Month: May 2017

Bank Tax Is Positive, Not Negative, For Big 5

Interesting take on the Bank Levy from Christopher Joye in the AFR.

For the first time big Aussie banks can point to the fact that they now pay a specific levy in lieu of their too-big-to-fail status, which should in theory further reduce their cost of debt and equity.

Previously this particular government guarantee was implicit: from July 1 it becomes explicit. This directly reduces the probability of default and loss on the banks’ deposits and bonds, which should shrink the interest they are required to pay. Equally the banks’ cost of equity should decline given they now have materially lower risks. The explicit too-big-to-fail government guarantee actually gives the banks grounds to go back to depositors and bondholders and demand that they pay less, not more, interest, precisely because their perpetual nature has now been written into law.

It is entirely possible that this reduction in the banks’ weighted-average cost of capital could completely offset the (modest) 0.06 per cent levy. Any residual cost can easily be shared with customers via slightly higher product costs. The banks are about to receive another excuse to jack-up loan rates when by “mid-year” the Australian Prudential Regulation Authority releases its new equity capital targets to ensure these too-big-to-fail-institutions remain “unquestionably strong”.

Since we are explicitly guaranteeing their longevity, setting unambiguously world-class, first-loss equity buffers has never been more important. And the policy solution we have arrived at, which involves taxing the subsidy while requiring banks to have bullet-proof balance-sheets, is superior to that originally proposed by the financial system inquiry, which left the subsidy in limbo. But I must admit surprise at the Australian Bankers Association’s rabid opposition to the levy given the vast bulk of its members (by number) enthusiastically support it, as the likes of Bank of Queensland and Bendigo & Adelaide Bank have made clear. Perhaps those deposit-takers sitting outside the oligopoly would be better served establishing their own independent organisation.

The final crucial point is that the tactical rationale for the government introducing this levy is to save Australia’s AAA rating, threatened by the $13 billion of zombie savings the Senate failed to pass. The loss of the AAA rating would likely have no direct effect on the government’s interest repayments. But it would lower the four major banks credit ratings from AA- to A+, which our research suggests would increase their borrowing costs by about 0.10 per cent annually (notably more than the levy). This point has been missed in the debate: much of the motive for balancing the budget and maintaining a credible 2020-21 surplus is keeping the rating agencies at bay on behalf of the banks, not the public sector. In this manner, Scott Morrison’s explanation that the levy will help with “deficit repair” is absolutely spot-on

First bank to move will have ‘hell to pay’

From The Advisor

The head of a major aggregator says the big banks have plenty of ways to absorb the government’s $6.2 billion levy other than hitting mortgage customers with a rate hike.

Yellow Brick Road general manager of lending Clive Kirkpatrick told The Adviser that the first bank to lift rates in response to the government’s actions will have “hell to pay”.

“The banks have more than one stakeholder involved. The only way they can absorb this tax is by sharing it with either the customer, shareholder or staff member,” Mr Kirkpatrick said.

“To say that the customer will need to bear the uplift is just not right. I heard the Treasurer say that surely out of $35 billion in profit they can absorb $6 billion,” he said. “There are many alternatives available to the banks. The first bank to pass on that tax to the customer will have hell to pay.”

The former head of St. George Bank’s third-party division wrote to Vow Financial brokers last week explaining the potential impact of some of the measures announced in the federal budget. He noted that the bank levy, which applies to Macquarie as well as the big four, could certainly drive up lending costs.

“Fortunately, we have multiple funding sources, so we can continue finding the best deals for our customers,” Mr Kirkpatrick said.

The ACCC has been tasked with holding the major banks to account over their home loan pricing decisions.

The commission’s new Financial Sector Competition Unit will be tasked with undertaking regular inquiries into specific competition issues across the financial sector, starting with a one-year price inquiry into residential mortgage products, which will run until 30 June 2018.

As part of this inquiry, the ACCC can compel the major banks to explain any changes or proposed changes to fees, charges, or interest rates in relation to residential mortgage products affected.

However, YBR’s Mr Kirkpatrick believes the ACCC alone may not have enough power to prevent the big four from lifting their rates.

“But if you combine the strength of the customer bases, the government and the media, that is far more powerful than a single government body,” he said.

“Opinion is a big driver of behaviour. I think the first one to move will see customers vote with their feet. There are plenty of other alternatives.”

All Taxes Are Paid For By Everyday People

The following opinion piece by NAB Group CEO Andrew Thorburn was first published in the Herald-Sun on 15 May 2017: 

Australians make choices every day as to how they balance their own budget, managing their income with the bills they have to pay.

For a family that means if the price of groceries or electricity goes up, they have to decide how those costs will be borne. There is no magic solution to fill the gap – choices have to be made about what to spend less on, what things to go without.

It is the same for any business, large or small, such as a builder, a hairdresser or a coffee shop owner. If their costs go up (or they have more tax to pay), they too need to find a way to manage those costs against their income.

In reality the options are limited.

They can charge more for their services.

They can invest less in the training and development of their employees or make the tough decision to have fewer employees.

Or, as the owner of the business, they can accept less profit in return.

A bank is no different.

When our costs go up we must decide whether to reduce what we spend with suppliers. These include the people who own the properties we lease as branches and business centres; the agencies we pay to advertise our services or the companies that provide and help manage our technology

Or we can increase the rates we charge borrowers or reduce the rates we pay savers.

We must decide whether to invest less in new products and services, or less in our employees – all 34,000 of them who live and work in the communities they serve right across Australia

Or we can decide to return less to our shareholders. These are every day Australians who own shares in the bank either directly or through their super fund

Last week the Federal Government announced how it plans to balance the national budget. We agree on the need to return to surplus – but this must be done carefully and with long-term planning and consideration of the consequences.

So, while the new tax on the major banks might seem an easy solution, the fact is the cost of this tax will be borne by people.

That is because a bank is made up of the everyday people listed above: our customers – the savers and borrowers; our suppliers, our employees and our shareholders.

That is who “the bank” is.

In response to the new tax – $6.2 billion over four years, on top of the billions of dollars already paid by the major banks – it is wrong to state it can simply be absorbed.

The reason is simple. As any family or small business knows a tax is a cost, and a cost must be passed on somehow. No cost can be “absorbed” – even if a family or business is successful and doing well.

It is right to say Australia’s banks are strong and profitable.

And that is a good thing – because strong and profitable banks are vital to the health of any economy.

It means that we can continue to lend to Australian businesses to grow, and to provide loans to people to buy their own home. It allows us to pay our suppliers and our employees; and invest in our own business so we can be better.

But the vast majority of bank profits – in NAB’s case about 80 per cent – are returned to our shareholders twice a year in dividends (the rest is retained to invest in improving the bank and as capital to allow further lending).

So when people say the banks can afford the new tax and don’t have to pass the cost on, they must mean that the millions of retail shareholders – everyday Australians – who are the owners of our major banks can afford it.

For NAB alone, there are about 570,000 direct owners in our company. About 174,000 are Victorians who live in communities like Sunshine, Preston, Mildura and Warrnambool.

Another 161,000 people in New South Wales own shares in NAB, a further 84,000 Queenslanders, 71,000 West Australians, 34,000 people in South Australia, 8500 in the ACT, 6500 in Tasmania and 1500 in the Northern Territory.

Many of these are mums and dads, retirees and pensioners who hold small parcels of less than 1000 shares.

The income these shares pay – $1.98 in dividends for every share, fully franked, last financial year – help these Australians manage their household budgets.

Then there are the millions more Australian workers with superannuation who own shares in the major banks through their super fund.

This new tax will hit all these groups. For all of them it represents a potential pay cut, now or in retirement.

Banks exist to serve and support their customers – the borrowers and the savers. They provide jobs to more than 150,000 employees, and work and opportunity for countless suppliers. They are owned by millions of every day Australians.

The cost of this new tax will be borne by all these people.

From ‘white flight’ to ‘bright flight’ – the looming risk for our growing cities

From The Conversation.

If the growth of cities in the 20th century was marked by “white flight”, the 21st century is shaping up to be the era of “bright flight”. The young, highly educated and restless are being priced out of many of the world’s major cities.

They are choosing instead to set themselves up in smaller, regional cities. These offer access to less expensive housing and abundant cheap workspace. The barriers to entering the workforce or starting up a business are lower.

The “metropolitan pressure” of rapid urbanisation is generating a talent spill-over effect, which is setting the stage for a new era of urban winners and losers. This talent leakage is primarily made up of the “forgotten ones” – those who don’t qualify for social housing, but who are unable to afford market-rate housing.

In this age of of hyper-urban migration, where talent goes, capital flows. Cities need to respond to this migration trend and provide adequate housing solutions to retain talent. If not, it could shape up to be a major economic challenge as many are relying on this cohort of knowledge sector and tech-focused workers to lead them into the digital age.

Lessons from the rise of the suburbs

Many will know the urban story, or rather sub-urban story, of the mid-20th century. It was an era marked by “white flight”, the term used to describe the phenomenon of predominantly middle and upper-class Caucasians leaving urban centres to live in the suburbs.

For some, it was a chance to have their dream home in a culturally and ideologically homogeneous neighbourhood replete with white picket fences and enabled by access to cheap debt and favourable tax incentives.

From the cities’ perspective, this migration was devastating. Cities saw their tax revenues drained as higher-income earners fled to the ’burbs. At the same time, these cities required increased investment in social services, housing and education for low-income residents who largely had no choice but to stay in urban centres.

Over a few decades, this exodus led to severe economic and social decay in many of the world’s cities. By the mid-1970s, even New York was on the verge of bankruptcy.

Reversal drives an urban renaissance

This era of “white flight”, however, began to fade in the later part of the 20th century as a new generation of urbanites flocked to cities across the world.

What we are experiencing now is nothing short of a modern urban renaissance. From the very young to the very old, from singles to families, people are moving to cities in droves, drawn by the excitement, cultural diversity, eclecticism and array of employment opportunities that urban living offers.

Global cities like London and New York have rebounded from this era of urban decay better than they could ever have expected. In many ways, however, they have been too successful for their own good. The reverse migration back to the city has placed enormous pressure on our metropolitan regions.

As urban populations grow, so too does the level of investment needed for cities to function well. The investment is required to improve ageing infrastructure, expand mass transit, increase housing supply and extend capacity of civil services.

But making all these upgrades to improve and sustainably grow our cities creates another challenge: it increases competition for space. The more we increase density in our cities, the more expensive land becomes. The more expensive land becomes, the more expensive housing becomes, so people get priced out of their city of choice and move on.

Spilling over to second-tier cities

This pattern has been playing out for a some time now in the US. The spill-over of talent from top-tier cities like New York, Chicago, Los Angeles and San Francisco has flowed into more regional cities such as Seattle, Portland, Austin, Philadelphia and Denver.

Australia doesn’t have many regional cities that, like Minneapolis in the US, offer a place for talented workers to migrate within the country.

These second-tier cities have been the beneficiaries of this new wave of tech-savvy, knowledge sector workers. With all those bright workers around, companies like Google, Facebook, Apple and Amazon soon followed.

As a result, these cities now have some of the hottest property markets in the world. And they are now experiencing their own growing pains as housing prices have soared and the next wave of talent are being priced out.

And so the pattern continues and the talent spills into even more regional cities like Charlotte, Chattanooga and Minneapolis.

What does this mean for Australia?

Today, civic leaders and planning agencies are caught in the vice of balancing the need for increased density and growth while maintaining liveability, affordability and a sense of place.

Unfortunately for many cities, this vice has been tightened too much. We are pushing out the very workers who make our cities function (bus drivers, social workers, teachers), who define their culture (artists, designers, writers, musicians) and who will shape their future (data scientists, software developers, clean tech experts).

For Australia, this issue is much more acute. Unlike the US, which has a multitude of cities for talent to spill into, Australia has only a handful of cities. While places like Parramatta, Geelong and Newcastle will likely benefit from talent capture owing to the pressure build-up in Melbourne and Sydney, many more “bright ones” will likely seek their fortunes overseas and leave the country altogether.

We will rue the day if the companies follow suit, but cities can also take action to relieve some of this affordability pressure. Many cities are enabling innovative housing models such as Baugruppen in Berlin and Pocket Living in London. US cities like Seattle, Austin and Portland are leading the way on inter-generational urban co-housing models.

In Australia, Moreland City Council, birthplace of The Commons and Nightingale housing model, is doing its part to keep talented artists, designers, key workers, young families and downsizers within metro-Melbourne. Co-living models, such as Base Commons in Melbourne, are also making an entry here in Australia as a refreshed, millennial-driven approach to urban co-housing.

Watch this space. And cities: keep enabling housing innovation.

Author: Jason Twill, Innovation Fellow and Senior Lecturer, School of Architecture, University of Technology Sydney

Big Bank Levy Is Permanent

ABC Insiders included an interview with Treasurer Morrison and subsequent discussion on the big bank levy announced in the budget last week.

The Treasurer confirmed this is a permanent change to the landscape, and linked it to competitive disadvantage smaller players have relative to the majors, thanks to the implicit government guarantee. He also underscored the excessive profitability of these banks relative to other markets, which speaks to the structural issues we have here.

Subsequent panel discussion centered on whether this was the thin edge of the wedge, and they suggested it was the poor bank culture, and unique situation the big four have which explains the move. These banks have few friends, and there are no community concerns about the impost.

Barrie Cassidy interviewed the Treasurer, Scott Morrison. On the panel: the Financial Review’s political editor Laura Tingle, The Australian’s Niki Savva and political commentator and author George Megalogenis.

Auction Results For Today

The preliminary auction results from Domain for 13th May 2017 show continuing momentum in the major markets of Melbourne and Sydney.

Melbourne sold 593 properties at a clearance rate of 78.1%, compared with 466 last week at 74.6%. Sydney sold 445 at a rate of 79.3% compared with 366 at 70.6% last week. Both higher than this time last year.

Nationally, 1,153 sold at a rate of 78.1%, compared with 822 at 74.6% last week and 977 at 70.3% last year.

Brisbane cleared 55% of 69 scheduled auctions, Adelaide 62% of 74 scheduled and Canberra 78% of 72 scheduled auctions. So no obvious signs of a serious fall in transactions at the moment.

The High Frequency Trading Arms Race Just Went Up A Notch

High Frequency Trading is an arms race in the quest for speed. It creates an ever more uneven playing field.  This article from Zero Hedge demonstrates to what lengths the high frequency traders will go for just a few millisecond advantage – which makes in the HFT world makes all the different between billions in profits and losses – Bloomberg reports that a mysterious antenna has emerged in an empty field in Aurora, near Chicago, and a trading fortune depends on it.

Strange? Of course: as BBG’s Brian Louis admits “it was an odd transaction from the outset: $14 million, double the going rate, for a 31-acre plot of flat, undeveloped land just west of Chicago. In the nine months since, the curious use of the space has only added to the intrigue. A single, nondescript pole with two antennas was erected by a row of shrubs. Some supporting equipment was rolled in. That’s it.”

As it turns out, those antennas – as readers may imagine – were anything but ordinary. Same goes for the buyer of the property: anything but your typical land investor, although the name will be all too familiar to those who have followed our reporting on HFT over the years: it was Jump Trading LLC, “a legendary and secretive trading firm that’s a major player in some of the most important financial markets.”


Equipment on land purchased by an affiliate of Jump Trading

Jump Trading affiliate World Class Wireless purchased the 31-acre lot for $14 million, according to county records. “They paid probably twice as much as it’s worth,” said David Friedlandof Cushman & Wakefield. “I don’t see anyone else paying close to that price.”

There was a reason why Jump overpaid so much: it was an investment into guaranteed future returns.

Because ultimately the purchase was all about the location: just across the street lies the data center for CME Group, the world’s biggest futures exchange. By placing its antennas so close to CME’s servers, Jump hopes to shave maybe a microsecond off its reaction time, enough to separate a winning from a losing bid in trading that takes place at almost the speed of light. Enough to make billions in profits if done successfully millions of times every minute for year.

As Bloomberg describes the land grab, “it was the latest, and perhaps boldest, salvo in an escalating war that’s being waged to stay competitive in the high-speed trading business.”

 The war is one of proximity — to see who can get data in and out of CME the quickest. A company called McKay Brothers LLC recently won approval to build the tallest microwave tower in the area while another, Webline Holdings LLC, has installed microwave dishes on a utility pole just outside the data center.

“It tells you how valuable being just a little bit faster is,” said Michael Goldstein, a finance professor at Babson College in Babson Park, Massachusetts. “People say seconds matter. This is microseconds matter.”

It also tells you something else: at its core, modern trading is simply about being faster than your competition: no thinking goes into the trade, only reaction times matter. That, and frontrunning your competition. Some more details about this literal land grab:

In October 2015, McKay Brothers, a company that sells access to its microwave network to high-speed traders, leased land diagonal to the CME data center, under the name Pierce Broadband LLC, according to DuPage County property records.

Last month, the county gave McKay approval to erect a 350-foot high microwave tower that could be 600 feet closer to the data center than its current location, records show. Two trading firms, IMC BV and Tower Research Capital LLC, own minority stakes in McKay. Co-founder Stephane Tyc said his firm may never build the tower but it would be part of the firm’s continual efforts to speed transmission time.

Then there’s Webline Holdings. In November 2015, it was granted a license to operate microwave equipment on a utility pole just outside the data center, according to Federal Communications Commission records. Webline has licenses for a microwave network stretching from Aurora to Carteret, New Jersey, where Nasdaq Inc.’s data center is located. Messages left for Webline were not returned.

Back to the mysterious antenna: according to Bloomberg, the license for the transmission dishes is held by a joint venture between World Class and a unit of KCG Holdings, another HFT trading firm that was recently acquired by Virtu Financial. In other words, the “who is who” of HFT has been unleashed on an empty field near Chicago, and to the builder will go the spoils. It could be billions in revenues.

After all this frentic building of microwave tower, who is closest to the CME servers? It is unclear. Trading data first leaves CME computers via fiber cable, and then to nearby antennas that send it by microwave to other towers until it reaches New Jersey, where all the major U.S. stock exchanges house their computers. The moves in Aurora are intended to reduce the time that the data is conveyed through cable; the practical impact is shaving off a millisecond or maybe even a few nanoseconds.

At its core, the race is about latency arbitrage, and not being the slowest firm on the block – a recipe for financial ruin. Sending data back and forth between the U.S. Midwest and East Coast allows high-frequency traders to profit from price differences for related assets, including S&P 500 Index futures in Illinois and stock prices in New Jersey. Those arbitrage opportunities often last only tiny fractions of a second.

Ironically, all the land grab and overpriced land purchases could be made obsolete with one simple decision: a microwave tower could be installed on the roof of the CME data center to eliminate the need for jockeying around the site, the same way the NYSE has a microwave tower next to its NJ headquarters. The exchange is indeed looking at allowing roof access, along with CyrusOne, the company that bought the data center last year, CME said in a statement. Traders being traders, however, they may continue to battle, this time for the most advantageous position on the microwave tower itself.

“We are confident the CME can provide an alternate and better solution which offers a level playing field to all participants,” said McKay’s Tyc.

Which is ironic because at its core, modern High Frequency Trade is about everything but a level playing field: after all there are millions of traders to be frontrun, take that away, and the HFT parasites of the world have no advantage whatsoever.

Major Banks Down $16 bn This Week

So the net impact so far of the budget liability levy was to knock over $16 billion in market value from the big four, which is more than their most recent combined profit! ANZ fell the most, at 5%, followed by Westpac 4.3%. Macquarie dropped 2.5%.

They have reported a combined $15.6 billion in the half, and up on average more than 6%. Here is the ASX 200 Financials chart for the past 5 years.  They are still fully valued.

Given the overall market index was little changed, the majors are perhaps out of favour. What is not clear yet is whether this is a knee-jerk reaction to the budget “surprises”, or whether the tighter supervision, slowing home lending and rising consumer delinquencies are the root causes.

We think investor home lending is set to slow considerably in the months ahead. The question is how home prices will respond. As a result, the growth engine for the majors will be potentially misfiring. Given the concentration on the local markets, and focus on housing lending, they do not have many other shots in the locker.

 

Budget ignores housing market risks: Moody’s

From Investor Daily.

Tax initiatives introduced in the 2017 federal budget to address housing affordability concerns will do little to alleviate the build-up of “latent risks” in the housing market, according to Moody’s Investors Service.

The federal budget, released on Tuesday, 9 May, outlined a number of changes designed to improve housing affordability, offering tax incentives for first home buyers and tougher rules on foreign investors.

These include allowing retirees to exceed the non-concessional super contribution cap when they downsize their home, creating a new savings account within the super system for first home buyers, limiting foreign ownership in new developments and charging foreign investors who leave properties unoccupied for six or more months a year.

Moody’s noted that these initiatives may prove successful in improving housing affordability over the long-term, but cautioned that an immediate impact on halting the build-up of risk in the housing market was “unlikely”.

“Latent risks in the housing market have been rising in recent years as significant house price appreciation in the core housing markets of Sydney and Melbourne have led to very high and rising household indebtedness,” the ratings agency said.

This increase in household debt coincides with a period of low wage growth and a structural shift in labour markets, Moody’s said, subsequently leading to a rise in underemployment

“Whilst mortgage affordability for most borrowers remains good at current interest rates, the reduction in the savings rate, the rise in household leverage and the rising prevalence of interest-only and investment loans are all indicators of rising risks,” Moody’s said.

The ratings agency cautioned that loan borrowers “are more vulnerable to change in financial conditions” and this put banks at higher risk of losses in their residential mortgage portfolios and “triggering negative second-order consequences for the broader economy”.

NAB targetting A$18bn of clean energy financing

NAB is targetting A$18bn of clean energy financing activities over the seven years to September 2022 to help address climate change and support the orderly transition to a low-carbon economy, according to a release on Friday.

This underscores the growing importance of this sector, and the positioning of major companies across the industry.

National Australia Bank (NAB) would like to congratulate Xinjiang Goldwind Science & Technology Co. Ltd (Goldwind) on its successful bid to purchase the 530MW Stockyard Hill Wind Farm (Stockyard Hill).

Stockyard Hill, located approximately 35km west of Ballarat, Victoria, is slated to be Australia’s largest wind farm by capacity and upon its completion, will provide enough clean energy to power about 340,000 homes.

NAB acted as the sole mandated lead arranger, underwriter and bookrunner for Goldwind’s acquisition financing for Stockyard Hill. This transaction closely follows NAB’s successful collaboration on the financing of Gullen Range Wind Farm, White Rock Wind Farm and Gullen Solar Farm.

NAB Global Head of Clean Energy Andrew Smith said: “Goldwind are one of the world’s largest manufacturers of wind turbines and we are thrilled to have provided our support in this landmark transaction.

“NAB is the leading arranger of project finance in the Australian renewables sector and this transaction reinforces our position according to Project Finance International 2006 (2016 Asia Pacific Initial Mandated Lead Arrangers League tables December 2016) NAB analysis ranking against four major Australian banks – cumulative volumes.

“This transaction will contribute toward our target of undertaking A$18bn of clean energy financing activities over the seven years to September 2022 to help address climate change and support the orderly transition to a low-carbon economy,” he said.

Managing Director of Goldwind Australia, John Titchen said: “Goldwind recognises the key role that NAB played in underwriting the finance of our successful bid to buy the 530MW Stockyard Hill Wind Farm and secure the largest wind farm power purchase agreement in Australia.

“The capability, commitment and professionalism of the NAB team is impressive and the commitment of NAB to the renewable energy sector is very clear.”