Australia & NZ Archives - Page 18 of 103

May 3, 2019

Australian bank growth expected to slow

Last week I observed:

…the RBA will resist cutting rates unless the situation gets really desperate. Ultra-low interest rates encourage risk-taking and speculative behavior, offering short-term gain but courting long-term disaster. Walter Bagehot, editor of The Economist, observed more than 100 years ago: “John Bull can stand many things, but he cannot stand 2%.” Sound economic management requires that central bankers make the hard choices, resisting pressure from commercial banks and politicians.

Total assets of the four major banks grew at a much faster rate than nominal GDP from 2004 to 2014. This was only achieved through rapid expansion of debt in the economy.

Major Banks Total Assets and Nominal GDP

The sharp rise in debt pushed households into a precarious position, with record levels of debt to disposable income and a serious bubble in house prices.

Australian Household Debt to Disposable Income

The RBA and APRA have used macro-prudential measures over the last few years to rein in debt growth, with some success. The ratio of major bank total assets, mainly debt, to nominal GDP declined considerably since 2015.

Major Banks Total Assets over Nominal GDP

This is a major policy success by the RBA and APRA and they are unlikely to want to reverse course. But they may decide to slow, or even for a time halt, the decline in order to prevent a downward spiral in the housing market. Expect total asset growth of the big four to match nominal GDP growth, at around 5.0%, over the next decade. Comprising 3.0% real GDP growth and 2.0% inflation. A far cry from the heady days of 10% annual growth between 2004 and 2014.

Colin Twiggs

Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.

May 3, 2019April 18, 2024

ASX 200 bull trap

The ASX 200 retreated below its new support level at 6350, warning of a bull trap. Declining Money Flow peaks indicate selling pressure. Expect retracement to test support at 6000.

ASX 200

With the Aussie Dollar testing support at 70 US cents, international investors are noticeably skittish, as illustrated by price action in REITs over the past few weeks. Penetration of the rising trendline warns of a correction.

ASX 200 REITs

ASX 200 Financials is also retracing, to test its new support level at 6000. Lower peaks on the Money Flow indicator warn of secondary selling pressure.

ASX 200 Financials

Banks face headwinds from a declining housing market and the RBNZ call for an additional $8.1 billion in common equity capital (as estimated by S&P Global Ratings).

Materials have started a correction after penetrating its rising trendline. Expect a test of support at 12000. Declining Money Flow peaks warn of strong selling pressure.

ASX 200 Materials

I remain cautious on Australian stocks, especially banks, and hold more than 40% in cash and fixed interest in the Australian Growth portfolio.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

April 26, 2019

ASX 200 breakout

ASX 200 Financials broke resistance at 6050, signaling continuation of the up-trend after a weak correction. Rising troughs on the Trend Index indicate buying pressure. The next target is the August 2018 high at 6450.

ASX 200 Financials

Low inflation, with March Quarter CPI at 0%, increases the chance of another RBA rate cut. Short-term market response to this has been positive but we need to remember that the RBA will only cut rates, which are already at record lows, if the economy is going down the gurgler. Banks also face headwinds from a declining housing market and the RBNZ call for an additional $8.1 billion in common equity capital (as estimated by S&P Global Ratings).

Materials penetrated the rising trendline after encountering resistance at 13500. Expect another test of support at 12500.

ASX 200 Materials

The ASX 200 broke resistance at 6350, signaling another advance. Expect retracement to test the new support level (at 6350). Respect would strengthen the bull signal.

ASX 200

Long-term (LT) target for an advance is 7400 but I remain cautious on Australian stocks, especially banks, and hold more than 40% in cash and fixed interest in the Australian Growth portfolio.

I suspect that the RBA will resist cutting rates unless the situation gets really desperate. Ultra-low interest rates encourage risk-taking and speculative behavior, offering short-term gain but courting long-term disaster. Walter Bagehot, editor of The Economist, observed more than 100 years ago: “John Bull can stand many things, but he cannot stand 2%.” Sound economic management requires that central bankers make the hard choices, resisting pressure from commercial banks and politicians.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

April 12, 2019

ASX 200 divergence

REITs and Utilities found support, partially recovering from their sell-off last week.

ASX 200 REITs

Financials continue to test support at 5800; breach would signal another test of primary support at 5300.

ASX 200 Financials

The RBA sums up the outlook for banks in its April 2019 Financial Stability Review:

“Analysts expect minimal growth in bank profits over the year ahead. Net interest income growth is expected to be below average as credit growth slows further and NIMs [net interest margins] remain under pressure. Bad and doubtful debt charges are also expected to pick up a little from their current very low level. The final cost of remediation for misconduct identified over recent years is uncertain, and could exceed existing provisions, while spending on compliance and IT may remain elevated in order to address some of the recommendations of the Royal Commission. Overall, there appears to be greater-than-usual uncertainty about the future profit outlook for banks because of the increased scrutiny on banks and the weaker outlook for property prices and housing credit growth.”

Materials encountered resistance at 13500, with a lower peak on the Trend Index warning of selling pressure. Another test of support at 12500 is likely.

ASX 200 Materials

The ASX 200 is heading for another test of resistance at 6350 but divergence with a declining Trend Index continues to warn of a correction. Expect stubborn resistance at 6350, followed by another test of 6000. Breach of 6000 would signal another correction to test primary support at 5400/5500.

ASX 200

I remain cautious on Australian stocks, especially banks, and hold more than 40% in cash and fixed interest in the Australian Growth portfolio.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

April 5, 2019

ASX 200 offshore investors retreat

The ASX has undergone a sell-off in the last two days, presumed to be offshore investors withdrawing from Australian investments.

Bell Direct equities analyst Julia Lee (Thursday) said it appeared that overseas investors – or even just one large player – had pulled their money from the Australian market, as losses were concentrated among the ASX’s top 20 companies. (thebull.com.au)

Worst hit were REITs.

ASX 200 REITs

Followed by Utilities.

ASX 200 Utilities

ASX 200 Financials are testing support at 5800, while the Trend Index warns of a correction. Breach of 5800 would signal another test of primary support at 5300.

ASX 200 Financials

Materials continue their advance, benefiting from the iron ore windfall.

ASX 200 Materials

The ASX 200 retreated from resistance at 6350. Declining Trend Index warns of a correction. Breach of 6000 would confirm.

ASX 200

I remain cautious on Australian stocks and hold more than 40% in cash and fixed interest in the Australian Growth portfolio.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

April 5, 2019

Australia: Headwinds persist

From Elliot Clarke & Simon Murray at Westpac:

…the take home from Budget 2019 is that, while supportive of activity over the long-term, the near-term impact on incomes and activity is limited. Labor’s alternative proposals, as per the budget reply, are also spread out over time. So no matter which party wins in May, the headwinds of persistent weak income growth and declining house prices are set to hold growth well below trend through 2019. This is clear justification for interest rate cuts from the RBA, which Westpac believes will come in August and November.

While the RBA is yet to adopt an easing bias, the April meeting decision statement did emphasise the fluidity of the situation…

The last sentence is important: the RBA has not yet adopted an easing bias. Perhaps because of the housing debt bubble.

Australia: Household Debt and Disposable Income

Business investment has already failed to respond to interest rate cuts.

Australia: Business Investment

10-Year AGB yields are already below US Treasuries but have failed to significantly weaken the Australian Dollar.

Australia: Difference to US 10-Year Bond Yield

House prices are falling.

Australia: Housing Prices

Plunging high-density housing approvals promise a sharp slow-down in housing construction.

Australia: Building Approvals

Dwelling Investment is likely to join Mining Investment in the red, detracting from GDP growth. Windfall iron ore prices (Exports) are keeping the economy afloat, while they last.

Australia: GDP Components

Bank’s impaired and total non-performing assets are low, but likely to rise if the housing fall (and construction down-turn) continues.

Australia: Bank Non-Performing Assets

Bank capital ratios are modest at just over 10% of common equity (CET1) against risk-weighted assets. But that falls to about 5.5% without risk-weighting (leverage ratio). Not a lot of room for comfort.

Australia: Bank Capital

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

March 30, 2019

ASX 200 continuation likely

Weak red candles on the ASX 200 Financials index indicate support at 5900/6000. Rising troughs on Twiggs Money Flow flag buying pressure. Falling housing prices have not yet made a dent in investor confidence. Penetration of medium-term support at 5800 would warn of another test of primary support at 5300 but a rally is more likely.

ASX 200 Financials

Materials respected their new support level at 12500, benefiting from high iron ore prices.

ASX 200 Materials

The ASX 200 is consolidating at 6200 but continuation to test resistance at 6300/6350 is likely.

ASX 200

Expect stubborn resistance at 6350, followed by a correction.

I remain cautious on Australian stocks and hold more than 40% in cash and fixed interest in the Australian Growth portfolio.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

March 22, 2019

ASX 200: Financials & Materials test support

Financials are testing their new support level at 5900/6000. Falling housing prices are likely to drag the index lower. Penetration of the rising trendline at 5800 would warn of another test of primary support at 5300.

ASX 200 Financials

Materials are also testing their new support level at 12500/12600 but respect is far more likely, given the tailwind from iron ore prices.

ASX 200 Materials

The ASX 200 is consolidating at 6200 but continuation to test resistance at 6300/6350 is likely. Expect stubborn resistance, followed by a correction.

ASX 200

I remain cautious on Australian stocks and hold more than 40% in cash and fixed interest in the Australian Growth portfolio.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

March 16, 2019

ASX 200 approaching resistance

A sign of increased risk aversion is the stellar performance of the A-REIT index. AREITs are trading at substantial premiums to net asset value as investors bid up stocks with stable cash flows.

ASX 200: Real Estate

Financials are retracing to test their new support level at 5900/6000. Calls from the RBNZ for the big four to increase their capital haven’t helped.

ASX 200 Financials

Materials are also retracing but continue their up-trend. Though the iron ore windfall is unlikely to last.

ASX 200 Materials

The ASX 200 is heading for a test of resistance at 6300/6350. Expect stubborn resistance, leading to a correction.

ASX 200

I remain cautious on Australian stocks and hold more than 40% in cash and fixed interest in the Australian Growth portfolio.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

March 14, 2019March 14, 2019

Aussie banks get a wake up call from across the Tasman

I have long called for Australian banks to increase their equity capital in order to withstand a potential banking crisis in Australia. The Murray Commission found that banks, in a crisis, would act as “an accelerant rather than a shockabsorber”.

Now the RBNZ has announced plans to force the big four banks to hold more capital in their New Zealand banking operations. From Clancy Yeates at the Sydney Morning Herald:

The Reserve Bank of New Zealand has mounted a firm defence of its plan to force Australia’s major banks to hold $NZ12.5 billion ($A12.12 billion) more in capital in their banking operations across the Tasman, saying the “highly profitable” businesses would have to accept lower returns.

In an interview on Wednesday, RBNZ deputy governor Geoff Bascand also justified the plan to bolster bank balance sheets by emphasising the social costs of banking crises and arguing New Zealand could not rely on Australian parent companies for a bail-out in severe shock.

……The big four Australian banks made $4.4 billion in cash profits from their New Zealand operations in 2018 representing about 15 per cent of their total combined profit with ANZ tipped to experience the most significant hit.

Mr Bascand said the central bank had estimated the big four’s NZ return on equity, until recently 14 to 15 per cent, would decline by between and 1 and 3 percentage points as a result of the change.

Earlier, Bascand said:

“At one time, the owners of a bank had plenty of skin in the game; in fact, there was a time when banks got most, or all, of their money from their owners. However, over the last century, banks have started to use less of their own money and more of other people’s, and the balance has almost entirely reversed. While we are not attempting to turn back the clock …..We believe that more ‘skin in the game’ for banks will result in:

Banks being better able to absorb large, unexpected losses

Society being less at risk from banking crises

Reduced fiscal risk…..As the global financial crisis illustrated, when banks fail there can be a severe domino effect that puts pressure on governments to step in with financial support

Bank shareholders and management being less inclined to take excessive risks”

(Gareth Vaughan, Interest.co.nz)

The RBNZ proposal calls for systemically important banks to hold a minimum of 16% Tier 1 capital against risk-weighted assets, of which 6% would be a regulatory minimum and 10% would act as a counter-cyclical buffer to absorb losses without triggering “resolution or failure options”. Bear in mind that risk-weighting significantly understates total assets and that leverage ratios, reflecting un-weighted assets, are about 55% of the above (i.e. 8.8%).

The banks have protested, warning that increasing capital will raise interest rates to borrowers.

…..The RBNZ has acknowledged interest rates charged by banks will probably rise as a result of the change, but Mr Bascand said it estimated the impact would be about half a standard 0.25 percentage point move in official interest rates.

If banks’ borrowing rates did rise more sharply than expected, he said the RBNZ could offset this through monetary policy…..

What the banks failed to consider (or mention) is that investors are prepared to accept lower returns on equity if there is lower associated risk. Also banks with strong balance sheets have historically experienced stronger growth. Both lower risk and stronger growth would help mitigate the costs of additional capital.

Question is, why are RBNZ raising concerns about bank capital and not APRA? Another case of regulatory capture?

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.