20 Jun 2011

Sovereign Crisis Drives Investors to Aussie Bank Bonds: Australia Credit

Aussie Banks Seen as Refuge Amid Greek Crisis
National Australia Bank priced A$2 billion of five-year floating-rate notes to yield 117 basis points more than the bank bill swap rate on June 16, Bloomberg data show. Photographer: Ian Waldie/Bloomberg
May 19 (Bloomberg) -- Patrick Winsbury, a senior vice president at Moody's Investors Service in Sydney, talks about the outlook for Australia's four largest banks, whose credit ratings were cut one level to Aa2 by Moody's on concern their reliance on wholesale debt markets makes them vulnerable to swings in investor confidence. Winsbury speaks to Rishaad Salamat on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)
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. Speculation a Greek default would infect Europe’s banking system and slow the global economy is roiling markets.
“Australian banks have very limited exposure to Greek sovereign debt and other European peripherals, which helps to explain why they have outperformed of late,” said Mark Mitchell, the head of credit at Sydney-based Kapstream Capital, which manages about A$3.9 billion ($4.1 billion). “Investors are getting increasingly concerned about the situation in Greece and the potential contagion effects.”
Bondholders demand 198 basis points, or 1.98 percentage points, more than yields on government debt to hold global bank notes, compared with 166 basis points on Australian securities, the widest gap since March, Bank of America Merrill Lynch indexes show. Credit-default swaps insuring debt of 152 banks worldwide, including Bank of America Corp. and HSBC Holdings Plc, are the most expensive relative to contracts on Australian lenders in three months, according to data compiled by Bloomberg.

Greek Default

A default by Greece is “almost certain” and could help drive the U.S. economy into recession, Alan Greenspan, former Federal Reserve chairman, said in a June 16 interview with Charlie Rose in New York.
European officials failed to agree on releasing a loan payout to spare Greece from default, after a seven-hour crisis meeting that ended early today. European Union finance ministers pushed Greece to pass laws to cut its deficit and sell state assets, and left open whether the country will get the full 12 billion euros ($17.1 billion) promised for July. The crisis is set to dominate an EU summit in Brussels on June 23-24.

Growth Rates

The euro region is likely to expand 1.9 percent in 2011, and 1.65 percent in 2012, according to the median estimates of economists surveyed by Bloomberg. In the U.S., where industrial production rose less than forecast in May and the jobless rate climbed to 9.1 percent, growth is estimated to be 2.6 percent this year and 3 percent in 2012. Australia’s economy may expand 2.8 percent in 2011 and 4 percent next year, the surveys show.
The Reserve Bank of Australia cash-rate target is the highest in the developed world at 4.75 percent. That compares with the U.S. Fed’s range of zero to 0.25 percent, held since December 2008.
Demand for commodities has helped the nation’s currency gain 20 percent against the U.S. dollar in the past 12 months. It reached $1.1012 on May 2, the highest since exchange controls were scrapped in 1983, and traded at $1.0569 at 2:00 p.m. in Sydney today.
Consumer prices in Australia may rise an annual 2.78 percent in the next five years, based on the gap between yields on government bonds and inflation-indexed notes.
Yields on Australia’s benchmark 10-year bonds fell 3 basis points today to 5.09 percent, compared with 2.93 percent on similar-maturity Treasuries.

Investor Confidence

The Markit iTraxx Australia index of credit-default swaps rose 0.9 basis point last week to 115.3, the highest weekly close since September, according to data provider CMA. The gauge typically falls as investor confidence improves and rises as it deteriorates. CMA is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.
The extra yield investors demand to hold Australian corporate bonds instead of government debt rose 3 basis points to 171 in the week ended June 17, Bank of America Merrill Lynch index data show. That compares with a 4 basis-point widening of spreads on global company debentures to 164 last week, the data show.
Australian banks have no investments in Greece, compared with $56.7 billion owed to French banks, according to data from the Bank for International Settlements as of the end of 2010.
Greek government bonds held by banks in countries reporting to the BIS totaled $54.2 billion, of which 96 percent was owned by European lenders.
BNP Paribas SA, France’s biggest bank, and local rivals Societe Generale SA and Credit Agricole SA may have their ratings cut by Moody’s because of their investments in Greece, the risk assessor said June 15.

Moody’s Downgrade

Moody’s cited the Australian banks’ reliance on international bond investors for the downgrade, saying markets will be “less liquid and lot more volatile” in the next five to seven years.
Fixed-income markets brushed off the move, the first ratings cut for the country’s biggest lenders in more than a decade. Credit-default swaps on three of the four banks remained unchanged the day of Moody’s announcement while contracts on Westpac rose 0.5 basis point, CMA data show.
Moody’s ratings are now in line with the lenders’ AA grade from Standard & Poor’s. Less than 10 percent of members of the MSCI World Bank Index (MXWO0BK) are ranked higher.
The average cost of insuring the senior debt of Australia’s top four banks increased 8.3 basis points to 116.9 basis points this month, CMA prices show. Contracts on global peers rose 25.1 to 233.5 in the same period. The gap of 116.6 is the widest since March 15, Bloomberg data show.

Bond Returns

Financial bonds in Australian dollars have gained 0.12 percent on a price return basis this month, compared with a loss of 0.35 percent on global bank debt, Bank of America Merrill Lynch indexes show.
Australian banks’ balance sheets are benefiting from a surge in deposits as companies and consumers boost savings, while home buyers have also become more conservative. Borrowing for mortgages grew by 6.4 percent in April from the year-earlier period, the least since the central bank figures were first reported in 1977.
The nation’s household savings ratio climbed to 11.5 percent in the three months through March from 9.7 percent in the previous quarter, the highest level since 2009, according to the statistics bureau. U.S. households saved 4.9 percent of their disposable income in April, according to the Bureau of Economic Analysis.
Nomura Holdings Inc. cut its bond sale forecast for ANZ, Westpac, National Australia Bank and Commonwealth Bank to A$89 billion for the 2011 financial year, from an earlier estimate for the period of as much as A$130 billion, according to a report published last month.

Pimco Bet

National Australia Bank priced A$2 billion of five-year floating-rate notes to yield 117 basis points more than the bank bill swap rate on June 16, Bloomberg data show. JPMorgan Chase & Co. paid a 135 basis-point spread on A$600 million of five-year bonds sold in March, the data show.
Pacific Investment Management Co.’s Australian unit holds more financial debt than the benchmark it tracks, Robert Mead, Sydney-based head of portfolio management, said in an interview this month.
“Given the fundamental tailwinds for the Australian corporate sector and our banks, we are overweight both of those,” he said.

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