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ANZ's Asian strategy has failed
by Christopher Joye
The related banking, housing and inflation gods have conspired to make next Tuesday's Reserve Bank of Australia board meeting a "live" one, with markets putting a 50 per cent probability on a cut.
Afflicted by occasional bouts of relevance-deprivation syndrome, our monetary policy mandarins have no compunction pulling the interest rate trigger on Melbourne Cup day. For the first six years of governor Glenn Stevens' tenure, he obliged punters with a rate recalibration.
And if you feel the need to go, November is a good time. This is because banks take almost a month to adjust lending rates, which implies you have to get ahead of the festive season to influence consumer behaviour.
Even before one contemplates gouging by our banking behemoths or the deceleration in the housing bubble's expansion rate, it is straightforward to make the orthodox case for a cut:
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• The economy is not growing rapidly enough to reduce the unemployment rate, which at 6.2 per cent is higher than the jobless rates in the United States (5.1 per cent) and Britain (5.4 per cent), and Treasury's estimate of full employment at around 5 per cent;
• The price of our most important commodity, iron ore, has tumbled 17 per cent from $US59 a tonne in September to $US49 today while the Aussie dollar has only depreciated 1.7 per cent (even less on a trade-weighted basis);
• A slack labour market has driven down wages growth to the lowest levels in more than 20 years; and
• Notwithstanding a 20 per cent decline in the exchange rate since January 2014, annual core inflation surprised on the downside, at merely 2.15 per cent over the year to June, which is only a touch above the lower bound of the RBA's target band.
A November cut came into frame after Westpac's decision to jack up home loan rates by 0.20 percentage points on October 14 as compensation for the higher-equity funding costs attributable to its government-mandated deleveraging process. As this column explained at the time, there were more rate hikes to come and the three other oligarchs, which combined with Westpac account for more than 80 per cent of the market, did not disappoint. Smaller lenders such as Members Equity have also jumped on the bandwagon.
As far as the RBA is concerned, the result is an unexpected tightening of monetary policy in the interest rate-sensitive housing market, which it (rightly or wrongly) considers to be a vital source of growth, while the economy endures the headwinds induced by the "capex cliff". Naturally, there is a chance that this is actually welcomed by the RBA, given it failed to anticipate the double-digit house price inflation since 2013 that has bequeathed us the most indebted and expensive bricks and mortar in the world.
Yet the daily house price and weekly auction clearance rate data, which the RBA watches closely, suggests a cooling of Sydney housing conditions was already in train as a result of the regulator's efforts to clamp down on speculative investments and dodgy lending. While Melbourne's 70 per cent clearance rate last weekend is unchanged from 12 months ago, Sydney's 61.3 per cent rate is well below the 75 per cent mark attained in October 2014. A similar divergence can be found in the capital growth rates over September and October: whereas Sydney homes have experienced modest gains of just 0.34 per cent, Melbourne prices are up a strong 3.1 per cent.
So if Martin Place is minded to debase the risk-free rate to a new low, it can draw some comfort that the Sydney housing exuberance – and associated banking dysfunctions – have dissipated. The RBA might also assert that it is simply seeking to restore monetary policy to its former status. And if the banks only partially pass on any rate relief, which is a safe bet, policy will still remain more restrictive than it was after the RBA's May cut.
A counterargument is the RBA should wait for the US Federal Reserve's lift-off, which is likely to commence in December and would put further downward pressure on the Aussie dollar. The complication with this logic is that the Fed meeting is not until the middle of December, which is two weeks after the RBA's next caucus.
This brings us back to Glenn Stevens' maxim that if you think you should go, best to get the job done quickly or risk the economy running ahead of you. It's also worthwhile recalling that several senior RBA officials, including Guy Debelle and John Simon, have tried to convince us that the lowest interest rates in human history are entirely appropriate and unlikely to trigger financial stability troubles.
Of course, the RBA is superficially responsible for financial stability. And in this respect the big banks have been compelled by the Australian Prudential Regulation Authority (APRA) to remedy their reckless lending standards and lift their capital ratios to what increasingly resembles world-beating levels.
The speed and apparent ease with which the majors have accumulated more than $36 billion in tier 1 equity over the past year should encourage them to follow APRA boss Wayne Byres' advice to do more while they can. This week ANZ and NAB reported internationally harmonised "leverage ratios" of 5.7 per cent and 6.0 per cent respectively, which is above the 5.5 per cent target I had nominated and will push them close to the top quartile of global peers. (The four majors all appear to be top quartile on a risk-weighted tier 1 capital basis.) Both banks also published total loss-absorbing capacity (TLAC) ratios of around 18 per cent, which implies they will have no difficulty complying with the incoming TLAC rules after 2019.
One worry is ANZ's Asian expansion strategy, which I have criticised for years as a source of entirely unnecessary risk. "What comparative advantage do Australian bankers have competing in Asian territories," I have repeatedly asked. The history of the major banks' offshore forays, with NAB's UK banking disaster the most recent case study, suggests absolutely none.
If neither NAB nor APRA can prudently monitor and manage credit risks in a country like Britain, which has similar political, legal, cultural, and banking conventions to our own, what hope do they have in China, India, Singapore, or Indonesia? The chickens have now come home to roost. ANZ's boss Mike Smith has been forced to describe his own 16 per cent return on equity target as "a bridge too far" as his misguided Asian adventures run amok with a $650 million spike in bad debts.
"ANZ's claims of a low-risk Asian expansion have been proven false," says Merrill Lynch banking analyst Andrew Hill. "ANZ led us to believe that its expansion into Asia was low risk, but in [the second half of 2015] we saw the institutional bank's new impaired assets treble," he continued. "If two exposures can cause so much damage, what happens if systemic problems arise, as appears likely given Asian macro and commodity prices?"
Australian bank credit exposures to Asia have jumped from less than $25 billion ($50 billion) in 2005 (2010) to more than $175 billion today, according to the RBA. While the return on assets on these foreign investments has always been lower than the banks' domestic activities, chief executives are lemming-like in their preparedness to ignore history and blindly search for growth overseas.
ANZ has managed to lend an incredible $100 billion throughout Asia – more than 1.6 times NAB's UK exposures or 3.7 times the amount NAB and Westpac lend in the region. Unless prompt action is taken, it may end in disaster ...
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又来了，橙皮空心蛋糕-orange peel ring cake (2007-11-3) hattie 
发表于 2015-10-30 10:38
