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Australia's major banks gain price power
Richard Gluyas | February 28, 2009
Article from: The Australian
THE nation's major banks are emerging from the financial crisis as profit machines with huge, enhanced pricing power, only six months after the global banking system was "nearly lost", according to former Westpac boss David Morgan.
Former Westpac CEO David Morgan in Sydney. Picture: Amos Aikman
Dr Morgan, who is now senior operating partner at financial services private equity firm JC Flowers & Co, made his dramatic characterisation of the depth of the financial crisis, and how local banks will emerge even stronger as foreign banks quit the local market, at an investor conference in Sydney yesterday.
The former Westpac chief had a bird's eye view of the September weekend when the banking system almost collapsed, because JC Flowers was considering investments in the key institutions Lehman Brothers, Merrill Lynch and insurer AIG.
"Plainly, we nearly lost the global banking system in the September-November period of 2008," he told the Perennial INVEST09 conference.
"That was a massive and very public shock: collapse or near collapse of what were supposed to be some of our safest institutions.
"It led to a collapse of confidence on the part of all economic entities -- households, companies, financial institutions, borrowers, lenders and investors."
But now, six months after that cataclysmic September weekend and its aftermath, when Lehman folded, Merrill was absorbed by Bank of America and AIG rescued by $US85 billion ($132 billion) of taxpayer funds, Dr Morgan said the core of Australian banking was "very healthy".
Foreign banks were fast retreating, second-tier lenders were disappearing and while funding costs had risen, these could generally be passed on to customers.
Bank capitalisation, furthermore, was strong, and bad debts in the most plausible scenario of a recession would be of "manageable proportions".
The result was a reduction in competitive intensity and a capacity to price loans more appropriately for risk, counter-balanced by a big increase in moral suasion used by the federal Government to keep a lid on the price of credit.
"This means we have not seen, in my judgment, the full impact of the new-found pricing power of the major banks," Dr Morgan said.
"Given also my judgment that the return of foreign financiers -- and a new tier-two of financiers -- to Australia is likely to take a long time, I believe we have seen a fundamental, very significant structural shift that augurs well for major bank profitability in the future."
But to fully use that pricing power, he said, the banks had to wean themselves off the current level of support provided by the Government -- most importantly, the wholesale funding guarantee.
While the greatest threat to the earnings power of the banks was government intervention, Dr Morgan said the risk was manageable.
Offshore investors, he said, did not accept the view that Australia's banks were different, with significantly enhanced earnings power and sound capital bases.
Consistent with that, the nation's top bank analysts had "simply given up" marketing our lenders to overseas fund managers.
"But as always, over time, the fundamentals will assert themselves," Dr Morgan said.
On events surrounding that fateful September weekend, he said the decision to allow Lehman to fail was "plainly incorrect, with the benefit of hindsight".
"I can understand why the Lehman decision was made," he said.
"The US Government was only dimly aware of how serious AIG's problems were, so they did not realise how close we were to losing the entire system.
"So I understand why they let Lehman go, but it was plainly incorrect with the benefit of hindsight."
JC Flowers gave Lehman, Merrill and AIG a wide berth, but last January -- in conjunction with computer mogul Michael Dell and hedge fund operator John Paulson -- bought the collapsed US home lender IndyMac Bank for $US14 billion.
Richard Gluyas | February 28, 2009
Article from: The Australian
THE nation's major banks are emerging from the financial crisis as profit machines with huge, enhanced pricing power, only six months after the global banking system was "nearly lost", according to former Westpac boss David Morgan.
Former Westpac CEO David Morgan in Sydney. Picture: Amos AikmanDr Morgan, who is now senior operating partner at financial services private equity firm JC Flowers & Co, made his dramatic characterisation of the depth of the financial crisis, and how local banks will emerge even stronger as foreign banks quit the local market, at an investor conference in Sydney yesterday.
The former Westpac chief had a bird's eye view of the September weekend when the banking system almost collapsed, because JC Flowers was considering investments in the key institutions Lehman Brothers, Merrill Lynch and insurer AIG.
"Plainly, we nearly lost the global banking system in the September-November period of 2008," he told the Perennial INVEST09 conference.
"That was a massive and very public shock: collapse or near collapse of what were supposed to be some of our safest institutions.
"It led to a collapse of confidence on the part of all economic entities -- households, companies, financial institutions, borrowers, lenders and investors."
But now, six months after that cataclysmic September weekend and its aftermath, when Lehman folded, Merrill was absorbed by Bank of America and AIG rescued by $US85 billion ($132 billion) of taxpayer funds, Dr Morgan said the core of Australian banking was "very healthy".
Foreign banks were fast retreating, second-tier lenders were disappearing and while funding costs had risen, these could generally be passed on to customers.
Bank capitalisation, furthermore, was strong, and bad debts in the most plausible scenario of a recession would be of "manageable proportions".
The result was a reduction in competitive intensity and a capacity to price loans more appropriately for risk, counter-balanced by a big increase in moral suasion used by the federal Government to keep a lid on the price of credit.
"This means we have not seen, in my judgment, the full impact of the new-found pricing power of the major banks," Dr Morgan said.
"Given also my judgment that the return of foreign financiers -- and a new tier-two of financiers -- to Australia is likely to take a long time, I believe we have seen a fundamental, very significant structural shift that augurs well for major bank profitability in the future."
But to fully use that pricing power, he said, the banks had to wean themselves off the current level of support provided by the Government -- most importantly, the wholesale funding guarantee.
While the greatest threat to the earnings power of the banks was government intervention, Dr Morgan said the risk was manageable.
Offshore investors, he said, did not accept the view that Australia's banks were different, with significantly enhanced earnings power and sound capital bases.
Consistent with that, the nation's top bank analysts had "simply given up" marketing our lenders to overseas fund managers.
"But as always, over time, the fundamentals will assert themselves," Dr Morgan said.
On events surrounding that fateful September weekend, he said the decision to allow Lehman to fail was "plainly incorrect, with the benefit of hindsight".
"I can understand why the Lehman decision was made," he said.
"The US Government was only dimly aware of how serious AIG's problems were, so they did not realise how close we were to losing the entire system.
"So I understand why they let Lehman go, but it was plainly incorrect with the benefit of hindsight."
JC Flowers gave Lehman, Merrill and AIG a wide berth, but last January -- in conjunction with computer mogul Michael Dell and hedge fund operator John Paulson -- bought the collapsed US home lender IndyMac Bank for $US14 billion.
