For a number of months i have been highlighting the unique nature of the big 4 Australian banks as an effective oligopoly (and why its foolish to compare our major banks to their international comparisons)
One of the best ways to 'see' a monopoly or oligopoly in practice is to look at when the going gets tough. For most people when the going gets tough we buckle down and bear the times, when the going gets tough for an entity with monopolistic practices they just increase the prices.
ANZ eyes higher business-lending profit marginsFont Size: Decrease Increase Print Page: Print Richard Gluyas | March 04, 2009
Article from: The Australian
STRUGGLING businesses will not get the full benefit of falling interest rates and may even be slugged with higher lending charges after ANZ Bank warned large corporate customers that the bank's profit margins on business lending would widen.
As the Reserve Bank kept the cash rate unchanged at 3.25 per cent yesterday, The Australian has learned that ANZ chief executive Mike Smith told about 100 large business customers at a board dinner early last week that ANZ's margins would expand for the foreseeable future.
This was due to higher funding costs, as well as the repricing of loans to reflect greater risk following a spate of internal ANZ downgrades of customers due to deteriorating business conditions.
One customer at the board dinner, held in the 34th-floor dining room of the bank's Queen Street office tower in Melbourne, said he was surprised by Mr Smith's blunt message. "But clearly that's the environment we're now in," he said.
The tougher environment has led to a flood of criticism of the banks by small and medium-sized enterprises about their inability to secure funding from domestic banks, which have greatly improved their position in the domestic market because of the global financial crisis.
The ANZ chief's warning on margins follows former Westpac boss David Morgan's assessment last week that the major banks were emerging from the financial crisis with huge, enhanced pricing power.
Dr Morgan said the core of the domestic banking system was "very healthy", with foreign banks retreating, second-tier lenders disappearing and higher funding costs generally able to be passed on to customers.
The result was a reduction in competitive intensity, and an ability to price more appropriately for risk, offset by a greater tendency for the federal Government to use moral suasion to keep lending rates relatively low.
"This means we have not seen, in my judgment, the full impact of the new-found pricing power of the major banks," Dr Morgan said. "Given also my judgment that the return of foreign financiers -- and a new tier-two of financiers -- to Australia is likely to take a long time, I believe we have seen a fundamental, very significant structural shift that augurs well for major bank profitability in the future."
Paul Dowling, head of financial services research firm East & Partners, said businesses were now in a "cost-plus" margin environment with their banks.
While lending rates for some customers were not falling as fast as benchmark rates, Mr Dowling said other businesses in riskier segments such as commercial property and retail were doing it even tougher, and being slugged with interest rate rises.
Business lending rates, he said, had fallen by an average of only 60 basis points over the past six months, in contrast to plunging rates in "politically sensitive and transparent" residential mortgages.
"There's been a fair bit of dancing around this issue, and only recently has the penny really dropped that, for the next couple of years at least, the majors will hold an unusual level of pricing power," Mr Dowling said.
"With the foreign banks not active any more, and the second-tier lenders disappearing, there's a whole pile of refugees beating a path to the Big Four.
"Clearly, they have pricing power and they're exercising it, through straight pricing but also increased collateral and security requirements."
Mr Dowling said the majors were also starting to demand the customer's other banking business, on top of lending, including transaction services, deposits, treasury, foreign exchange and trade finance.
While SMEs had a relationship with an average of two banks, that figure stepped up quickly to five for the corporate or middle market, and 13 in the institutional segment.
Mr Dowling disputed the banks' argument that greater risk justified higher lending rates for the SME segment. He said two-thirds of SME lending was secured against residential property -- the same security held for retail mortgage lending.
RBA governor Glenn Stevens said that demand in Australia had not weakened as much as in other countries and the economy had not experienced the sort of large contraction seen elsewhere.
NAB Capital chief economist Rob Henderson said Mr Stevens' comments suggested rates could remain steady for the next three to four months while the RBA monitored economic activity.
One of the best ways to 'see' a monopoly or oligopoly in practice is to look at when the going gets tough. For most people when the going gets tough we buckle down and bear the times, when the going gets tough for an entity with monopolistic practices they just increase the prices.
ANZ eyes higher business-lending profit marginsFont Size: Decrease Increase Print Page: Print Richard Gluyas | March 04, 2009
Article from: The Australian
STRUGGLING businesses will not get the full benefit of falling interest rates and may even be slugged with higher lending charges after ANZ Bank warned large corporate customers that the bank's profit margins on business lending would widen.
As the Reserve Bank kept the cash rate unchanged at 3.25 per cent yesterday, The Australian has learned that ANZ chief executive Mike Smith told about 100 large business customers at a board dinner early last week that ANZ's margins would expand for the foreseeable future.
This was due to higher funding costs, as well as the repricing of loans to reflect greater risk following a spate of internal ANZ downgrades of customers due to deteriorating business conditions.
One customer at the board dinner, held in the 34th-floor dining room of the bank's Queen Street office tower in Melbourne, said he was surprised by Mr Smith's blunt message. "But clearly that's the environment we're now in," he said.
The tougher environment has led to a flood of criticism of the banks by small and medium-sized enterprises about their inability to secure funding from domestic banks, which have greatly improved their position in the domestic market because of the global financial crisis.
The ANZ chief's warning on margins follows former Westpac boss David Morgan's assessment last week that the major banks were emerging from the financial crisis with huge, enhanced pricing power.
Dr Morgan said the core of the domestic banking system was "very healthy", with foreign banks retreating, second-tier lenders disappearing and higher funding costs generally able to be passed on to customers.
The result was a reduction in competitive intensity, and an ability to price more appropriately for risk, offset by a greater tendency for the federal Government to use moral suasion to keep lending rates relatively low.
"This means we have not seen, in my judgment, the full impact of the new-found pricing power of the major banks," Dr Morgan said. "Given also my judgment that the return of foreign financiers -- and a new tier-two of financiers -- to Australia is likely to take a long time, I believe we have seen a fundamental, very significant structural shift that augurs well for major bank profitability in the future."
Paul Dowling, head of financial services research firm East & Partners, said businesses were now in a "cost-plus" margin environment with their banks.
While lending rates for some customers were not falling as fast as benchmark rates, Mr Dowling said other businesses in riskier segments such as commercial property and retail were doing it even tougher, and being slugged with interest rate rises.
Business lending rates, he said, had fallen by an average of only 60 basis points over the past six months, in contrast to plunging rates in "politically sensitive and transparent" residential mortgages.
"There's been a fair bit of dancing around this issue, and only recently has the penny really dropped that, for the next couple of years at least, the majors will hold an unusual level of pricing power," Mr Dowling said.
"With the foreign banks not active any more, and the second-tier lenders disappearing, there's a whole pile of refugees beating a path to the Big Four.
"Clearly, they have pricing power and they're exercising it, through straight pricing but also increased collateral and security requirements."
Mr Dowling said the majors were also starting to demand the customer's other banking business, on top of lending, including transaction services, deposits, treasury, foreign exchange and trade finance.
While SMEs had a relationship with an average of two banks, that figure stepped up quickly to five for the corporate or middle market, and 13 in the institutional segment.
Mr Dowling disputed the banks' argument that greater risk justified higher lending rates for the SME segment. He said two-thirds of SME lending was secured against residential property -- the same security held for retail mortgage lending.
RBA governor Glenn Stevens said that demand in Australia had not weakened as much as in other countries and the economy had not experienced the sort of large contraction seen elsewhere.
NAB Capital chief economist Rob Henderson said Mr Stevens' comments suggested rates could remain steady for the next three to four months while the RBA monitored economic activity.
