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Weak economy set to spur Reserve Bank cash rate cut on Tuesday

Concern about deteriorating economic growth lies behind the Reserve Bank’s determination to cut interest rates, a move most likely at its first board meeting for the year on Tuesday.

A cut in the bank’s cash rate from 2.5 per cent to 2 per cent would bring the standard discounted home loan rate below 5 per cent, knocking $53 off the cost of servicing a $350,000 loan.

Although the latest official figures show Australia’s unemployment rate falling, the Reserve Bank’s preferred measure shows it continuing to climb.

The bank averages the unemployment rate for each quarter and compares it with the average for the previous quarter.

Board members will be told on Tuesday that over the past year the average unemployment rate has climbed from 5.9 per cent to 6 per cent to 6.1 per cent to 6.2 per cent. The averages mean that abstracted from monthly “noise” there has been no let up in the pace at which unemployment is climbing.

The board will be told economic growth figures released since it last met show the annualised pace of growth slipping from 3.6 per cent to 1.6 per cent in the space of six months.

The bank’s previous forecast of rising economic growth published in November is now regarded as out of date and will be revised when new forecasts are issued on Friday.

No lift in business confidence

Board members will be told that neither consumer nor business confidence has lifted since the budget, as would be needed for economic growth to climb back to its long-term trend.

Retail sales are solid but not spectacular, maintained by discounting and weighed down by low wage growth and rising unemployment.

Inflation provides no impediment to cutting rates. The headline rate is now just 1.7 per cent after the collapse in oil prices. Importantly, the bank expects lower oil prices to continue to weigh down on inflation as they feed through into a myriad other prices, something it did not expect late last year when it looked as if the collapse in the oil price would be less severe.

Rather than focusing on the unexpectedly high rate of so-called underlying inflation in the December quarter, the bank is paying special attention to the rate of inflation on so called “non-tradables” – products that are not internationally traded, which is well down on where it was a year ago, reflecting low wage growth and weak consumer demand.

“Tradables” inflation, the rate on products that are internationally traded, is now negative despite the lower dollar.

The bank is minded to cut its cash rate despite doubts about its effectiveness in boosting the economy. It is concerned that another cut may simply reignite the investor housing market and it fears it could fail in its objective of encouraging businesses and consumers to borrow and spend more. While a boost to the economy from the budget would be preferable, it isn’t likely.

Another impediment is the statement the bank released after its December board meeting, saying “the most prudent course is likely to be a period of stability in interest rates”.

The bank believes that enough has changed since December to release it from the commitment. The oil price has collapsed, economic growth has weakened, and the steam has gone out of inflation.

It believes that if it is clear it has to cut rates, there is little point in waiting. And it is also concerned that if it doesn’t cut when it is clear it should, the Australian dollar will head back up after dropping.

Canada has just cut its cash rate to 0.75 per cent. Denmark has just cut its rate to minus 0.5 per cent. The United States is keeping its rate at 0.25 per cent. An Australian cash rate maintained at 2.5 per cent in the face of these moves would give the dollar support the bank would prefer it not to have.

The final decision will up be made by the nine members of the board, including the newly appointed treasury secretary John Fraser, who will meet in Sydney on Tuesday.

If they decide to keep the cash rate at 2.5 per cent in the face of recent developments, they are likely to indicate they intend to cut it soon, in March. But it is more likely that they will cut on Tuesday.

Peter Martin is economics editor of The Age.

Twitter: @1petermartin

The story Weak economy set to spur Reserve Bank cash rate cut on Tuesday first appeared on The Sydney Morning Herald.

[…]

Australia's Westpac profit up 8%

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Saeed Khan | AFP | Getty Images

People walk past an ATM machine of Australian banking giant Westpac in the central business district of Sydney.

Australia’s Westpac Banking booked a fifth straight year of record profit with an 8 percent rise in full-year cash earnings on robust loan growth and declines in bad debts.

Bolstered by a strong focus on mortgage lending, a rapidly growing property market and tight cost controls, three of Australia’s “Big Four” banks have notched up five consecutive years of record income in current earnings season.

“Housing credit growth has increased over 2014 and we expect growth at similar levels to continue through 2015, driven by strong demand and continued low interest rates,” Chief Executive Gail Kelly said in a statement.

Kelly said there were signs of improving prospects for non-mining investment and expected a moderate pick-up in business credit growth.

The nation’s No. 2 lender by value said cash profit was A$7.6 billion ($6.64 billion), meeting the average forecast from seven analysts polled by Reuters. Revenues rose 7 percent in the year.

Read MoreIs Australian housing facing a repeat of 2003?

Net interest income, the difference of interest earned and paid out, rose 5 percent to A$13.5 billion, while net interest margin, a key measure of profitability for a bank, fell 7 basis points to 2.08 percent.

Impairment charges fell 23 percent, it said.

Expenses at Westpac grew at 6 percent, faster than revenues, while underlying profit and revenue growth came in below expectations, Omkar Joshi, a Sydney-based investment analyst at Watermark Funds Management, said in a note.

[…]

Banks offer home loan enticements as property market hots up

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Banks offer home loan enticements as property market hots up

BusinessDate September 22, 2014 – 6:34AM (0) Read later

Business reporter

View more articles from Jared Lynch

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National Australia Bank will on Monday start giving borrowers $1000 in an unapologetic marketing tactic.

Banks have started to throw cash at customers again in an effort to win business as spring fever hits the property market and house prices soar.

National Australia Bank will on Monday start giving borrowers $1000 in an unapologetic marketing tactic aimed at increasing its share of Australia’s $1.3 trillion mortgage market without cutting interest rates, which are at historic lows.

It comes as Treasurer Joe Hockey said he was “hesitant” for the government to take action to rein in spiralling property prices, with the median Australian home price surging 11 per cent in the past year. Instead, he said it was up to the Reserve Bank and bank regulator, the Australian Prudential Regulatory Authority, to adopt limits on mortgage lending to cool an overheating property market.

“I am naturally hesitant to have government in any way interfere in the market. But, of course, we are in some challenging times when it comes to monetary policy,” Mr Hockey said. “The Reserve Bank needs to be mindful of some of the domestic challenges, and the quite limited massive growth in real estate prices in parts of Australia. I say that because it’s primarily in pockets of Sydney, pockets of Melbourne and, to a lesser degree, in Brisbane.”

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[…]

CBA's FY14 cash profit climbs to record

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Ian Waldie | Bloomberg | Getty Images

Customers use the automated teller machines (ATM) at a Commonwealth Bank of Australia branch in Sydney, Australia.

Commonwealth Bank of Australia (CBA), the country’s top lender by market value, said its full-year cash profit grew about 12 percent to a record high, matching expectations, on strong growth in loans and lower bad debt provisions.

CBA said cash profit, a key measure of its earnings, rose to A$8.68 billion ($7.99 billion) in the year to June 30, compared with a consensus forecast of A$8.62 billion – from 10 analysts polled by Reuters. The profit was up from A$7.76 billion a year ago.

Read MoreAustralia central bank sticks to low rate stance

The bank was “cautiously positive” about the outlook for 2015 financial year with business and consumer confidence remaining fragile, chief executive Ian Narev said in a statement.

CBA’s results mark its sixth straight year of record annual profits, with Australia’s banking sector benefiting as low interest rates encourage consumers to take out housing and other loans. Mortgage and consumer loans generate 35 percent to 40 percent of earnings in the Australian banking industry.

Read MoreHousing bubble fears resurface in Australia

It declared a final dividend of A$2.18 per share, taking its full-year dividend payout to A$4.01 a share, a 10 percent rise.

Net interest margin – a core measure of profitability – rose 1 basis point to 2.14 percent during the year. The ratio of cash loan impairment expense to gross loans improved 4 basis points due to lower provisions, the bank added.

[…]

Rolex for casino cash fuels Singapore pawnshops

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A +A – Reset

(June 18): Yeah Lee Ching recalls when a lady walked into her pawnshop in Singapore and pledged a $10,000 diamond-studded gold Rolex watch to bankroll casino spending. She never came back for her jewelry.

Pawnbrokers are proliferating across Singapore as gamblers seeking short-term loans add to demand for quick cash from people struggling to make ends meet in the world’s most expensive city. The number of pawnshops in the city-state surged to 214 this year from 114 in 2008, according to a report by DMG & Partners Securities Pte. Loans disbursed by the industry jumped to S$5.5 billion ($4.4 billion) in 2013 from S$1.6 billion in 2007, government data show.

“Pawnshops are the most-frequent automated teller machines for regular gamblers,” Ivan Ho, president of Singapore Pawnbrokers’ Association, said in an interview this month. “They need capital and pawnshops offer them loans that are reasonably priced.”

Since Singapore’s two casinos opened in 2010, about 20 percent of the increase in pawnbroking activity is driven by clients raising money for gambling, said Ho, who’s also the owner of Heng Seng Pawnshop Co. The rest comes from business owners and low-income individuals who need quick cash to pay hospital bills and other unexpected costs.

“I pawn my jewelry when the need arises,” said Vikki, a businessman who runs his own security agency and asked to only be identified by his first name. “The biggest loan I got was S$70,000 to cover salaries of my staff when payments from customers got delayed.” He was speaking last week outside the ValueMax Group Ltd. pawnshop in Little India, just across the street from competitor Maxi-Cash Financial Services Corp.

Shares of ValueMax and competitor MoneyMax Financial Services Ltd. were little changed at 9:29 a.m. in Singapore today. Maxi-Cash declined 1.6 percent to 30 Singapore cents while the benchmark Straits Times Index gained 0.2 percent.

Living Costs

S. Pandian, a 50-year-old construction supervisor from India, was pawning a chain and gold ring at the same ValueMax shop. He said he earns about S$1,600 a month and sends most of it back to his family, making it hard to cover living costs.

ValueMax, Maxi-Cash and MoneyMax Financial Services Ltd. dominate the industry, owning almost 40 percent of all pawnshops in Singapore, according to DMG. Yeah Lee Ching, in whose shop the $10,000 Rolex was pawned, is the executive director of ValueMax.

The three companies raised a combined S$103 million from initial public offerings in the past two years to fund expansion, regulatory filings show. For MoneyMax, which forecasts revenue will climb to S$100 million in two years, it was the opening of the casinos that created a market opportunity.

Soaring Prices

“In Macau, you see casinos and pawnshops,” MoneyMax founder Peter Lim Yong Guan said in an interview on June 12. “That gave us an idea.” While Macau might have been the inspiration, MoneyMax’s Singapore clientele has turned out to be mainly people seeking money for living costs rather than gambling, he said.

The republic topped Paris, Oslo, Zurich and Sydney in the Economist Intelligence Unit’s Worldwide Cost of Living Survey released in March. An influx of foreign workers has contributed to competition for jobs, congested public transportation and surging home prices. The gap between the richest and the poorest Singaporeans rose in 2012 to the widest since 2007, before narrowing last year, according to government data.

The pawnbroking industry also got a boost as surging gold prices increased the amount of collateral borrowers could access, said Yeah, executive director of ValueMax, the biggest such broker by market value in Singapore. Spot gold climbed to a record $1,921.17 an ounce in 2011 before tumbling 28 percent last year.

Get Lucky

Whatever the reason clients need cash, it’s not a pawnbroker’s job to ask. “Sometimes, we hear the customers saying maybe we’ll get lucky this time,” said Henry Kiew, who works at the ValueMax outlet in Little India, a 15-minute drive from the Marina Bay Sands casino. “Then we know they’ll go to try and win back losses.”

Shadow lenders, also known as “matao,” extend loans to gamblers backed by valuables, according to Ho of the pawnbrokers’ association. The client gets 50 percent to 60 percent of the value of their jewelry, lower than the 80 percent to 90 percent rate offered at pawnshops.

If the customer doesn’t pay in three days, the matao takes the valuables to pawnshops and passes on the pawn ticket to the original borrower, Ho said. The pledge can be redeemed by anyone who produces the ticket, said Ho, adding that pawnshops do not know mataos or their representatives.

Spokesmen for Marina Bay Sands and Genting Singapore Plc’s Resorts World Sentosa declined to comment for the story.

Revenue Growth

The combined revenue of Maxi-Cash, MoneyMax and ValueMax will increase 8.7 percent to S$577.7 million in 2014 from a year earlier, according to DMG. MoneyMax will add four outlets to bring its total to 40 by the end of the year, said Chief Financial Officer Choi Swee Weng.

Singapore identified pawnbroking as an industry where controls can be improved to curb money-laundering and terrorism financing risks, according to the country’s national risk assessment report in January. As transactions in the industry are mainly cash-based, risks are posed by pawners repaying debt using illicit funds and pawning illegally-obtained items and leaving them unredeemed, the report said.

Combined gaming revenue of the city’s two casinos will rise to $6.5 billion this year from about $6.3 billion in 2013, according to CLSA Asia-Pacific Markets. There were 15.6 million overseas visitors to Singapore in 2013, compared with 11.6 million in 2010, when the gaming venues first opened, according to data from the tourism board.

“The performance of the casino resorts will be one of the key drivers empowering the pawnbroking industry moving forward,” DMG analysts Jarick Seet and Terence Wong wrote in their May 30 report.

ThomsonReuters/INSEAD Q2 Asian Business Sentiment Survey – by economy< Prev Next >#Flash* Metal Reclamation shares hit limit up […]

Roof cash stash of $500k stolen

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Roof cash stash of $500k stolen

ANNE DAVIES

Last updated 08:16 12/02/2014

ANTHONY JOHNSON/ Fairfax

CASH STASH: The Helous family his about $500,000 in a roof cavity of their Sydney home.

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Australia

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In what could be the ultimate moral tale about living in the cash economy, a Sydney family has won judgment against a neighbour who exploited their intellectually disabled son and stole about half a million dollars of life savings from their roof cavity.

The extraordinary civil case in the NSW Supreme Court in Australia was brought by the Helous, a devout Muslim family, after the NSW police declined to lay charges, citing insufficient evidence.

The Helou family had only handwritten tallies about the amount of money stashed in their roof, and the only person who had seen Thai Giam Nguyen, a fruit shop owner, take some of the money was their intellectually disabled son Walid.

But the Helous were convinced Nguyen was the culprit. They became all the more convinced as months went by and Nguyen went on a spending spree that included buying properties and renovating his house.

Last week, with the help of their lawyers, Paltos Briggs, the Helous convinced Justice Lindsay that on the balance of probabilities, Nguyen was the man who had stolen their life savings.

In painstaking detail, they forensically tracked Nguyen’s finances – the new bank accounts he opened and the efforts he made to avoid scrutiny as he deposited the cash.

The judge also heard evidence from Walid and a neighbour, who said he had seen Nguyen enter the townhouse in the southwestern Sydney suburb of Bankstown carrying a ladder.

The Helous had chosen to keep their cash in the roof to avoid breaching the proscriptions in the Koran against earning or charging interest. Nekou Helou, the father, was extremely strict. The five adult children lived at home in an arrangement the judge described as ”grounded in the younger generation’s veneration for the parents”.

The children contributed their wages towards the family savings. At first they kept their money in the bank but after making the Haj in 1998, Helou senior became even more staunchly religious.

”In the year 1999, 2000 he became so strict he didn’t want any money at all in the bank,” his son Mohammed, a chiropractor, said during the case.

His sister Suzanne diverted their interest earnings to a charity that helped orphans, believing this would meet the requirements of Islam. But this did not placate Helou senior.

Mohammed recalled his father saying: ”’Son, I will not live in a house which has money accumulated from interest in it.’ I tried to reason with him but he is a dominating and controlling person.”

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From 2000 they put money under floorboards and behind a kickboard, and then opted for the roof cavity to keep their $467,500 (NZ$507,000) in cash along with the family jewellery.

Walid became aware of ”the family secret” and told his ”best friend,” Nguyen. Justice Lindsay found on or about March 27, 2006, Nguyen, using Walid’s key, entered the house with a ladder and stole the money.

The judge said he did not accept the defendant’s contention the cash did not exist. Nor did he accept Nguyen’s explanation he, too, had been hoarding cash under the mattress of his bed.

”Payments for the acquisition of property apparently funded through a bank, appear on close examination to have been sourced from Nguyen’s amorphous, unverifiable reservoir of cash,” he said.

He also found that an undocumented loan from a Mr Truong for A$74,000 (NZ$80k) was ”not credible”.

”The conduct of the plaintiffs, in their management of cash, may be condemned as imprudent, eccentric or economically irrational… Misguided they may have been; dishonest and greedy they were not,” Justice Lindsay said.

”The same cannot be said for Mr Nguyen. An opportunity for gain, at the expense of the Helou family, presented itself to him courtesy of Walid’s simple dependency upon him… and the improbability of anybody believing that they had a small fortune in cash held, at home, without security.”

Nguyen has been ordered to repay the A$467,500 (NZ$507,000). An equitable charge representing the amount that can be traced to the property investments has been placed on the title of Nguyen’s property. He has 28 days to appeal.

– Sydney Morning Herald

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Pawnbrokers Thriving as Poorest Aussies Bear Brunt of Slowdown

On a sidewalk in Sydney’s Bankstown neighborhood, where unemployment is more than double Australia’s average, Dave Cox pulls the starter cord of an edge trimmer to prove it works as he tries to sell it to pawnbroker Cash Converters International Ltd. (CCV)

“The economy is pretty crap right now,” 38-year-old truck driver Cox, who’s between jobs, said after he offloaded the snipper for A$30 ($28). In the past month, he sold an iPhone and got a loan at Cash Converters, whose sales last year grew faster than any other Australian retailer that didn’t make a major acquisition. “It just feels bad out there.”

While a mining-investment boom has sustained Australia’s growth and employment, many like Cox have missed out and instead seen finances stretched by high housing costs, driving them into the arms of pawnbrokers. Central bank efforts to plug the gap with record-low interest rates are bypassing lower-income households, which account for just 6 percent of the nation’s home buyers, while government and opposition pledges to return the budget to surplus mean support for the most marginalized has declined as welfare payments stagnate.

“I’m not surprised,” Bernie Fraser, whose tenure as Reserve Bank of Australia governor from 1989 to 1996 included the last recession in 1991, said of the increasing use of pawnbrokers. “I think that’s pretty heavily correlated with a lot of people doing things tough, and that’s going to continue I believe.”

Gillard Ousted

The economy switched from a strength to a liability for the ruling Labor Party, which last week dumped Julia Gillard as leader in favor of Kevin Rudd. The new prime minister, who reclaimed the post after he was ousted by Gillard three years ago, signaled economic management will be central to his bid to reel in an almost two-year lead in polls for the opposition.

Cash Converters — which offers pawnbroking, payday loans, goods sales and installment loans — recorded the fastest growth of any Australian retailer with more than $100 million in sales last year that didn’t see revenue boosted by a major purchase, data compiled by Bloomberg show. Revenue jumped 26 percent in 2012. In contrast, sales at the country’s largest electrical-goods retailer, Harvey Norman Holdings Ltd. (HVN), fell 7.6 percent.

“Part of why we’ve got that growth could well be the economy,” said Peter Cumins, managing director at Perth-based Cash Converters, who added that store locations are chosen for proximity to households with stretched finances. “Certainly, we are recession proof in that regard.”

Australia has posted the developed world’s quickest growth rates as demand from China fueled a once-in-a-century mining-investment boom. That’s souring as China’s outlook deteriorates and the Aussie dollar’s strength forces companies including Ford Motor Co. to cut workers and close plants.

Aussie QE?

Economists at Macquarie Group Ltd., Australia’s largest investment bank, see a 40 percent chance of recession in the next 12 months — defined locally as two consecutive quarters of contraction — even after the central bank cut rates to a record-low 2.75 percent. Saul Eslake, chief Australia economist for Bank of America Merrill Lynch in Melbourne, projects a 25 percent chance for 2015.

“We expect the RBA to cut further — to as low as 1 percent in the event of a recession — and it may need to undertake a ‘Down Under QE,’” Eslake wrote in a June 14 note to clients, referring to a local version of the Federal Reserve’s quantitative-easing policy to support economic growth.

South of Melbourne, Victoria’s state capital, some of pawnbroker Joe Yammouni’s customers are coming to his store, Cash Deal, on the Mornington Peninsula for the first time since he opened in 2001.

‘Unexpected Bills’

“I’m talking your average family members who you wouldn’t have seen before, who come in and say ‘I’m so embarrassed for being here,’” he said. “Things are tight at the moment; they just get unexpected bills or payments come through and they have to use our services.”

A decline in new electronic product prices is compounding difficulties for people selling goods for cash, said Yammouni, 41, who has worked in the industry since 1994. A A$3,000 TV that could be resold for A$1,000 five years ago now retails for about A$400, and as a reseller today, “you’d take whatever you could get,” he said.

One in eight Australians and one in six children live below the poverty line, according to a report last year by the Australian Council of Social Service. The group defines the level as 50 percent of median disposable income, a standard measure of financial hardship in wealthy countries, it says.

Jobless Payments

That was A$358 per week for a single adult in 2010 and A$752 for a couple with two children, the October 2012 Acoss report showed. Australia’s unemployed receive A$248.50 a week for as long as they demonstrate an active search for work, a payment that’s been indexed to inflation for more than 30 years.

An increase beyond consumer-price growth is unlikely as Australia’s slowdown curbs tax revenue and both major political parties vow to return the budget to balance.

“The existing government, and even more so the incoming government, are making it clear they’re not going to use that fiscal-policy instrument, which is crazy really,” said Fraser, 72, who was also secretary to the Treasury from 1984 to 1989. “Monetary policy doesn’t have any distributional consequences.”

While a home owner with a A$300,000 mortgage is about A$300 a month better off since the RBA started cutting rates in November 2011, few lower-income households are benefiting. The proportion of Australian homebuyers in the bottom 40 percent of incomes is just 6 percent, according to the Australian Housing and Urban Research Institute.

Debt Trap

Fiona Guthrie, executive director of Financial Counselling Australia in Brisbane, Queensland’s state capital, said the use of short-term loans is spreading. While industry rates vary, interest charges and fees can equate to as much as 912.5 percent annualized, according to the Melbourne-based Consumer Action Law Centre. That compares with about 15 percent for an unsecured personal loan from one of the nation’s biggest banks.

“Payday loans just defer an inevitable financial crisis,” Guthrie said. “They trap people in debt” and aren’t “a benefit to them.”

The Australian government, responding to criticism of the payday-loan industry, introduced a cap beginning today that prevents lenders from charging more than 20 percent upfront and 4 percent a month in fees for the life of the loan.

More Loans

Cash Converters also has outlets in the U.K., Spain and Dubai, where it targets arriving and departing expatriates trading second-hand goods. Its personal-loan book in Australia increased by 25 percent in the six months through December to A$84.2 million. Its cash-advance business rose 7.1 percent to A$126.5 million loaned, while the number of active customers climbed 16 percent. Store sales grew 6.5 percent.

Cash Converters shares have jumped 71 percent in the past 12 months, versus a 48 percent gain for the S&P/ASX 200 Retailing Index.

Australia’s economy grew 2.5 percent in the first quarter from a year earlier, the slowest pace in almost two years. While unemployment was 5.5 percent in May, it was 10 percent or higher in 9.6 percent of the nation’s 1,402 regions during the fourth quarter, according to government data. The level was 14 percent for Bankstown in Sydney’s west.

Mortgage arrears rose in March — indicating lower borrowing costs aren’t sufficient for some households — and a record number of the nation’s companies went bust in April.

Businesses Squeezed

Grant Russell has had “quite a lot of business people who are literally financing their staff” by pawning personal possessions such as family jewelry during the past 12 months at his Cash Centre store in the outer Melbourne town of Frankston.

Russell, who also heads the Victorian Independent Pawnbrokers Association and is a 24-year industry veteran, said the value of items is “dropping quite rapidly,” and stores are becoming more selective in what they’ll accept. Many are so full of power tools from tradesmen waiting on delayed payments that they will no longer offer credit on the equipment, he said.

The practice of hocking goods shot to prominence in the past five years with the advent of television programs such as “Pawn Stars,” which first aired in 2009 as the U.S. economy struggled to emerge from the deepest recession since the 1930s. It was followed a year later by “Hardcore Pawn,” set in Detroit, a city that’s battling potential bankruptcy.

Russell said the American programs fueled misconceptions in Australia that people offered “weird and wonderful things” to hock. “It’s bread and butter items that people bring in: video games, flat-panel TVs, laptop computers, always there’s a few power tools,” he said.

Outside Cash Converters in Bankstown, Cox said he wasn’t surprised to learn the pawnbroker is Australia’s best-performing retailer. A staff member told him during the sale of the edge trimmer that the iPhone he brought in the prior week had been sold for almost double what he was paid.

“That’s business and they do it well,” Cox said.

To contact the reporters on this story: Michael Heath in Sydney at mheath1@bloomberg.net; David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

[…]

Analysis: China cash squeeze exposes risks from short-term funding

By Gabriel Wildau

SHANGHAI (Reuters) – The mirror that China’s central bank is holding up in front of the country’s banks is providing uncomfortable viewing. Too many banks are reliant on short-term funding markets to survive, and a shake up in the sector is needed.

The central bank has engineered the current cash crunch as a warning to overextended banks but a growing concern, analysts say, is of a miscalculation that sets off a full-blown crisis.

The central bank’s determination to rein in rapid credit growth has sent interbank lending rates soaring to record highs, sparking panic and swirling speculation that banks are defaulting on deals as they scramble to secure short-term funds.

Analysts suspect a particular target of the central bank is non-bank lending, or shadow banking, which has boomed in recent years.

“A more structural factor behind this squeeze is that banks are using liquidity tools to support their long-term business. That should be a strong warning sign for the industry,” said Hu Bin, senior China banking analyst at Moody’s Investor Service in Hong Kong.

In particular, Hu says, some banks are relying on short-term interbank borrowing to come up with the cash necessary to meet repayment obligations on high-yielding investment products, a similar reliance that caused problems for some Western banks during the global financial crisis.

“Everyone in the system is impacted by this, even all the way at the top in terms of the largest banks in the country,” said Charlene Chu, senior director at Fitch Ratings.

“It’s certainly a lot more swift and arguably more effective in reining in the growth of shadow credit. But it does create a lot of repayment risk within the system between financial institutions and there is potential for unintended consequences.”

Overall financing in the Chinese economy increased 52 percent in the first five months of 2013 compared to the same period last year, which analysts say was led by a surge in shadow banking activity and wealth management products that promised investors high returns.

Fitch estimated that total sales of wealth management products reached 13 trillion yuan by the end of the 2012, more than 16 percent of total bank deposits.

More immediately, it estimated that more than 1.5 trillion yuan in wealth management products will mature in the last 10 days of June. That may explain the scramble by some banks to secure short-term funds, which are often used to meet the repayment obligations.

WEALTH PRODUCT BOOM

Banks have created wealth products by packaging various assets like money market deposits, corporate bonds and informally securitized loans.

Many of these products are held off-balance-sheet, which allows banks to meet state-mandated loan-to-deposit ratios and still create new loans.

Many are also based on long-dated assets, so when payouts are due to investors, banks often raise cash by issuing new products – or by borrowing in the interbank market.

Authorities have tried to regulate the shadow banking sector and in particular these wealth management products but with little impact on the sector’s growth. Now the central bank is playing hard ball with the banks by refusing to provide liquidity to the money markets, which this week drove the interest rate for some banks to borrow short-term funds to 25 percent or higher.

“The critical question now is how long is this going to go on,” said Fitch’s Chu on the sidelines of a conference in Sydney. “If this is going on for quite a while and we really start to get a shake out of institutions, the question is what potentially would they do to try and address some of that and would consolidation be on the radar screen.”

Smaller banks, whose less extensive branch networks give them less access to customer deposits, are especially vulnerable to the credit squeeze.

At the end of 2012, interbank assets accounted for 25 percent of the total assets of mid-sized banks examined by Michael Werner, senior bank analyst at Bernstein Research. That compared with 15 percent in 2009, he said in a report this month.

Therefore, a wave of defaults on interbank loans could seriously threaten the solvency of smaller banks, he said.

“Speaking with a lot of Chinese banks, you often hear, ‘this is not a risk because these loans always get repaid.’ I think that type of mentality is going to get thrown out the door,” Werner said.

At the end of 2012, mid-sized Minsheng Bank’s (1988.HK) interbank funding of less than one year accounted for 29 percent of its non-equity liabilities, the highest among the Chinese banks that Bernstein covers.

Werner says other mid-sized banks like Everbright Bank , Industrial Bank , and Ping An Bank are also highly dependent on short-term borrowing.

To be sure, the level of reliance on short-term funding is no where near the levels of some Western banks before the global credit crunch. Short-term funding may have accounted for more than half of such liabilities at Lehman Brothers at the end of 2007, a research paper by staff economists at the Federal Reserve Bank of New York showed in 2010. Lehman’s collapse set off the global financial tsunami.

REFORM

Banks that find themselves overly reliant on short-term funding face a choice: they can shrink their balance sheets so that more assets are funded by deposits, or they find other more stable funding sources.

If they choose the latter, equity and long-term debt are possibilities. But resorting to these more expensive funding sources would pressure banks’ net interest margins, hurting profitability.

China’s central bank appears to prefer de-leveraging.

“The central bank appears to be determined to force banks and other financial institutions, such as funds, brokerages and asset managers, to de-leverage,” said a trader at a major Chinese state-owned bank in Shanghai.

“That hardline stance suits the recent government policy of clamping down on non-essential businesses by financial institutions, such as shadow banking, wealth management, trust operations and even arbitrage,” he said.

An article in a China central-bank backed newspaper called the Financial Times suggested the cash crunch and a rumored default had provided impetus for China to accelerate the roll-out of a new deposit insurance system.

Such a system would eliminate the need for authorities to bail out individual banks by ensuring that depositors were protected even if a bank found itself short of funds.

(Additional reporting by Lu Jianxin: Editing by Neil Fullick)

[…]

Battle for buyers heats up

Thumbnail

Source: RateCity.com.au, RBA

Westpac has fired the latest salvo in the fixed-rate home loan wars as lenders battle for new borrowers following the Reserve Bank’s cash rate cut.

The bank dropped its one-year fixed-rate home loans to 4.79 per cent, while its Bank of Melbourne and St George divisions lowered their one to five-year fixed rates to below 5 per cent. Mortgage rates are at their lowest since the global financial crisis.

”It’s a further continuation of injecting more competition into the home loan marketplace, and also a confidence booster given that we’ve got the lowest government cash rate for 53 years,” Bank of Melbourne chief executive Scott Tanner said.

Shorter plank as interest rate battle intensifies. Photo: Bloomberg

The Reserve Bank’s decision to slash the cash rate to 2.75 per cent on May 7 saw a flurry of lenders, including the big four banks, pass on the 25-basis-points cut in full.

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ANZ took a step further by dropping its standard variable mortgage rate by 0.27 percentage points to 6.13 per cent, matching NAB.

Westpac has the highest standard variable mortgage rate among the big four with 6.26 per cent.

Commonwealth Bank and ANZ were contacted for comment. A NAB spokesman said the bank had no comment at this time.

The moves came amid lower funding costs for banks and strong profit growth.

”I think it presents a bit of a borrowers’ dilemma about whether to lock in now or hold back and see if rates fall further,” said Kirsty Lamont, of comparison site Mozo, adding that the Greater Building Society had the lowest fixed one-year rate at 4.74 per cent.

”The fact that the banks are cutting their fixed rates again so aggressively shows they are pricing further rate cuts from the Reserve Bank down the track.”

Rising fixed-rate ratio

In March, 18.45 per cent of home loans financed through financial comparison website RateCity were fixed, the highest proportion in five years, said its spokeswoman, Michelle Hutchison.

Changing lending conditions such as ”out-of-cycle” mortgage rate cuts independent of the RBA’s actions and the banning of early exit fees on variable rate mortgages in mid-2011 were contributing factors, she said.

A Westpac spokesman said the bank’s take-up levels for fixed home loans doubled from about 8 per cent to between 15 and 20 per cent after it slashed its two-year rate to 4.99 per cent in February.

Mr Tanner expected the proportion of St George’s fixed-rate loans to rise from about 10 per cent to about 30 per cent as mortgage rates drop.

Financial markets were pricing in a 20 per cent chance of a 25-basis-point interest rate reduction for June, and tipping at least one 25-basis-point cut by the end of the year, Credit Suisse data showed.

The housing market has experienced patchy growth since the financial crisis. At the same time, auction clearance rates in Sydney and Melbourne have improved.

At the weekend, Sydney’s auction clearance rate was 78.6 per cent – its highest in three years, while Melbourne recorded its highest auction clearance rate for the year at 73.6 per cent, Fairfax Media’s Australian Property Monitors data showed.

[…]

Battle for borrowers heats up

Thumbnail

Source: RateCity.com.au, RBA

Westpac has fired the latest salvo in the fixed-rate home loan wars as lenders battle for new borrowers following the Reserve Bank’s cash rate cut.

The bank dropped its one-year fixed-rate home loans to 4.79 per cent, while its Bank of Melbourne and St George divisions lowered their one to five-year fixed rates to below 5 per cent. Mortgage rates are at their lowest since the global financial crisis.

”It’s a further continuation of injecting more competition into the home loan marketplace, and also a confidence booster given that we’ve got the lowest government cash rate for 53 years,” Bank of Melbourne chief executive Scott Tanner said.

Shorter plank as interest rate battle intensifies. Photo: Bloomberg

The Reserve Bank’s decision to slash the cash rate to 2.75 per cent on May 7 saw a flurry of lenders, including the big four banks, pass on the 25-basis-points cut in full.

Advertisement

ANZ took a step further by dropping its standard variable mortgage rate by 0.27 percentage points to 6.13 per cent, matching NAB.

Westpac has the highest standard variable mortgage rate among the big four with 6.26 per cent.

Commonwealth Bank and ANZ were contacted for comment. A NAB spokesman said the bank had no comment at this time.

The moves came amid lower funding costs for banks and strong profit growth.

”I think it presents a bit of a borrowers’ dilemma about whether to lock in now or hold back and see if rates fall further,” said Kirsty Lamont, of comparison site Mozo, adding that the Greater Building Society had the lowest fixed one-year rate at 4.74 per cent.

”The fact that the banks are cutting their fixed rates again so aggressively shows they are pricing further rate cuts from the Reserve Bank down the track.”

Rising fixed-rate ratio

In March, 18.45 per cent of home loans financed through financial comparison website RateCity were fixed, the highest proportion in five years, said its spokeswoman, Michelle Hutchison.

Changing lending conditions such as ”out-of-cycle” mortgage rate cuts independent of the RBA’s actions and the banning of early exit fees on variable rate mortgages in mid-2011 were contributing factors, she said.

A Westpac spokesman said the bank’s take-up levels for fixed home loans doubled from about 8 per cent to between 15 and 20 per cent after it slashed its two-year rate to 4.99 per cent in February.

Mr Tanner expected the proportion of St George’s fixed-rate loans to rise from about 10 per cent to about 30 per cent as mortgage rates drop.

Financial markets were pricing in a 20 per cent chance of a 25-basis-point interest rate reduction for June, and tipping at least one 25-basis-point cut by the end of the year, Credit Suisse data showed.

The housing market has experienced patchy growth since the financial crisis. At the same time, auction clearance rates in Sydney and Melbourne have improved.

At the weekend, Sydney’s auction clearance rate was 78.6 per cent – its highest in three years, while Melbourne recorded its highest auction clearance rate for the year at 73.6 per cent, Fairfax Media’s Australian Property Monitors data showed.

[…]