Australian Banks – Safe Harbour in the coming storm?

June 21, 2011

Australian Equities, FOREX

The Australian banking system is the envy of the world and it’s strength and lack of need for Government bailouts is one of the reasons why Australia is in such fine economic and fiscal fettle. This strength is institutionalised and runs all the way through the system from the Majors on down.

But given the headwinds facing the Australian economy with regard to household restraint, lack of demand for credit and so on challenges are evident for the listed entities. And given our underlying belief that households desire for savings is structural not transitory the demand for the services Australian banks offer is likely to be stagnant to down in ‘real” terms. Now this selloff since April is getting long in the tooth but we’d rather be owners of Australian bank debt than equity in the current global environment where capital gains are so hard to hold onto – as the Westpac chart below suggests.

But hot on the heals of the story in The Australian yesterday morning saying the Russians are buying up to $5 billion in Australian assets , which I posted on over at MacroBusiness, came a story on Bloomberg yesterday afternoon saying many offshore investors are changing their tune to Australian Banks, at least their debt and using them as a safe harbour in the coming Greek Default induced market storm. Bloomberg says,

Bond investors seeking refuge from Europe’s sovereign debt crisis are finding Australia’s banks safer than their global peers, even after the top four lenders’ credit ratings were downgraded last month.

The nation’s biggest banks, cut one level to Aa2 by Moody’s Investors Service, don’t own Greek debt and get at least 70 percent of their revenue from Australia, where growth is forecast to outpace the U.S. and the euro region next year.

But is this true?

We are not so sure that it isn’t just a good story that isn’t really backed up with price action. For example let’s have a look at the Credit Default Swap Spreads of Australian banks and then against their global peers.

In the first chart above we can see that the Big 4 are fairly generic when it comes to their CDS spreads. So for comparison purposes we can just use one of the 4 when we are looking at global banks.

So how do they compare on a global scale?

You’ll have to click on the chart to get a better view of things but the key message is that we have used Westpac as our Aussie bank proxy and it is just mid ground. Soc Gen, Barclays, Erste and BNP Paribas are all above them while UBS, Wells Fargo, Credit Suisse, Deutsche, JP Morgan and HSBC are all below Westpac.

Not an exhaustive list by any stretch of the imagination and while not on this chart what we see is that Westpac’s CDS spread moves pretty much in line with the average of the selection of Banks.

Therefore I would conclude that while the Australian majors may eventually be looked at in a different light for the moment there is scant evidence of it.

What does it all mean for US and you? We reckon that Debt and TD’s in the Australian ADI space are amongst the best risk adjusted returns on the planet given how strong the overall banking system is. But we are yet to see a wholesale rerating by offshore investors of the Majors. Perhaps we will soon – we’ll keep an eye on things.

This blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

If you do need economic, investment or financial adviser we are happy to help and if you are an adviser and would like to join our network we are also happy to help.

Please Email the team at Lighthouse at or Greg directly on

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