX 200. Roughly 60 per cent of the majors’ funding comes from deposits. The cost of these deposits is thus a crucial driver of the banks’ net interest margins and profitability.
Under the new banking laws that come into effect on January 1, 2015, called Basel III, the Australian Prudential Regulatory Authority will start discriminating between “good” and “bad” deposits.
In short, small sums of sticky money that are covered by taxpayer guarantees and sourced from unsophisticated households with long-standing bank relationships will be classified by APRA as “stable” sources of funding.
In contrast, deposits that are not covered by taxpayer guarantees, that are large in size, furnished by financial institutions or sourced online via promotional rates will be categorised as unstable.
Banks will be required to assume that a significant share of these deposits race out the door in a crisis. To protect against this hazard, APRA will force banks to hold “liquid assets”, such as government bonds, against more fickle funding suppliers. If and when customers demand their money back, the bank should, in theory, be able to pay them.
The Basel III regulations have profound consequences for product design, and the profitability of different institutions.
In the future, banks will legally lock you into term deposits. That is, you will not have the right to break them unless the bank authorises it. There is a conflict here: when banks most need to hold on to your cash in a genuine liquidity crunch, you may want to withdraw it.
If a bank does give you the right to break a term deposit, APRA says it will have to charge you a penalty that is “materially greater than the loss of interest”. This means you will suffer a capital loss that is not covered by any government guarantee.
Popular online savings products like ING Direct’s, which gives new customers a high 5.35 per cent “promotional” rate for the first four months, will either disappear or become less attractive to provide.
APRA is going to ensure that these flighty online customers, who are constantly shopping around for the sharpest rates, will become much more expensive funding sources relative to depositors that have deep transactional relationships.
Banks will be required to assume that a significant share of these deposits race out the door in a crisis. To protect against this hazard, APRA will force banks to hold “liquid assets”, such as government bonds, against more fickle funding suppliers. If and when customers demand their money back, the bank should, in theory, be able to pay them.
All the MMT loonies on this board keep telling me that real deposits don't matter because they can just be invented?
The next trick of our glorious banks will be to charge us a fee for using net bank!!! You are no longer customer, you are property!!!
Deposit products have been murdered as viable investments and conservative savers are being compelled to absorb much more risk than they ordinarily would to meet their income needs.
Even before tax, “real” returns on deposits after core inflation are now negative for only the third time in the past quarter of a century. The king – cash – is dead and the trail of blood leads to Sydney’s Martin Place and central banks around the world, where cheap money and deliberately distorted asset prices are usurping economic reality.
When I first suggested that the Reserve Bank of Australia’s inflation-adjusted cash rate might have turned negative in December 2012, the governor, Glenn Stevens, correctly retorted that deposits still offered investors positive real returns.
Today that is no longer true. Since the RBA cut its target cash rate to a record low of 2.5 per cent in August last year, banks have chiselled deposit rates to the point where most no longer supply returns above your cost of living. After tax, you are falling way behind.
This is a big deal. Since the RBA started targeting inflation in 1993, its cash rate has, on average, returned a healthy 2.4 per cent above core inflation. The RBA’s cash rate settings have meant investors have typically been able to earn a decent real return of about 1.5 per cent a year, on average, above core inflation via three-month or six-month term deposits.
Investing in cash as a risk-free asset class and getting acceptable real returns beyond the cost of living, savers could rationally demand a significant premium from riskier investments like bonds, convertible preference shares (called “hybrids”), equities and housing. And if any particular sector became overvalued such that expected returns did not provide enough compensation for the risk of loss, savers could exercise the option of diverting their portfolios back into cash and still survive until more sensible valuations prevailed.
But the RBA has taken away that option. Even the most attractive “special” savings products promoted by banks, which come with bucket-loads of catches, now only furnish, on average, 3.45 per cent. After tax, you still cannot keep pace with living costs.
This was despite a jump in the jobless rate to 11.1 per cent in 1992.
The only time investors had to grapple with negative real deposit returns was in late 2001, when interest rates were probably left too low for too long (which precipitated the mother of all housing booms), and in early 2009, when house prices likewise rocketed at worrying rates.
When I called double-digit house price growth in mid-2013, some pundits poured cold water on the proposition. The economy was too weak, credit and wages growth too low and households had already levered up. We could not have a re-run of the previous housing booms, they argued. Yet over the past 12 months, property prices have climbed at three to four times wages while housing credit is expanding at twice the rate of incomes.
Australia’s four major banks have a combined market capitalisation of $300 billion. They are worth about a fifth of the nation’s gross domestic product, or 25 per cent of the total value of the S&P/ASX 200. Roughly 60 per cent of the majors’ funding comes from deposits. The cost of these deposits is thus a crucial driver of the banks’ net interest margins and profitability.
If they are worth $300 billion, why do they have access to $380 billion bank bailout fund provided by the tax payer?? The bailout amount is more than any of them are even worth!!!! The justification for the bank bailout fund was the reasoning that the assets banks hold are hard to convert to cash when depositors withdraw their money. The scam of the bank bailout supposedly gets around the flaw of the fractional reserve banking system where one coin is deposited, 10 coins are written on a piece of paper that is then lent out to buy something, the person who sells the borrower an item worth 10 coins pays with the piece of paper that says 10 coins on it. The seller goes to the bank with the note that says 10 coins, but the bank only has 1 coin. Now with the $380 billion bank bailout, when this happens, the bank can just use the bailout to get 10 real coins and use the note that says 10 coins as collateral for it.
Not like that is any different than before, the central bank will do it even if there was no $380 billion bailout setup, it just the public won't get outraged and the banks can sleep easier each night knowing it is there for sure. $15,000 averaged over every Man, Woman and Child is potentially on the hook because of this bank bailout that was quietly put through and not discussed at all for the public.
Quote:
We could not have a re-run of the previous housing booms, they argued. Yet over the past 12 months, property prices have climbed at three to four times wages while housing credit is expanding at twice the rate of incomes.
Sydney house prices must be over 10x average wage now with the median price Sydney price now $930,000 according to latest sales reports.
Even 10x is conservative as that implies medium income for Syd is $93,000 PA which it is not, last time I looked it was around $60,000 PA.
The FACT that there are those here who reckon banks don't even need any deposits? As gub can just print them a bit more if they look like they might run a bit short - Is my punt as to what Count is "'crapping' on about now" ... ???
A Professional Demographer to an amateur demographer:"negative natural increase will never outweigh the positive net migration"
The FACT that there are those here who reckon banks don't even need any deposits? As gub can just print them a bit more if they look like they might run a bit short - Is my punt as to what Count is "'crapping' on about now" ... ???
Banks need reserves to support their payment obligations on behalf of customers who hold deposits. The deposits are created via the lending process and government payment net of tax.
I've been away for a while. Does count still think we get our dollars from china!
Banks need reserves to support their payment obligations on behalf of customers who hold deposits.
But they don't need deposits IF gub can just print them a bit more to "support their payment obligations on behalf of customers who hold deposits" surely?
But they don't need deposits IF gub can just print them a bit more to "support their payment obligations on behalf of customers who hold deposits" surely?
Govt print who money? How? What mechanism? What happen when a banks assets start to go bad?
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