Westpac and Bank of Queensland updates provide window into banking competition

BoQ said on Monday its profit for the half year ending February 28 would be in the range of $165 million to $170 million, or about 9 per cent below the previous corresponding period. The bank said non-interest income was expected to be $8 million to $10 million lower than the first half of 2018.

The bank said it would record lower net interest income because of higher wholesale funding costs and price competition for new loans. BoQ’s retail banking business needs a shake-up but that will probably have to awaitthe appointment of a new chief executive to replace Jon Sutton.

Acting CEO Anthony Rose, who did not put his name to Monday’s press release, is the person in the box seat to replace Sutton but the bank’s chairman, Roger Davis, is conducting a global search.

Sutton’s sudden departure last year for health reasons will have implications for the half-year profit because his $1 million payout will be included in the accounts as a non-recurring item.

Improving conditions

When Sims attacked the competitive environment in banking he said his office was looking at ways to strip away regulatory barriers faced by smaller financial institutions. But if the problems at BoQ and Bendigo are lack of creativity and thinking outside the square, that should be laid at the feet of the respective boards of directors, not market structures.

Westpac’s surprise quarterly disclosure of its profits for the three months to December served to highlight the power and scale of the big four banks. Westpac released quarterly profits only to ensure it could take advantage of favourable funding markets in the United States.

It is the only one of the big four registered with the Securities and Exchange Commission in New York under the Dodd-Frank laws. This means it can issue debt securities to a broader array of investors in the US than the narrow set of investors that target the private debt placement market.

Westpac raises about $30 billion in term wholesale funding each year. It has already raised $16 billion since its financial year started in October. Conditions have improved noticeably in the US debt market this calendar year following a horror period in December when liquidity almost dried up.

Improving conditions mean you can expect Westpac to raise about $4 billion to $5 billion in a benchmark debt offering in the US between now and its blackout date for half-year results April.

Westpac’s capacity to fund lending to business and households depends on its ability to secure the wholesale funding that is beyond the dreams of any regional banker. Westpac and its three peers are part of an oligopoly but without them the economy would be unable to fund itself.

The quarterly update provided a timely update of prevailing credit conditions and the message was positive. Westpac’s mortgage delinquencies were 0.76 per cent, up 4 basis points over the quarter.

But the most interesting data point in the slide pack released by Westpac in its quarterly update was that only 1 per cent of Westpac loans have loan-to-valuation ratios where the value of the loan exceeds the value of the property.


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