Does private debt matter?

Not sure the miners have it completely support free. Favourable depreciation, instant exploration write-offs, etc are pretty favourable in a capital intensive industry.

Exploration does not necessarily yield a result I.e. a mine. It is more appropriate to see it as a cost in my view rather than capex. It would be like the time spent at a real estate company committee meeting being capitalised because they may set up a new office in a new suburb at the end of it. The time invested exploring the proposition is not capitalised into the new venture.

For me the only compelling argument is that they make good on Australia's natural resources but so do farmers, surf schools and fishing charter operators.
 
Also banks are heavily regulated. They have their own watchdog purpose built to look over them! APRA.

They are indeed central to the functioning of a well working economy, and the costs of failure are extraordinary. Hence the additional oversight.

In Australia, the competitive dynamics make it quite simple for the oversight function. Oligopoly structure means theres really only 4 major players that can shake the market (loosely). Easier to control 4 banks than 40.

Part of the reason why macropru policies, which target financial stability, are less favoured in Australia compared to other countries.

I would argue our regulation allows our big four banks to make super profits to the exclusion of others. All the more reason for a banking super profits tax that can be used as a war chest for an adverse event.
 
I would argue our regulation allows our big four banks to make super profits to the exclusion of others. All the more reason for a banking super profits tax that can be used as a war chest for an adverse event.

There is some truth in that -

Secret to big bank profits

In free, private markets, lower expected risks come with lower required returns. Yet in banking, this is inverted: the bigger and less risky regulators think you are, the more risk you are (ironically) allowed to take, which engenders higher returns.

And it concludes with -

Mid-sized lenders are working to convince APRA they are safe enough to hold risk-weights closer to the majors. This might eventually see the huge gap in bank leverage narrow, implying more homogeneous returns, which would affect share prices.

d76735ae-a7ec-11e2-9376-72613e301ddc_20p27sm_joye.png


* * *​

O T O H

Australia's big four banks aren't as profitable as we think they are

Article which shows that Big 4 Aussie Banks when measured by Pre-tax profit as a percentage of total assets, and compared against banks in -

Canada
France
Germany
Italy
Japan
Spain
Sweden
Switzerland
United Kingdom
United States

Rank 3rd over the period 2000-2007
1st over the period 2008 - 2012
1st in 2013

(Not sure why 2013 is split out, it just is).

But argues - "this might not be the best measure of their profitability. According to former CBA executive and Monash University adjunct professor of economics Rodney Maddock, the structure of Australia?s banking system means that it will always rate well in the BIS? rankings. This is because the asset pool of our major banks consists of high-return and low-risk residential property mortgages, according to the BIS. Australia's disposition towards property and home-ownership has allowed them to tailor their portfolio in this manner.

Overseas banks are structured differently. While they still hold property mortgages, their investment portfolio is weighted more towards the securities market. This strategy delivers lower, riskier returns than our banks? mortgages set-up"


Then looks at ROE for Top 10 ASX companies in the last 5 years -

BHP________23.2
CBA________18.1
Rio Tinto____1.0
Westpac____14.6
ANZ________14.8
NAB________12.0
Telstra______30.5
SingTel______15.3
Wesfarmers__8.5
Woolworths__25.2

So, Australia's banks hold their own in competing with Australia?s top companies. But look what happens when we rank the ASX 200 by ROE: Australia's banks don?t even come close to the top ten

Carsales.com.au____60.3
Monadelphous______57.9
Ainsworth gaming___56.4
WOTIF.com________56.3
Platinum Assets_____52.8
Dulux Group________50.3
JB Hi Fi____________48.4
Fortescue__________47.7
SP AusNet_________41.0
SEEK______________40.8

The reason why we all care about the profits of the banking sector (as opposed to other industries) is that we assume that if the banks are making a killing, it's at our expense. After all, no other industry charges consumers for accessing their own money. And as Stephen Bartholomeusz pointed out earlier this week, there's also the risk the high profits are indicative of a lack of competition in the sector.

[The ABA] admits the banking sector still has a way to go in winning the affection of everyday Australians. He argues that they are reducing fees and providing more education to consumers to ensure they choose the right financial product. The recent revelations from the ongoing CBA financial planning debacle doesn?t bode well for this cause.

But this story isn't about the behaviour of the banks; it's about the interpretation of their data. Australia?s banks are making money, just not as much as we think they are


* * *​

My 2c

Here's the thing... as individuals if you don't like that your bank makes super profits (if you believe they do) - what can you do about it?

Well you can't change the law.

And you can't change how the ASX values them.

But you can change banks.

In the article Stephen Bartholomeusz suggests the profits might reflect a lack of competition.

More an lack of proactive consumer choice I would have thought.
 
I would venture to say that an overwhelming proportion of folks are still near to their maximum serviceability levels already.

A few years ago, it was stated that the Average Aussie spends 105% of their income.

Despite the recent statements that folks are decreasing debt and saving more, I'd wager that the figure would still not be much below 100%.

Let's call it 90% to be generous.

People's habits haven't really changed; they are still spending, just in different ways and different areas.


BV - some ABS graphs for you to chew over (since I know how much of a fan of ABS statistics you are)

REAL HOUSEHOLD DEBT PER PERSON​
0.711A!OpenElement&FieldElemFormat=gif

SIZE OF HOUSEHOLD DEBT COMPARED WITH ASSETS​
0.861E!OpenElement&FieldElemFormat=gif

SIZE OF HOUSEHOLD DEBT COMPARED WITH ANNUAL INCOME​
0.9B76!OpenElement&FieldElemFormat=gif


SIZE OF HOUSEHOLD DEBT COMPARED WITH ANNUAL INCOME

in Australia, Canada, France and Italy​
1.500!OpenElement&FieldElemFormat=gif

in the UK, Japan, the USA and Germany​
1.1544!OpenElement&FieldElemFormat=gif

See: ABS Australian Household Trends 2014
 
Exploration does not necessarily yield a result I.e. a mine. It is more appropriate to see it as a cost in my view rather than capex. It would be like the time spent at a real estate company committee meeting being capitalised because they may set up a new office in a new suburb at the end of it. The time invested exploring the proposition is not capitalised into the new venture.

For me the only compelling argument is that they make good on Australia's natural resources but so do farmers, surf schools and fishing charter operators.

Yep - but this is pretty easy to 'claim'. Good in theory, loophole in practice.
 
I would argue our regulation allows our big four banks to make super profits to the exclusion of others. All the more reason for a banking super profits tax that can be used as a war chest for an adverse event.

I agree with the idea and purpose too tom. Not so sure about the execution.

It is quite an innefficient way to target the moral hazard problem though. Also it will just increase the cost of borrowing.

Although as Mark pointed out, given that the larger banks benefit from risk assessments, it could be a way to level the field up.
 
I think that private debt relative to the size of the economy is a pretty important measure to keep an eye on. There has to be a limit at which point the burden becomes too much and it tops out... whether we are there or not is another question?!
It topped out about eight years ago...

asleep%20graph%201.png
 
This may be a sign that folks spent less on mortgages over the past few years due to less sales, less access to loans (post GFC Bank mentality), and generally stopped spending due to negative sentiment?

Or, the simplest answer.... the interest rate?

18bl-cr-small.gif
 
But you can change banks.

In the article Stephen Bartholomeusz suggests the profits might reflect a lack of competition.

More an lack of proactive consumer choice I would have thought.

I have to say thank you for that post mark. It is good to read something balanced yet influential. Very interesting about the smaller operators having the bigger capital ratio requirements.

A couple of points thoug on your sources thoughts;

A) comparing big four banks roe to the very best performers on our asx 200 is akin to comparing backing number 6 in race 7 at rose hill during the autumn carnival. yeh banks dont make good roe because you could have just as easily backed number 6, race 8 for a 450pc roe. But if we think there is something wrong with the 10best (retrospective) companies in our asx 200 beating our big four banks then clearly I need to load up on bank stocks...

B) the overseas banks invest in higher risk lower return assets? Surely a whole swathe of them would rather invest here then? Why don't they?

C) on what you say about consumer choice. It took the comm bank shagging me 3 times over 15years before I finally had enough of them. My debt is now with teachers mutual bank which are good to deal with IMO.
 
I agree with the idea and purpose too tom. Not so sure about the execution.

It is quite an innefficient way to target the moral hazard problem though. Also it will just increase the cost of borrowing.

Although as Mark pointed out, given that the larger banks benefit from risk assessments, it could be a way to level the field up.

Ive thpight about this before. If it was a tax on profits do you think it would effect borrowing costs?

I'm not sure that it would.

In fact if the australian gov had a war chest for catastrophic events I'd expect our banks would get finding easier / cheaper.
 
But if we think there is something wrong with the 10best (retrospective) companies in our asx 200 beating our big four banks then clearly I need to load up on bank stocks...

Fair Comment.

Though for me, the top 10 ASX comparison (which included the Big 4) was a more salient one.

B) the overseas banks invest in higher risk lower return assets? Surely a whole swathe of them would rather invest here then? Why don't they?

Who says they don't?

who-owns-the-big-4-banks.jpg


C) on what you say about consumer choice. It took the comm bank shagging me 3 times over 15years before I finally had enough of them. My debt is now with teachers mutual bank which are good to deal with IMO.

I don't like the major banks myself (and I have worked for two of them).

And I do wish more consumers would vote with their feet (I now bank with a Co-Op Bank).

But, I also think that mistakes have been made with regards competition in the banking sector.

Imo allowing the mergers / takeovers of -

Westpac - Bank of Melbourne
CBA - Colonial
Westpac - St George
Westpac - Bank SA

etc

Maybe not the best idea (in retrospect).


who-do-you-really-bank-with-infographic.jpg
 
This discussion was started as a continuation from another:











Given that private debt is issued through a bank who creates both the deposit and the loan together, then by your measure net debt would be 0 (as there is private savings in the system to match all debt)?

I think that private debt relative to the size of the economy is a pretty important measure to keep an eye on. There has to be a limit at which point the burden becomes too much and it tops out... whether we are there or not is another question?!

You keep looking through the lense of a one dimentional equation, and that's why at (least so far) you have been proved wrong.

Real world far more complicated
 
That's the question I'm asking. They are not exactly comparable, but if we consider GDP is the country's income, how high can private debt get relative to that before it is no longer serviceable? As it is we've had to drop rates down to record lows to sustain economic growth under the current burden... how much higher can it get?

maybe the first first step should be to look at net aggricate of all factors of debt.

Why only private?
 
I would venture to say that an overwhelming proportion of folks are still near to their maximum serviceability levels already.

.

yes that's why the world is entering a new paradigm.

But what happens when this occurs?

Could it be deflation?

And hence why interest rates could actually be sustainable at lower levels for longer than thought????????

(I don't have the answer)
 
BV - some ABS graphs for you to chew over (since I know how much of a fan of ABS statistics you are)

REAL HOUSEHOLD DEBT PER PERSON​
0.711A!OpenElement&FieldElemFormat=gif

SIZE OF HOUSEHOLD DEBT COMPARED WITH ASSETS​
0.861E!OpenElement&FieldElemFormat=gif

SIZE OF HOUSEHOLD DEBT COMPARED WITH ANNUAL INCOME​
0.9B76!OpenElement&FieldElemFormat=gif


SIZE OF HOUSEHOLD DEBT COMPARED WITH ANNUAL INCOME

in Australia, Canada, France and Italy​
1.500!OpenElement&FieldElemFormat=gif

in the UK, Japan, the USA and Germany​
1.1544!OpenElement&FieldElemFormat=gif

See: ABS Australian Household Trends 2014

beaut post especially the one of debt vs assets.

And yes yes I already know what a doomer is going to post to counteract this.

Look at the Ireland situation pre-GFC right????????
 
maybe the first first step should be to look at net aggricate of all factors of debt.

Why only private?
Agree, all debt matters as even public debt is going to be repaid or serviced by same individuals. On that measure (total debt) Australia also one of the worst in the world.
 
Haven't thought very deeply about this. But all I know is, in the collapse of USA, Greece, Italy, Spain, Portugal etc the only measure that matters to people were public debt to GDP.

In fact, in Greece, private debt to GDP was one of the lowest in the Euro zone.

The sovereign debt problems in the USA, Spain, Portugal and Ireland were caused by their governments backstopping the financial system or keeping the economy from melting down due to the financial crisis. For example, the Irish national debt rose from something like 25% of GDP to 90% of GDP when they bailed out their banks.

Greece is a straightforward case of the state overspending, combined with tax evasion being a national pass time.

Italy was also self-inflicted. They've got a large national debt, but a small budget deficit. There are also a number of state-owned assets that could be (or might have already been) pawned off to pay it down.

My take is that total debt, regardless of whether it's private, public or commercial, is equally of concern. In Australia, private debt is something like 105% of GDP, and if there was a massive financial or property crash then a chunk of those losses could be socialised to keep the banks afloat.

And, as this chart shows, Australia's total debt is similar to the US, just with a different composition.

Decomposition-of-Debt-worldwide.jpg
 
The sovereign debt problems in the USA, Spain, Portugal and Ireland were caused by their governments backstopping the financial system or keeping the economy from melting down due to the financial crisis. For example, the Irish national debt rose from something like 25% of GDP to 90% of GDP when they bailed out their banks.

Greece is a straightforward case of the state overspending, combined with tax evasion being a national pass time.

Italy was also self-inflicted. They've got a large national debt, but a small budget deficit. There are also a number of state-owned assets that could be (or might have already been) pawned off to pay it down.

My take is that total debt, regardless of whether it's private, public or commercial, is equally of concern. In Australia, private debt is something like 105% of GDP, and if there was a massive financial or property crash then a chunk of those losses could be socialised to keep the banks afloat.

And, as this chart shows, Australia's total debt is similar to the US, just with a different composition.

Decomposition-of-Debt-worldwide.jpg

Germany and US debt is more similar but their performance during and after the GFC is very different, how do you explain the difference?
 
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