Term Deposit Service

Leaders at the recent G20 summit in Toronto have abandoned a plan for a global bank levy and agreed on a longer timetable for banking reforms. Banking capital reforms, which are set to begin rather than be completed in 2012, aim to enable banks to withstand stresses associated with the recent financial crisis without extraordinary government support. When the new reforms are fully implemented, the amount of capital will be significantly higher and the quality of capital will be significantly improved.

Despite the lack of a general consensus on a global bank levy, some governments including France, Germany and the UK will look to introduce a similar levy within their countries. Canada, Japan, Brazil and Australia, whose banks did not need government bailouts during the crisis, were among the countries opposing the levy. In addition, there was a non-binding pledge to halve budget deficits by 2013 and balance budgets from 2016.

Telstra reaches agreement with Government

Monday 21st June 2010

Telstra has reached an agreement with the government-backed NBN Co.’s fiber-optic service, causing its share price to rise 3.4%, the biggest rise in 9 months. Under the deal which is subject to shareholder and ACCC approval, Telstra will receive about $11bn to phase out its copper-wire network and transfer customers to NBN Co. The agreement also gives NBN access to Telstra’s ducts, trenches and other infrastructure which will allow much of the cabling to go underground.

Although $1bn less that Telstra initially wanted, it is considerably more than the $8bn the Government had originally offered. With a federal election later this year, the opposition has said it will cancel the NBN if elected which adds a level of political risk to the deal.

NAB Acquires US Bank Assets

Monday 7th June 2010

NAB through its subsidiary Great Western Bank has announced the acquisition of US$1.9 bn in deposits and US$1.9 bn in loans of TierOne Bank from the US regulator Federal Deposit Insurance Corporation for a cash payment of approximately US$76m.

Included is an agreement where the FDIC absorbs 80% of credit losses arising on the loan portfolio and related assets. The agreement has a term of ten years for residential mortgages and five years for all other loans. Following the acquisition, the loan portfolio remains more than 100% funded by deposits.

It is estimated the acquisition will require less than 10 basis points of group tier 1 capital.

Commonwealth Bank Releases Pillar 3 Results for 3Q10

Monday 31st May 2010

Commonwealth Bank of Australia have released their Pillar 3 results for the third quarter of 2010.

The group’s Tier 1 Capital ratios as at 31 March 2010 was 9.19% down from 9.10% on the previous quarter, and the group’s Total Capital ratio was 11.33%, down from 11.63% for the previous quarter.

Total Risk Weighted Assets decreased by 1.2% to $293.9bn and credit risk risk-weighted assets decreased 1.8% to $253.7bn.

Total credit risk exposure (excluding equities and securitisation) was $650.5bn, a decrease of $0.3bn on the previous quarter. The reduction in corporate and specialised lending risk weighted assets reflects a net run-off of exposure within these portfolios, exchange rate appreciation and a modest improvement in credit quality.

A reduction in money market lending and swap exposure resulted in a decrease in bank risk weighted assets. Operational risk risk-weighted assets increased by 6.2% to $19.5bon over the quarter due to an increase in risk associated with transaction execution, delivery and process management.

There was good news on the bad debts front with actual losses falling 61% to $288m indicating the bank will report a strong profit at the end of the financial year.

Federal Budget 2010 tax changes

Friday 14th May 2010

The 2010 Federal Budget announced a number of measures to to help out working families. From 1 July 2011, there will be a 50% discount on up to $1000 of interest income, and from July 1 2012 taxpayers will have the option of a standard $500 deduction for work related expenses. This deduction will rise to $1000 from 1 July 2013 and people will still be able to submit receipts if they are entitled to a higher deduction.

Changes to personal income tax rates and thresholds announced in the 2009 budget have also been confirmed. The threshold to be charged the 30% tax rate has been lifted from $35,001 to $37,001 and the tax rate for those earning $80,001 to $180,000 has fallen 1% to 37%. There is also an increase in the maximum low income tax offset to $1,500 per year from 1 July 2010, effectively raising the tax free threshold to $16,000.

Changes in superannuation were confirmed with the superannuation guarantee gradually increasing from 9% to 12% from 1 July 2013, with the government contributing up to $500 for those on incomes up to $37,000 to effectively refund contributions tax.

For small businesses the key benefit is a reduction in company tax from 30% to 28% from the 2012-13 financial year along with allowing an immediate write off for assets costing less than $5,000 (up from $1,000). For larger enterprises the corporate tax rate will decrease from 30% to 29% in 2013-14 and will reduce to 28% in 2014-15.

NAB posts disappointing 1H10 profit

Friday 7th May 2010

NAB has posted a half year to 31 March 2010 profit of $2.1bn, a fall of 21.4% from the previous corresponding period. Cash earnings increased 8.2% to $2.2bn thanks to its business banking and NAB wealth divisions.

Revenue fell 3.3% due to reductions in customer fees and more normal income in global markets and treasury after an exceptionally strong contribution in 2009.

Tier 1 capital ratio rose 7.08% to 9.09% which is above the Group’s target and $15.0bn was raised in term funding with the 2010 funding program now more than 50% complete. Total liquid assets were $68.0bn.

On improving economic conditions mostly within wholesale banking and business banking, bad and doubtful debts fell 32.1% to $1.2bn. Net writeoffs decreased from a peak of $1.6bn in the previous six month period to $1.0bn.

Westpac releases solid 1H10 results

Friday 7th May 2010

This week Westpac released results for the half year to 31 March 2010 with net profit jumping 32% to $2.9bn. Cash earnings of $3.0bn surpassed analyst’s estimates of $2.9bn.

Customer deposits grew by $15.0bn and their Australian market share grew from 23% to 24%. A $732m reduction in impairment charges, most notably in Westpac Institutional Bank, reflected an improved operating environment, a stabilisation in asset quality and relatively lower risk loan book.

Cash earnings as part of the Retail and Business Banking division fell as Westpac reduced banks fees, but increases in the BT Financial Group division as well as a huge 410% increase at Westpac Institutional Bank more than made up for this.

Thanks to a more conservative managing of the Group’s balance sheet with its Tier 1 capital ratio increasing by half a percent to 8.6%. The stable funding ratio also rose 1% to 79% and the bank has higher liquidity levels, up $6.0bn to $80.0bn. Finally, Westpac also has higher provision cover with collective provisions to credit risk weighted assets at 1.50%, up from 1.42%.

Nevertheless, Westpac gave a cautious outlook due to the effects of the global financial crisis that will continue to impact the company, particularly over the next two years.

Germany – damned if they do, damned if they don’t

Friday 30th April 2010

A recent series of downgrades from ratings agency Standard & Poor’s during the week has highlighted the difficult position the German government finds itself in as the ‘owner’ of German banks.

This week S&P downgraded the Kingdom of Spain; The Republic of Portugal; and the Hellenic Republic (Greece) to junk status.

It is estimated that German financial institutions have an exposure to Greek bonds of around Euro 28 bn with around half of that estimated to be held by institutions owned or controlled by the government as a result of bailouts through the credit crisis. As a result, the government’s direct exposure outweighs its potential immediate contribution to a EU Greek bailout (but possibly not as much as its total contribution). So failure to secure a bailout of Greece in the short term, will rebound on the German government through significant write-downs in banks which they control – which ultimately may require further injections of government funds to prop them up.

Germany’s Chancellor Angela Merkel can expect to continue to come under pressure from the EU, the IMF, and President Obama to sign up to a EU-IMF bailout, while fighting domestic political pressures on using German taxpayers money to fund generous Greek pensions.

Germany – damned if they do, damned if they don’t.

ANZ release solid 1H10 results

Thursday 29th April 2010

ANZ today announced a 36% increase in reported profit for the first half of 2010 to $1.93bn. The more important underlying profit for the period increased 20% to $2.30bn.

It was a reasonable result from ANZ which benefitted from increases in the margins it charges on its loans to corporate clients as well as reduced bad debts. Australia was again the star performer with the New Zealand also improving in line with its recovering economy.

The bank maintains the highest capital ratios of the major bank with Tier 1 capital at 10.7%.

Consumer Inflation Expectations

Wednesday 21st April 2010

The Melbourne Institute survey of consumer inflation expectations said expectations rose 0.9 percentage points to 4.1% in April, its highest level in 18 months. As Australia’ economic recovery continues, the figure indicates the Reserve Bank of Australia may continue to increase interest rates to keep inflation within its target of between 2 and 3%.

New Issues

Monday 19th April 2010

NTTCorp $500m 6.25% October 2015

Northern Territory Treasury Corporation raised $A500m via a new 5-year fixed rate bond issue, with a coupon rate of 6.25%. Details are as follows:

Total Amount: $500m

Pricing Date: 15 April 2010

Settlement Date: 20 April 2010

Maturity Date: 20 October 2015

Coupon: 6.25%

Rabobank NZ$250m 5.465% April 2013 MTNs

Rabobank has priced its issue of NZ$250m of 3 year MTNs, upsized from N$200m by including a second tranche. Details are as follows:

Tranche 1

Issue amount: NZ$200m

Pricing date: 15 April 2010

Settlement date: 19 April 2010

Maturity date: 19 April 2013

Coupon: 5.465%

Tranche 2

Issue amount: NZ$50m

Launch date: 14 April 2010

Pricing date: 15 April 2010

Settlement date: 19 April 2010

Maturity date: 19 April 2013

Coupon: 5.465%

QTC launches New 2016 Benchmark Bond

Queensland Treasury Corporation has launched a 6.00% April 2016 benchmark size issue through a bookbuild process. Books open 20 April 2010, with pricing expected on 21 April 2010. The transaction is fully guaranteed by the Queensland government but is not guaranteed under the federal government’s scheme for state and territory borrowing. Details are as follows:

Pricing date: 21 April 2010

Settlement date: 27 April 2010

Maturity date: 21 April 2016

Coupon: 6.00%

Dexus Finance

Dexus Finance, a subsidiary of Dexus Property Group, priced its $180m 8.75% AMTN and will buy back $178.9m of the 8 February 2011 bonds. Details are as follows:

Pricing date: 21 April 2010

Settlement date: 21 April 2010

Maturity date: 21 April 2017

Margin: BBSW + 270bps

Building Sector Comparison

Wednesday 7th April 2010

After a tumultuous eighteen months, the property trust/developer sector seems to have stabilised over the last six months. While there were further writedowns of property assets as capitalisation rates increased, the quantum of these impairments declined. It appears as though the property cycle is close to bottoming.

When combined with the substantially de-leveraging that has occurred over the past two years, the credit risk of the sector overall has decreased significantly. With credit spreads still high there is some excellent opportunities available in property company bonds.

The biggest risk now for investors owning debt of the property companies relates to their long-term ambitions. After the recent round of capital raising near term solvency risk is extremely low and combined with undergeared balance sheets the biggest concern is that they will go on acquisition sprees and again over-leverage in the medium to long-term.

Overall however, the combination of capital raisings and more conservative valuation of property assets means from a credit perspective, the sector is now low risk. With spreads in many property trusts still high, especially in subordinated debt pieces, there remains some excellent value in the sector.

We have recently completed a review of the property sector reviewing the various credits in the sector and where value lies. See our website for the full version of this report.

More Solid Infrastructure Returns

Thursday 25th March 2010

Envestra owns gas distribution networks in Victoria, South Australia, Queensland, New South Wales and the Northern Territory. The networks transport gas to over one million domestic, commercial and industrial consumers. Envestra’s network consists of over 20,000 kilometres of mains pipeline and 1,000 kilometres of transmission pipeline.

Envestra’s financial profile has improved over the past 18 months as a result of the paying down of short term maturities on the back of a shareholder backed actions with $134m pumped into the business via an equity raising ($111m underwritten by its major shareholder) and its dividend reinvestment scheme ($23m).
Envestra has no short term refinancing issues (courtesy of the equity injections and new bonds which were in part used to meet short term maturities) with the next maturities requiring refinancing falling in the second half of 2011.
As a result of the initiatives above, and the lowering of dividend payments, Envestra will fund growth capex via surplus cash flows and equity (as opposed to debt and equity as had previously been the case) which will result in continued improvements in leverage over the medium term.
As a result of its geographic diversity, Envestra has lower regulatory risk in any one year and also mitigates some volume risk as a result of mild weather conditions in any one jurisdiction.

Mixed Signals Surrounding Investor Confidence

Tuesday 23rd March 2010

Mixed signals throughout the economy have caused an unexpected fall in investor confidence. The Investment and Financial Services Association CoreData Investor Sentiment index fell to 2.9 points in the first quarter of 2010 from a reading of 7.4 points in the final quarter of 2009.

Within the local economy home prices on average jumped 13.6% in 2009 However, fears of an interest rate rise by the Reserve Bank may put further pressure on home owners. Internationally, there are a number of lingering events that if triggered could impact the stability of the global economy. These events include sovereign debt defaults in Europe, the possibility of a real estate and credit bubble in China, the high rate of unemployment in the US and the commodity-exporting boom in Australia’s expiry date.

Government Bond Issues

Friday 19th March 2010

TCorp issues new 6.00% April 2016

New South Wales Treasury Corp (TCorp) will issue up to A$1bn of a new 6.00% benchmark hot stock, which offers higher liquidity, maturing on 1 April 2016.

The bonds will be issued via a book build process. Pricing will begin on Wednesday 17 March and settlement will occur on Monday 22 March, 2010.

AOFM Upcoming Tenders

The Australian Office of Financial Management plans to hold the following tenders for the issue of government securities:

Wednesday 17 March: $500m April 2015 bond line

Thursday 18 March: $600m 11 June 2010 treasury notes

Friday 19 March: $1bn November 2012 bond line

Tuesday 23 March: $300m September 2025 Treasury Indexed bond line

AOFM A$600m June, A$300m July 2010 Treasury Note Tender Results

The Australian Office of Financial Management has announced the results of Treasury Note Tender Number 09/10.

A$600m 11 June 2010 Treasury Note

Amount: $600m
All Bids Received: $1.94bn
Weighted Average Bid: 4.1665%

Amount: $300m
All Bids Received: $1.285bn
Weighted Average Bid: 4.265%

New Issues

Tuesday 9th March 2010

Heritage Government Guaranteed A$200m 5yr FRN

Heritage Building Society has priced a new guaranteed $200m floating rate note set to mature on 10 March 2015. The Issue has a coupon of 3 month BBSW + 40bp.

ANZ EUR1.25bn 7 year Eurobond

ANZ priced its EUR1.25bn Eurobond with a coupon of 3.75% and is set to mature on 10 March 2017.

Wesfarmers 5 year EUR500M

Wesfarmers issued EUR500m at a coupon of 3.875% which will mature on 10 June 2015 bonds.

JPMorgan A$1bn 5yr Kangaroo

JPMorgan Chase & Co. priced a A$1bn Kangaroo bond which will mature on 11 March 2015. It consists of $700m 6.75% fixed rate tranche and a $300m Floating priced at 3mth BBSW+ 130bp. The deal will settle on 11 March 2010.

IADB A$375m August 2019 Kangaroo Tap

The Inter American Development Bank increase the size of its 20 August 2019 kangaroo issue by A$375m at a coupon of 6.5%, taking the total issue size to $1.1bn. The transaction has a re-offer clean price of $102.042.

Rabobank Australia A$50m January 2013 Tap

Rabobank Australia added A$50m to its 6.0% 15 January 2013 MTN, bringing the new total issue size to A$400m. Issue price is $101.6925. Settlement date is 10 March 2010.

Members Equity Bank A$673m RMBS

Members Equity bank has priced it’s A$673m RMBS which was increased from A$500m. The issue will be settled on 15 March 2010 and is separated into three tranches.

Class A, A$643.5m (increased from $478.5m) 2.6year, 1mth BBSW+ 135bpts, AOFM took $250m
Class AB, A$17m (increased from $12.5m), 7.2year, 1mth BBSW+ 180bpts
Class B, A$12.5m (increased from $9m) 7.2year, Undisclosed

Fitch Transfers St. George Ratings to Westpac

3rd March 2010 - Fitch has withdrawn the ratings of St.George Bank, following the transfer of all its assets and liabilities to its parent Westpac. At the same time, Fitch has affirmed the ratings of St.George's senior and subordinated debt instruments upon their transfer to Westpac, including its outstanding debt.

Westpac acquired St.George on 1 December 2008. All assets and liabilities of St.George were transferred to Westpac on 1 March 2010. Now the group operates with one banking license. The ratings of Westpac and its subsidiaries, Westpac New Zealand Limited and St.George Insurance Australia Pty Limited are unaffected by this action.

Jump in Retail Sales

2nd March 2010 - A better than expected result was reported for Australian retail sales in the month of January with retail trade increasing by 1.2% to a seasonally adjusted record $20.2bn, from a downwardly revised $19.9bn in December.

The result indicated further improvement within the economy as the market only forecasted a 0.5% gain in sales. The monthly increase was a strong rebound from the revised 0.9% retail sales drop in December.

New Issues

24th February 2010 -

ING Bank (Australia)

ING Bank (Australia) issued $2bn of 3 March 2015 government guaranteed bonds. $1bn was in the form of 5.75% fixed rate notes (with a reoffer price of $99.188 and margin of 33bps + semi-quarterly coupon matched asset swap to yield 5.94%), with the remaining $1bn floating at 3-month BBSW +33bpts. The issuer is rated AAA, and the deal will settle on 3 March.

Arab Bank Australia

Arab Bank Australia priced a $150m 18 February 2013 issue at 3-month BBSW +47bpts.

Members Equity Bank

Members Equity Bank priced a $500m Feb 2014 medium term note issue; $175m was priced at 38bpts over semi-quarterly coupon matched asset swap, with $325m priced at 38bpts over BBSW.

Credit Union Australia

Credit Union Australia plans to market $500m of RMBS this year, maturing in April 2041. Westpac will be the lead manager, with QBE Lenders Mortgage Insurance and Genworth Financial Mortgage Insurance providing insurance. The issue will be distributed over three classes of notes: Class A-1, with $470m rated AAA, and an average life of 2.9yrs; Class A-2 with $20m rated AAA, and an average life of 5.1yrs; and Class B, with $10m rated AA- with an average life of 5.1yrs.

The entire collateral pool consists of full documentation mortgages, consisting of 2,992 loans originated by Credit Union Australia. The total value of the pool is $522.4m; fixed rate loans make up 55.8%, investment loans 12.9% and interest-only loans 10.3%.

NAB Business Surveys - January

22nd February 2010 - The NAB released its business surveys for January, contrasting a sharp increase in confidence with a stark drop in conditions.

Confidence rose 7pts in the month to January to 15pts. With a reading of over zero indicating that optimists outweigh pessimists, this is clearly a strong result. Moreover, with the survey being conducted over January 31 – February 4, a large part of the sample would still have been unaware of the pause in interest rate rises announced by the RBA on February 2. Still, with this result following from a 12pt slump in December, it represents a moderation of confidence more than a long term increase.

NAB Business Confidence – January

Source: Bloomberg

Painting a bleaker picture were the results from the conditions survey. Based on several key measures of hiring, sales and profitability, this index dropped 7pts to 3pts in January. While this reading is still positive, it represents the first drop in the index of this size since February last year. The drop was driven by a 14pt drop in the measure for trading conditions and a 10 pt drop in profits.

NAB Business Conditions - January

Source: Bloomberg

The indices are constructed from surveys taken of 410 key Australian companies each month.

Bendigo and Adelaide Bank Update

19th February 2010 - Bendigo and Adelaide Bank yesterday announced its 2010 first half result. Key points of the result follow:

Net profit after tax was $104.1m, a 106% increase on the $50.6m reported for the prior corresponding period and more than triple the $33.2m from June 2009. Cash earnings, a more relevant record of banking profitability was up 24% to $139.7m.
Net interest margin increased from 1.67% to 2.09% in large part due to a repricing of the bank’s term deposit book.
The cost to income ratio was down to 57.7% from 63.7% at June 2009 and the bank is working towards a target of 55.0%.
Retail funding accounts for 68% of the bank’s liability base with securitisation at 19%, term debt at 1% and wholesale funding 12%.
Provisions for bad and doubtful debts increased from $198.1m to $220.3m although $13.3m of this increase was acquired through the business combination with Rural Bank. Overall, provisioning and arrears remain stable.
The bank’s Tier 1 capital increased to 8.95% from 7.43% mainly due to a $300m capital raising in August/September 2009. The total capital ratio increased to 11.97% although the amount of Tier 2 capital decreased as the bank’s subordinated debt issues were redeemed without being replaced.

Overall it was a strong performance from Bendigo with profitability returning to more normal levels on the back on an increased net interest margin and moderating bad debts. When combined with the substantial capital raising undertaken in the last 6 months, Bendigo remains a soundly capitalised bank and we are comfortable with the credit risk.

BoQ $850m RMBS

16th February 2010 - On 9 February 2010 the Bank of Queensland upsized their RMBS issue to $850m due to heavy demand. The deal was first launched at $500m on 1 February 2010.

The senior notes consist of three tranches:

$786m Class A Notes (AAA/Aaa) 3.1yrs BBSW +130bpts
$51m Class AB Notes (AAA) 5.4yrs BBSW +175bpts
$13m Class B Notes (AA-) 5.4yrs undisclosed pricing

This is the second mortgage-backed offer this year, following AMP’s $1 billion RMBS issue in January.

Unemployment Drops to 5.3%

11th February 2010 - Australia’s unemployment rate fell for the fourth consecutive month in January to 5.3% from 5.5% in December. Total amount of jobs created were 52,700 - 15,900 full-time jobs and 36,900 part-time jobs. The result defied economist expectations of a rise to 5.6%. The drop in unemployment will add to the likelihood that the Reserve Bank will lift interest rates next month.

Withdrawal of the Government Guarantee

8th February 2010 - Yesterday the Rudd Government announced the withdrawal of its Guarantee Scheme for Large Deposits and Wholesale Funding (the Guarantee) effective from 31 March 2010. This however does not affect deposits under $1m. Deposits under $1m will continue to be covered under the Financial Claims Scheme which will stay in place at least until October 2011 when it will be reconsidered. For large deposits and wholesale funding, the guarantee will be withdrawn on 31 March 2010.

Existing guaranteed liabilities and large deposits will continue to be covered by the guarantee until maturity (for wholesale funding and term deposits) or until October 2015 (for at call deposits). The final date for ADIs to apply for access to the Guarantee is 24 March 2010. The Guarantee of State and Territory Borrowings will also be closed on 31 December 2010. All existing guaranteed bonds will continue to be covered until maturity.

European Debt Worries

5th February 2010 - There are concerns that European countries that remain heavily in debt will default on debt repayments throughout this year. Countries such as Greece, Spain and Portugal are top contenders in their inability to repay debt and their high budget deficits. Due to the high deficits within these countries large volumes of sovereign debt have been issued to counteract the difficulty in raising money.

Greece’s budget deficit has blown out to 12.7% of gross domestic product, along with Spain’s deficit growing to 9.8% of national output and a deficit of over 9% for Portugal.

Other countries that have significant levels of debt are the US and the UK. The gross public debt for 2009 as % of GDP for the US was 83.9% and for the UK was 71.0%. However the total gross debt for Greece was 114.9% which indicates a very constrained growth outlook for their economy.

New Issue: BoQ to launch a $500 million RMBS

3rd Febuary 2010 - The Bank of Queensland will launch a $500m RMBS transaction, which is set to be priced next week. This will be the second mortgage-backed offer this year, following AMP Bank’s $1bn RMBS issue in January. The offer will be structured in three tranches and has been rated by S&P.

$462.5m Class A notes AAA
$30m Class AB notes AAA
$7.5m Class B notes AA

TD Securities Inflation

2nd Febuary 2010 - Following on from the ABS official fourth quarter inflation statistics last week, the TD Securities Inflation gauge shows that consumer prices continued to rise in January, increasing 0.8% for an annualized headline rate of 2.6% (compared with official headline inflation of 2.1% for 4Q2009).

Given that the RBA aims to keep underlying inflation at between 2-3%, this appears to land it squarely in the target, however if the fourth quarter figures are anything to go by, headline figures are low-balling inflation considerably, with a 1.1-1.5% differential depending on which measure you look at. Was such an adjustment to be applied to these figures for January, this would imply worrying levels of inflation, although note that it may be that headline figures are just approaching underlying measures more closely.

Negative One-Month Bill Rate

28th January 2010 - For the first time in 10 months the US Treasury one-month bill rate dropped to negative 0.0101% due to issuance declines while investors seek the most easily traded securities. In other words, investors are paying the US government to borrow their money.

Treasury sold $10bn of one-month bills on 26 January 2010 at a rate of zero percent, the second auction of the securities in three weeks at this rate. Successful bidders will receive no interest on their investment.

Treasury is seeking to lock in near record-low borrowing costs by lengthening the average due date of the Treasury’s outstanding debt. Treasury plans to lengthen the average due date to 72 months from a 26-year low of 49 months.

Sons of Gwalia

21st January 2010 - The Federal Government has moved to reverse the High Court’s ruling that shareholders should be ranked equally with debt holders that was established in the Sons of Gwalia liquidation. The original decision from the High Court undermined the distinction between debt and equity and the fundamental characteristics that each asset class holds.

The Sons of Gwalia decision was adding considerable cost, complexity, and delay to insolvency administrations, and causing an increase in the risk to attempt at restructuring a number of large financially troubled companies.

The news is a major positive for debt investors as it re-establishes the long held pecking order of the capital structure which ranks debt above equity

Employment

19th January 2010 - Last Thursday, the ABS released surprising figures for December employment, reporting a 0.1% drop in the seasonally adjusted unemployment rate to 5.5%, bringing it to an eight month low.

Employment increased by 35,200, comprising 7,300 new full-time workers and 27,900 new part-time, however aggregate hours worked decreased 0.1%.

While the participation rate stayed constant at 65.2%, when we break down the figures for the unemployed, we see that full time job seekers (down 15,700) are starting to look for part time work (up 5,100 despite 27,900 new part time employees).

Still the report was surprisingly positive, and as reported last week, December’s job ads figures imply that the labour market will continue to strengthen.

Westpac - Melbourne Institute Consumer Confidence Index

18th January 2010 - An index of Australian consumer sentiment had the biggest rise in 6 months, increasing 5.6% to 120.1 points in January. With a reading of over 100 indicating that more consumers are confident than pessimistic, this month’s reading approaches the 2007 peak of 123.9 points, reached at the height of the resources boom.

Perhaps more importantly, the index’s continued increases indicate that the Reserve Bank’s three straight rate rises aren’t dampening consumer confidence. In fact, mortgage holders’ confidence rose 16.7% buoyed by expectations of rising house prices.

When the board meets again on February 2nd, this surely removes an argument against raising rates further

Fitch May Downgrade US Debt

13th January 2010 - The cost of the fiscal stimulus in the US is starting to mount with credit rating agency, Fitch, warning that unless it acts to bring the budget deficit under control it will lose its AAA credit rating. Such a move would severely impact its debt servicing costs and dependence on foreign lenders.

Fitch expects the combined state and federal debt to reach 94% of gross domestic product next in 2011, up from 57% at the end of 2007. Federal interest costs will reach 13% of revenues. These levels are considered by Fitch experts to be extremely dangerous and close to the point of no return for debt dynamics.

The average maturity of US Government debt has fallen to four years, compared with seven for Europe's AAA club. Due to the short term nature of the US debt they will be vulnerable to interest rate movements.

The US may also be exposed to foreign investors such the Chinese, Japanese and Middle East which own almost half of the stock of US debt, liquidating their holdings due to lack of confidence in the market.

To pay for this additional debt load it seems inevitable that the US will have to increase taxes – something it will be reluctant to do while still sorting out its economic difficulties.

Fall in Arrears on Residential Mortgages

4th January 2010 - Since the beginning of 2009 arrears on residential mortgage loans have fallen by around a third, according to the Standard & Poor’s rating services. In September only 1.25% of mortgages were in arrears compared to a peak of 1.84% in January 2009. The data covers residential mortgage backed securities and excluded loans from banks.

ANZ's News Hybrid

18 December 2009 - The Australian and New Zealand Banking Group have just announced that the Convertible Preference Share 2 (CPS2) has successfully closed. The issue has raised approximately $2bn of tier 1 capital.

The CPS2 securities will have a fully franked coupon of 3.10% per annum and have a credit rating of A+ by Standard and Poor’s. They have a mandatory conversion date on 15 December 2016 and have commenced trading today under the ASX code of ANZPA at a price of around $99.50.

Westpac Issues $1bn RMBS

15th December 2009 - Westpac has issued $1bn of residential mortgage backed securities (RMBS), known as the Series 2009-1 WST Trust. The issue is the first RMBS by an Australian bank since the global financial crisis and is expected to be priced on 18 December 2009. The issue is only offered to institutional investors and will be separated into three classes.

A$920m of Class A Notes expected to be rated AAA/Aaa
A$55m of Class B Notes expected to be rated AA/Aa1
A$25m of Class C Notes will be unrated

Class A notes will benefit from the 8% subordination provided by the Class B and C notes.

High Returns in Term Deposits

9th December 2009 - Increase return while reducing risk with one year government guaranteed term deposits as high as 6.9%.

Term deposits are currently offering outstanding returns and all investors should at the very least consider these investments as the current levels can’t last.

This is a case of increasing return for reducing risk. In a normal market, this should not exist…but it currently does and there are no catches.

The best rates of recent have been from the majors and regionals as competition for term deposit funds has increased. This is on the back of Westpac’s recently announced strategy to increase its use of term deposits. Also the expected APRA liquidity changes will put a greater focus on longer maturity term deposits, an area the banks have traditionally not focused on.

This represents a free lunch – a rare opportunity to reduce risk and materially increase return. Such opportunities rarely arise and tend to exist for only short periods of time so we recommend investors at the very least consider this seriously and if interested act quickly.

For a more detailed report please refer to the research section on www.fixedincome.com.au.

New Issues: Bank of Queensland

7th December 2009 - On 2 December 2009 the Bank of Queensland (BOQ) priced a four year $1.25bn government guarantee domestic bond. The bond will pay a floating coupon of 0.5% over the three month bank bill swap rate and will mature on 25 October 2013.

The initial volume was set at $500m, however due to strong investor demand the issue was upsized to $1.25bn. The issue is a part of BOQs $4bn debt instrument program.

Bendigo and Adelaide Bank Increase their RMBS Issue

3rd December 2009 - Bendigo and Adelaide Bank (BEN) have recently priced $1bn of Torrens 2009-3 residential mortgage back securities (RMBS) securitisation issue. The issue had been upsized to $1bn from the $500m announced last week, indicating strong investor demand within the securitisation market. $915m of class-A notes have been priced at 1.35% over the bank bill swap rate (BBSW).

AMP Capital Wholesale Office Fund

2nd December 2009 - On 23 November 2009 AMP Capital Wholesale Office Fund priced a five year $250m Medium Term Note. The senior domestic note has a credit rating of A from S&P and will pay a fixed coupon of 8.00%. The note matures on 5 October 2014.

Due to strong investor demand the transaction was increased from the initial launch amount of $200m to $250m. The secured nature of the notes was the primary reason for the higher demand from investors.

Debt Ridden Dubai

27th November 2009 - The re-emergence of fear within the economic markets hit the world yesterday with a shock announcement from the Dubai state corporation indicating that it was unable to meet its debt obligations. Dubai World, the government’s investment company has a total of $US59bn of liabilities in which analysts believe will place the market in a very vulnerable position.

The stability of Australia’s multibillion-dollar stevedoring industry has come under fire from the restructuring of Dubai World. Dubai World is the owner of ports operator DP World which is responsible for loading and unloading around one third of Australia’s sea cargo. By delaying debt payments by at least six months this may cause a significant impact on Australia’s trade productivity as well as exposing Australian companies operating in Dubai to risks of losing projects and discontinuing payments.

Amcor Issues a Further $US850m

23rd November 2009 - Amcor has recently completed a $US850m issue that will bring their total debt issued to $3.5bn. The debt issued by Amcor will rank as the largest ever by an Australian company in the US and the biggest by a foreign company this year. The total issue will be one-third from the market and two-thirds bank supplied.

The $US850 issue was set up in three tranches:

$US275m for 7 years at 5.30%
$US300m for 9 years at 5.69%
$US275m for 12 years at 5.95%

Once Amcor completes the Alcan packaging deal 85% of its earnings will be sourced from outside Australia which will be beneficial as a natural currency hedge for any fluctuations in exchange rates. Capital markets are starting to show higher demand from investors which is a positive for Australian issuers.

Telstra - Returning to the Corporate Bond Market

20th November 2009 - For the first time in three years Telstra is coming back into the bond market as the company seeks to sell $500m in 10 year bonds to local investors. The bonds are expected to be initially priced at a margin of 1.50% over the benchmark swap rate (BBSW). The funding will be used for general corporate purposes.

The longer dated bond will assist in stretching out the company’s debt maturity profile as Telstra is expected to pay a total of $1.525bn maturing bonds within the next 12 months.

Due to the yield curve significantly steepening in the recent market activities (higher returns for longer maturity), domestic investors are starting to favour the longer dated bonds. However fund managers are speculating that there might be a limited demand on the bonds due to Telstra’s recent regulation changes.

Westpac has recently priced a $1.4bn fixed rate seven year bond

13th November 2009 - Westpac has recently priced a $1.4bn fixed rate seven year bond with a coupon of 7.25%, maturing in November 2016. The bonds will offer a yield of 7.46% and will be priced at 1.30% over swap rate. They will be the first issue of longer dated bank debt in the domestic market in more than two years and is expected to be rated AA by Standard and Poor’s.

The decision by Westpac to extend the maturity beyond the standard 3-year or 5-year range was due to the improvement of investor confidence as well as banks seeking to lengthen their liabilities in advance of the new liquidity rules.

Westpac also issued a $1.1bn fixed rate five-year bond which is government-guaranteed. The bonds will pay a coupon of 6.25%, priced at 0.3% over swap with a yield of 6.26% and are expected to be rated AAA by Standard and Poor’s.

ANZ yesterday launched its new hybrid

11th November 2009 - ANZ yesterday launched its new hybrid – the CPS 2. CPS stands for converting preference share which is the standard structure for bank hybrids these days. The securities will be rated A+ by agency Standard & Poor’s meaning they are an investment grade hybrid with relatively low risk.

The CPS 2 will pay a quarterly coupon of between 3.10% and 3.30% over the 90 day bank bill swap rate (BBSW) with exact pricing to be set on 17 November. The hybrids will mandatorily convert to ANZ ordinary shares after 7 years as long as the prescribed conditions are met.

The chart below outlines the current trading spreads for major bank converting preference share issues.

To access a more detailed report on the ANZ CPS 2 Hybrid refer to our research link.

Westpac Full Year Results

5th November 2009

Westpac today announced its 2009 profit result. Key details of the announcement follow:

Reported net profit of $3.45bn was down 11% while cash earnings was down 8% to $4.63bn.
However underlying earnings (excluding income tax and impairment charges) was up 19% to $10.02bn. This is in line with the other major banks who have recorded 15%+ increases in this figure and forms the basis of our view that when bad debts moderate, and with the banks underlying earnings still increasing, net profit is likely to see substantial increases if not in 2010 then 2011 if the economic recovery continues unabated.
Net interest margins increased by 0.07% from 2.25% to 2.32%.
Overall revenue growth was strong at 13% compared with expense growth of 5%.
Impairment charges increased to $3.29bn from $1.21bn last year.
Tier 1 capital increased from 7.8% to 8.1% which will is comfortably above the bank’s internal targets I relatively low compared with the other majors.
On a divisional basis the retail bank operations were the standout increasing cash earnings by 9%. The institutional bank performed well on an underlying basis with earnings increasing 29% to $2.05bn however due to the large amount of bad debts, cash earnings decreased by 58% to just $0.36bn. New Zealand was the other major poor performer with cash earnings down 50% to $0.24bn.

Overall, from an initial view there are no major surprises in the result. The bank also announced yesterday that it would appeal the NZ tax judgement recently handed down against. We remain comfortable with all debt products of Westpac.

RBA Decision

4th November 2009 - The RBA today increased interest rates by 0.25% from 3.25% to 3.50%. The decision was largely in line with expectations with calls for a 0.50% rise petering in recent days after mixed economic data and the return of volatility to the stock market in the past few weeks.

In making its decision to increase rates the RBA noted that the global economy had resumed growth. While the expansion is expected to be modest for the major countries the prospects for Asia, especially China, are strong.

Local conditions have also improved. The various stimulus measures introduced by the government are having the desired effect and medium term prospects are strengthening. Importantly, labour market conditions are improving and the rate of unemployment is now expected to peak at levels considerably lower than initially expected.

The key concerns remain inflation and a housing price bubble. While the RBA noted that inflation should remain moderate in the interim, it is expected to rise over coming years. The fact that the RBA deemed it necessary to comment on the solid housing credit growth and that dwelling prices had increased appreciably this year indicates that this issue remains a concern.

The RBA stated that its intentions now that the risk of serious economic contraction is over are to gradually lessen the monetary stimulation that has put in place. However, considering Australia still has extremely low interest rates by historical standards we believe there is a strong possibility of a 0.50% increase or more in the next six months to bring us quickly closer to the neutral position of 5.50-6.00%.

ANZ Full Year Results

2nd November 2009

ANZ today announced its 2009 profit result. Some of the key features include:

Underlying cash earnings of $3.7bn, an increase of10% on 2008. Statutory earnings were just $2.9bn however due to a number of timing differences and one-off items. Profit before credit impairment and income tax increased by 20% to $8.3bn.
Net interest margin increased by 0.16% to 2.24% in a sign that the bank is continuing to re-price upwards its lending book.
The bad debt charge for the period increased by 46% to $3.1bn. Importantly the credit provision only increased by 13% in the second half indicating that the bank may have reached the peak of its bad debts cycle. This is consistent with the National Australia Bank’s result.
After $5.7bn in ordinary equity raisings the bank’s Tier 1 capital ratio now stands at 9.5%, up from 7.7% a year ago despite significant acquisitions during the year.
The liquidity position has improved with deposits now accounting 55% of the funding base compared with 50% a year ago.

Overall, it was again a solid result from the ANZ. As mentioned yesterday the major banks look set to record substantial profit increases next year as bad debts moderate, re-pricing of the loan book continues and underlying profit (20% growth for ANZ) continues. The biggest risk for ANZ is acquisition risk considering it is currently sitting well in excess of its targeted Tier 1 capital ratio at 9.5%.

NAB Full Year Results

29th October 2009

NAB today announced their full year profit for the year ended 30 September 2009. Some of the key points were:

Cash earnings of $3.8bn, a 1.9% fall on last year.
Underlying profit increased however by 14.6% to $9.3bn.
The reason for the difference between underlying and cash earnings was the increase in bad debts from $1.5bn to $3.8bn.
Reported net profit was $2.6n and was impacted by a number of one-off charges.
Tier 1 capital ratio now stands at 8.96%.

Australian banking was the standout performer while the United Kingdom operations continue to struggle. Wealth Management earnings also fell significantly but should increase this year as markets recover.

Overall NAB remains in a strong position from a debt investor’s perspective. The bank is strongly capitalised with a Tier 1 capital ratio of close to 9%. Also, underlying earnings have surged by almost 15%. Bad debts have probably now peaked and as these decrease combined with the strong underlying earnings, cash earnings should increase substantially in 2010. NAB remains a well capitalised and profitable operation.

Winding back the Government Guarantee

28th October 2009 - The Reserve Bank of Australia (RBA) has suggested that Australia has fallen behind the rest of the world in ending the government guarantee program. The recovery in global debt markets has made banks less reliant on the wholesale funding guarantee which was introduced nearly a year ago to assist financial institutions gaining access to crucial financing during the credit crisis.

International economies have announced ‘termination dates’ for the government guarantee program with the United States to end its program at the end of this month. However, they have allowed for a possible six-month extension and higher fees for banks that are unable to issue unguaranteed debt or have had difficulty rolling over maturing debt.

Australian banks have been among the biggest issuers of government-guaranteed debt due to heavy reliance on wholesale funding. This has accounted for about a third of guaranteed issuance in global markets over the past three months. Government-guaranteed bonds have accounted for the majority of corporate bond issues in 2009, with around $56bn issued in the domestic market this year.

New Issues

21st October 2009

Westpac Bank

Westpac Bank (AA/Aa1/AA) last week issued an AUD50m senior domestic Australian medium term note. The bond will be offered at the 90 day BBSW + 62bps that will have a maturity date of 24 September 2012.

CBA

The Commonwealth Bank of Australia (AA/Aa1) on the 12 October 2009 priced a CHF500m senior financial Eurobond at a fixed coupon of 3.00% that matures on 9 November 2017.

Both the above issues are non guaranteed and indicate that the major banks can issue at increasingly affordable margins.

AOFM & RMBS

19th October 2009 - The Federal Government has offered another $8bn to buy residential mortgage backed securities (RMBS) to inject additional funds towards regional banks, credit unions and non-bank mortgage providers that were impacted by the credit crisis. This comes at a critical time for the smaller authorised deposit-taking institutions (ADIs) as the existing support package announced in September last year, also worth $8bn, was not sufficient to enhance competition with the big four banks. The Australian Office of Financial Management (AOFM) will buy $8bn of high quality AAA-rated RMBS.

‘RMBS is a type of asset-backed security or debt obligation that is secured by a mortgage or collection of mortgages. These loans are assembled together to form pooled investments. Instead of paying investors fixed coupons and principal, it pays out the cash flows from the pool of mortgages.’

The collapse of the US housing market has made RMBS an unattractive product in the current climate, limiting ADI’s access to this important source of funding. The extra $8bn will help smaller lenders continue to issue RMBA in the short term as the securitization market recovers. However it is argued that the funding alone will not be sufficient for smaller lenders to solve competition problems with the big four as the major banks currently fund around 80% of all home loans. The smaller lenders are asking the government to extend its guarantee over bank bonds to AAA-rated RMBS which will allow a more competitive market.

A Historical Perspective to Investing in Term Deposits

15th October 2009 - Following the advent of the financial crisis in 2007, the term deposit market has become much more competitive and has provided investors with more to think about. The following is a quick recap of recent history and a few pointers as to what to look out for when investing in term deposits.

Historically speaking, or at least for the first part of this decade until mid-2007, term deposit rates were low (as measured against the benchmark of BBSW). The reasons were threefold:

The major banks did not compete strongly in this market as they were able to obtain cheaper funding in the wholesale bond markets.
The regional banks and larger building societies/credit unions did not compete strongly for term deposits as they were able to fund cheaply in the securitization markets. This was also true of the majors but as a percentage of total funding, the majors had a much lower reliance on securitization that their smaller cousins.
Without the free Government Guarantee on the first $1m of term deposits that was enacted in October 2008, the vast majority of Australia’s 160-odd Authorised Deposit-taking Institutions (ADIs) were considered a little too small or potentially risky for investors to leave their life savings in.

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NAB Business Confidence

13th October 2009 - The NAB business confidence survey indicated a small fall in confidence for September, where it fell 4 points to a reading of 14 index points. Last month, the survey achieved the highest level since October 2003. It was expected that some correction to the large rises in previous months would occur, and the fall should not have a significant impact on Australian markets.

The retail and manufacturing sectors assisted in the fall of the survey reading with manufacturing declining 11 points and retail down 6 points in the month.

NZ Gives the Big Four a Large Tax Bill

Potential Losses
Westpac	$NZ918m
NAB	$NZ654m
ANZ	$NZ562m
CBA	$NZ280m

9th October 2009 - Australia’s big four banks are facing payments of $1.8bn to the New Zealand Government after Westpac was yesterday ordered to hand over $750m to settle a long-running tax case relating to a series of complex offshore loan deals dating back 10 years. This news put Westpac on a trading halt for a brief period earlier in the week.

Westpac may appeal against the decision by the country's High Court but the tenor of yesterday's judgment suggested the bank could well lose any further legal action and be exposed to more penalties and interest charges on the original sum of $NZ586m ($480m).

NAB Hybrid Issue

7th October 2009 - The National Australia Bank last week announced that they will issue $500m of non-innovative tier 1 hybrid capital to Deutsche Bank. The securities will be perpetual capital instruments and will pay monthly distributions at a floating rate of 2.00% over the 30 day bank bill rate.

The securities are perpetual and will convert into NAB ordinary shares around March 30 2010, or redeemed as early as 30 December 2009, subject to APRA approval. This issue will increase NAB’s tier 1 capital levels.

DEXUS Property Group

7th October 2009 - DEXUS Property Group last week issued a US300m fixed rate senior unsecured note, with a coupon of 7.125%. The note will have a maturity date of 15 October 2014 and proceeds of the issue will be used to pay off existing borrowings.

Term Deposit Indices Update

2nd October 2009 - Rates offered on bank term deposits have indicated signs of tightening as the economy is preparing for interest rate rises in the next few months. Recently we have seen a dramatic change in the share market as the equity market has surged around 50.0% since Mach at the beginning of the year.

The value of $100.00 invested in our term deposit index on 1 June 2008, would be worth $107.63 at the end of September 2009. A corresponding investment in the Australian stock market would now be worth just $90.81 despite the stellar recent performance.

There are still opportunities to invest your cash at attractive rates. For more information, please contact your local FIIG dealer on 1300-DEPOSIT (1300 337 6748).

Macquarie on Acquisition Trail

2nd October 2009 - Macquarie Group is actively spending its surplus capital with recent announcements that it has purchased Fox-Pitt Kelton Cochran Caronia Waller (FKP), a boutique US investment bank and also acquired a portfolio of Australian car loans.

The investment bank purchase will cost Macquarie $167m and add 267 employees to its global work force. The acquisition further adds to Macquarie’s global ambitions with FPK operating in the United States, the United Kingdom and Asia.

Macquarie also purchased a car loan portfolio worth $1.0bn from an undisclosed financier. The car loan portfolio includes leases for about 60,000 cars, bringing their total vehicles financed by Macquarie to 200,000.

While Macquarie currently has a surplus of capital, both these acquisitions show that it won’t allow those funds to simply lie idle on the balance sheet.

NAB Hybrid Issue

30th September 2009 - The National Bank of Australia (NAB) today announced that they will issue $500m of non-innovative tier 1 hybrid capital to Deutsche Bank. The securities will be perpetual capital instruments and will pay monthly distributions at a floating rate of 2.00% over the 30 day bank bill rate.

The securities may be converted into ordinary equity around March 30 2010, or redeemed as early as 30 December 2009, subject to APRA approval. This issue will increase NABs tier 1 capital levels.

Top Term Deposit Rates

28 September 2009 - Interest rate rises are still on the Reserve Bank’s agenda but there is mounting speculation that they won’t rise as high and as quickly as some are expecting over the next few years. That means there is currently some excellent opportunities to lock in some high long-term rates on term deposits.

The only catch to locking in these rates is that investors will typically need a sizeable deposit to attract the best offers. Investors with over $150,000 who are prepared to tie their money up for five years can currently earn rates of 7.68% with one of our regional banks. However, that quickly drops off and customers with just $25,000 to invest will only earn around 6.25% with the Commonwealth Bank.

The differential in four year rates is even more pronounced. Clients with more than $150,000 can earn a rate of 7.29% but that drops off significantly to just 5.15% for $25,000 – apparently the banks aren’t currently that keen to attract four year term deposits.

For three years, the rates aren’t as attractive. The best rate is only around 6.47% but the good news is that investors with smaller deposits are still reasonably compensated and can earn 5.90%. There is a lot more competition in this term to maturity in term deposits.

Overall though these are some very attractive offers considering official interest rates remain at just 3.00%.

Strength In Australian Banks

25 September 2009 - Despite the recent financial downturn the Reserve Bank of Australia (RBA) has indicated that the Australian banking system has shown strong signs of stability and resilience within the market. RBA’s half yearly financial stability review outlined that Australia’s relatively strong financial performance was due to the absence of large-scale exposures to structured securities, and relatively conservative lending practices, particularly for housing.

The four major banks including Westpac, Commonwealth Bank, National Australia Bank and ANZ reported total net profits of around $8.6bn in the latest half yearly reports, which was 14.0% lower from the same period in the previous year. The fall in bank profits was primarily due to additional provisions for bad debts up to $6.2bn from $2.8bn in the previous year.

Loan losses may increase in the current market, however Australian banks remain better positioned than their counterparts in many other advanced economies.

Bank of America ends Asset Guarantee Program with the US Government

23 September 2009 - Bank of America (BAC) has just announced that it has terminated its term sheet that guaranteed up to $118bn in assets by the US Government. BAC has agreed to pay the Government $425m to exit the program. It has also received approval from the FDIC to exit the Temporary Liquidity Guarantee Program.

The Bank has taken various actions to reduce its reliance on government funding and return to normal market funding including:

Increasing Tier 1 common capital by $40bn
issuing non-government guaranteed debt of $10bn
reducing borrowings under the Government’s Term Auction Facility

Banks may be forced to buy government bonds

22 September 2009 - Banks may be forced to buy up billions of dollars of federal and state bonds under new rules designed to ensure that they are in a strong position in case they encounter another financial crisis. The Australian Prudential Regulation Authority (APRA) is proposing that banks will be required to increase their holdings of government-issued bonds due to sovereign bonds being the most reliable source of liquidity.

APRA has indicated that it wants to see new rules in place by the end of next year by regulating the banks to shift their asset allocation from bank bills to government bonds due to their high liquidity.

NAB Hybrid Issue

17 September 2009 - The National Bank of Australia (NAB) is poised to issue around US$500m of tier 1 capital to offshore investors. As the hybrid is issued through a subsidiary and not the bank itself, and also includes a step-up, it will be regarded as innovative tier 1 capital.

Details on the issue are scant but it is understood to be a non-cumulative perpetual structure with a call date in seven years, with a coupon stepping up in 2014. Pricing is expected to be completed later this week.

NAB recently raised $2bn in a share placement and a $750m through a share purchase plan to maintain its tier 1 capital ratio around 8.0%. The new hybrid should increase this ratio by approximately 16 basis points.

Term Deposit Rates on the Rise

30 July 2009 - Official interest rates might be low but financial institutions are offering some excellent term deposit returns.

In the short term market, rates of 3.75% for 30 days, 4.35% and above for 90days as well as rates of 4.51% and over for 270 days are available.

For long term investors, deposit rates are currently being offered at over 6.28% for 3 years, 7.19% for 4 years and 7.66% for 5 years.

Part of the reason long term rates are higher is that the government guarantee on all deposits will no longer be available after October 2011. However the main reason is that over the next few years’ interest rates are expected to increase markedly from current levels.

To access some of these attractive rates, contact your local FIIG dealer on 1300-DEPOSIT (1300 337 6748).

RBA Interest Rate Decision

10 July 2009 - At its meeting on 7 July 2009, the RBA decided to leave the cash rate unchanged at 3.00%. The board pointed to an upturn in Australia's major trading partner China as having a positive influence on economic activity allowing Australia's economy to grow at 0.40% for the period and avoiding a technical recession. China accounted for 14.60% of Australian merchandise export trade in 2008, worth $32.5 billion. Thus, the health of the Chinese economy is a major variable in influencing Australia's trade patterns. Conversely, conditions in the U.K, Europe and the U.S are still weakening.

Market and mortgage rates are at very low levels by historical standards. This in conjunction with an extension of the first home owners grant and fiscal hand outs has contributed to a rise in house prices and a rise in consumer spending by 1.00% in May. The RBA noted large firms have had good access to equity capital, which is assisting in strengthening their financial structure.

While the cash rate is still at a low 3%, there are some good opportunities in term deposits. Rates of close to 7.50% are available for terms of up to five years with select institutions. It might not be the 8.00%+ returns of last year but they are still attractive rates.

Government Debt and Term Deposit Rates

12 June 2009 - The Australian stock market has rallied for the third consecutive month showing an improved performance. There is still a long way to go before it catches up with term deposits however with the index slowly but steadily accumulating.

At the end of May 2009 the term deposit index was worth $106.20 based on an initial investment of $100.00 on 1 July 2008. By comparison the stock market index was worth just $73.21.

Low interest rates are having an impact on term deposits though. For the first month of the index when interest rates were high, a gain of $0.68 was recorded. However, in line with the 4.25% cut in interest rates, for the month of May, the index recorded a gain of just $0.37.

Government Debt and Term Deposit Rates

29 May 2009 - The RBA this week has stated that it believes the mass quantities of government debt issued over the past 18 months are beginning to have an adverse effect on private operations. The global bond supply has increased at a steep rate as governments around the world search for a means to finance stimulus packages.

Generally, as the quantity of a good supplied on a market increases, the price of that good will fall. For the bond market, this will result in rising coupons required to attract investors to take up a debt issuance. Thus, the cost financing investment for all firms is set to rise across the global economy.

This could have serious implications for growth and investment in the private sector. This result is called the ‘crowding out effect,’ where government spending and debt raises the cost of investment for the private sector.

The RBA stated that businesses outside the finance sector are paying 7.29 per cent on corporate bonds with a one- to five-year maturity, 0.67 percentage points above the previous decade's average of 6.62 per cent. Moreover, the ABS has reported a 9 per cent drop in investment spending in the first three months of the year.

The rising yields on bonds may have also have an impact on the rates offered by institutions on term deposits. As long as bond yields rise, they will be a preferred funds source for risk-averse investors. Thus, there may be an incentive for institutions to raise the rates on term deposits to ensure they are still a viable option for consumers.

Term Deposit Rates on the Rise

25 May 2009 - Rates offered on bank term deposits seem to suggest that the RBA has finished this cycle of interest rates cuts. Term deposit rates have plummeted in recent months in line with interest rate reductions; however, in the past month they have slowly crept up with some reasonable offerings starting to appear.

Over the last month, the All Maturities Index, an average of rates calculated across all terms on TermDeposit.com.au rose slightly. This up turn may reflect the market’s expectations that cash rates are likely to remain stable in the near future, as the RBA gauges the impact of the Federal government’s fiscal stimulus and its own monetary easing.

Currently, TermDeposit.com.au provides access to deposit rates of over 4.10% for 30 and 60 day deposits. For investors with a longer horizon, rates of 4.35% and above can be obtained for terms of 90 days to 1 year. Its certainly not the 8.00% levels that were available last year but it’s a welcome fillip for yield starved cash investors.

UK Government Debt Faces Potential Downgrade

21 May 2009 - In a sign of just how bad the global financial crisis has become, the British Government is at risk of losing its AAA credit rating. S&P recently announced that it is downgrading the outlook on Britain's Government debt from stable to negative outlook.

That is problematic for the government as it is looking to raise around 220bn this year from investors to finance fiscal stimulus. In response to the news, yield on British Government debt increased by 0.13% which means new issuance is likely to come at an increased cost.

However, the change in stance by S&P needs to be put in perspective. The government has only been placed on a negative outlook - it hasn't been downgraded and in fact isn't even officially under review at this stage. Also, the other two major rating agencies, Moody's and Fitch haven't changed their outlook on the British Government so far. The government no doubt will be watching the market closely and hoping yields stay low so it can keep its finance costs down.

RBA May Meeting Minutes

20 May 2009 - While there haven't been any major economic data releases over the last week, the Reserve Bank did release its minutes for the May meeting of its Monetary Policy Board, where it chose to leave the cash rate unchanged at 3.00%.

These minutes provide the rationale for the Bank's cash rate decisions, and in doing so, give the Bank's view on recent developments in the international economy, the domestic economy, and financial markets.

The Bank expressed its view that internationally, while they were encouraged by growth in Asia (and particularly in China), it appears that the global economy is stabilizing at best, and that with sentiment still very fragile, this could be threatened by any bad news. Specifically, they pointed to global growth still being below trend, which should lead to decreasing global inflation.

Within financial markets, the Bank pointed to global rallies in equities, and decreasing credit spreads. Also, they pointed out that businesses are starting to issue considerable amounts of debt again; significantly, within Australia; banks were beginning to issue more non-guaranteed debt.

In the Australian economy, the Bank said that while it thought that the stimulus was working, it doesn't predict a return to significant levels of growth until the year end, which will mean higher unemployment and lowering inflation in the meantime.

Ultimately, they claimed that while a case could be made for cutting rates further, they instead preferred to wait to see both if the trends which appear to be emerging above are sustainable, and what the full impact of both the fiscal stimulus and prior monetary easing within Australia might be.

Budget 2009/2010

13 May 2009 - As expected, the Treasurer last night announced a record budget deficit of $57.6 billion for 2009-10. The government projected that Australia will remain in deficit until 2015-16.

The economy is expected to contract by 0.5% in the 12 months through June 2010. The Australian economy is also expected to have fully recovered by 2011, with expected growth figures of 2.25% for the year. Economic contraction will cost the government an estimated $210 billion in revenue over four years. Unemployment is predicted to peak at 8.5% by June 2011.

The centerpiece of the budget is a significant program of investment in "nation building" infrastructure, including roads, metro rail, ports, universities and energy efficiency, with the aim of stimulating new employment and growth opportunities.

The government will spend an extra:

$8.5 billion on roads, railways and ports.
$3.5 billion to boost the use of energy from clean sources.
$2.6 billion on universities.
$3.2 billion on hospitals.
And an initial investment of $4.7 billion on a national broadband network.

The government stated that this spending would create 210,000 jobs and add 0.75% to GDP growth.

The government also announced pension increases as promised and a paid parental leave scheme to be implemented in 2011. Also, in good news for workers the government maintained its promise of across the board tax cuts.

However, financing its spending initiatives will require:

Means testing the private health insurance rebate
Increasing the Medicare levy surcharge
Freezing income thresholds for family payments
Increasing the qualifying age for the pension to 67 by 2023

The Government plans to bolster the value of the Commonwealth bond market from the current level of $58billion to $169.9billion in June next year, and $300.8billion by June 2014.

Interest Rates Remain on Hold

07 May 2009 - In what was somewhat of an anti-climax, the RBA decided to leave Australia's official cash rate on hold at 3.00% when it met on Tuesday. Considering rates had already been reduced by 4.25% in just over six months, and numerous stimulus packages had recently been introduced, it comes as no surprise that the RBA decided to take a breather before deciding on its next move.

As always, the attention now turns to what the RBA will do over the coming months. On one hand they need to weigh up the implications of an uncertain economic outlook and increasing bank funding costs against the stimulus that has already been introduced and Australia's strong relative economic position globally.

At this stage, we'd expect the RBA to hold off on further rate adjustments until it has a chance to more accurately measure the different variables that are currently impacting the economy.

Term Deposit Indices Update

06 May 2009 - After six months of losses, the Australian stock market has recorded consecutive months of gains. After a small rally in March, stocks continued rising with an increase of around 5.5% for the month.

At the end of April 2009 the term deposit index was worth $105.83 based on an initial investment of $100 on 1 July 2008. By comparison the stock market index was worth just $72.49.

Unfortunately there is still a long way to go before shares catch up with sturdy old term deposits. The market would still need to increase by almost 50% from here just to match the returns of cash in the bank.

While interest rates have fallen considerably in recent months, there are still opportunities to invest your cash at attractive rates. For more information, please contact your local FIIG dealer on 1300-DEPOSIT (1300 337 6748).

Interest Rates on the Rise?

27 April 2009 - There are a number of ways expectations of higher interest rates are priced in the market. One hint that the market expects a rise in interest rates can be seen in the rising yields of governments bonds and swap rates. Currently the yields on 10 year government bonds and swap rates are around 1.50% higher than their 1 year counterparts.

Another indication of long-term interest is how banks price their fixed rate mortgages - and the evidence is clearly suggesting interest rates are on the rise. Westpac has recently Westpac has raised it its one and two year fixed mortgage rates by 0.20% and 0.30% respectively, the Commonwealth Bank raised its four and five year fixed mortgage rates by 0.20% and 0.45% respectively and National Australia Bank has also raised the cost of its two and three year fixed mortgage rates by 0.20%.

The RBA has cut 4.25% from the cash rate since September 2008 to 3.00%, a 49 year low. Further cuts in mortgage rates are likely to be limited. Invariably the cycle will turn and home owners should consider locking in rates now while favourable rates exist.

Time Running out to Apply for Tabcorp Notes

16 April 2009 - Time is running out for investors looking to subscribe to the new Tabcorp Bonds. We believe the Notes are an attractive offer with a yield of 4.25% above the 90 day bank bill swap rate and a set maturity where investors will get their money back after five years.

In a sign that the Tabcorp Notes should be well supported on listing, the AMP Notes have traded consistently above their $100.00 issue price. This security is currently trading at around $102.00 and the fears that it would plummet below face value like many other income securities appears to be ill founded.

Applications for the Tabcorp Bonds need to be in by Tuesday, 21 April. Contact your FIIG dealer for more details on how to get an allocation in this float.

AMP Notes List at a Premium

09 April 2009 - AMP Notes have listed on the stock exchange right on the issue price of $100.00. The news will come as a welcome relief to the issuers of the notes, with almost all income securities currently listed on the stock market trading at a discount to face value.

Of course, like all listed investments, the securities will be subject to price fluctuations. However, we believe investors in the AMP Notes who are willing to hold the securities until maturity will be adequately rewarded by the margin of 4.75% over the 90 day bank bill swap rate.

The next retail bond to list on the market will be the Tabcorp Bonds. This issue also looks attractive and for details on how to obtain stock in this float, contact your FIIG dealer.

RBA Cuts Interest Rates

08 April 2009 - The Reserve Bank of Australia on Tuesday decided to cut interest rates by 0.25% from 3.25% to 3.00%. That brings the total cuts to 4.25% in just over a month since the RBA started reducing rates in this cycle.

It appears that the RBA hedged its bet between the sheer weight of economic bad news that is coming out against the fact that official rates were already at historical lows. While mortgagees are already basking in record-low interest rates and will benefit from the cuts - to a small extent anyway, retirees who rely on fixed income products for fund their lifestyle will see their coupons and interest payments cut further, potentially forcing them onto the public pension and placing an added burden on the Federal budget.

The question remains whether further cuts are on the way. At the start of the year FIIG was firmly entrenched in the view that interest rates would soon dip below 3.00%- but 3 months is a long time in financial markets and we now believe there is a high probability interest rates won't be cut next month and may have bottomed in this cycle with the RBA concerned about re-igniting the property bubble and awaiting to see the results of all the economic stimulus packages recently introduced.

Term Deposit Indices Update

01 April 2009 - Its seems as though the New Year was only being celebrated just the other day but already one third of the year has passed. It has taken a while but finally the equities market has shown some signs of life. Early on in the month it was looking like the share market index would decline further but a late rally means it has increased after six consecutive months of decline.

The value of $100.00 invested in our term deposit index on 1 July 2008, would be worth $104.96 at the end of February 2009. A corresponding investment in the Australian stock market would now be worth just $64.13.

There are still opportunities to invest your cash at attractive rates. For more information, please contact your local FIIG dealer on 1300-DEPOSIT (1300 337 6748).

Commonwealth Government Guarantees State Debt

25 March 2009 - The Commonwealth Government today announced that it would temporarily guarantee the debt of the state governments. The move was taken to help provide liquidity to the semi-government bond market with the states struggling to raise money in this capital-constrained climate.

Like the guarantee implemented for bank borrowing, the Commonwealth Government will charge a fee for providing this service. AAA rated states will pay a fee of 0.15% for existing issues and 0.30% for new issues. States with a rating of at least AA- will have to pay 0.20% and 0.35% respectively.

The states have 28 days to decide whether they will opt for the insurance on existing debt issues. Investors seem to think that the states will, with spreads on semi-government borrowings narrowing substantially after the announcement.

The guarantee is certainly good news for the states as it should now enable them to raise money to pay for the large number of infrastructure projects they are currently undertaking. Its especially good news for the Queensland Government. It was recently downgraded to AA+ by Standard & Poor's and the fact that it will only have to pay an additional 0.05% to insure its borrowings is a welcome relief for a state that has numerous infrastructure projects underway.

Quantitative Easing all the Rage

20 March 2009 - Printing money, or quantitative easing as it is commonly referred to, is all the rage these days. First the Bank of England announced that it was printing GBP75bn of new money, and then the US Federal Reserve stated it was effectively doing the same by buying back US$300bn of US Treasury bonds.

At first glance the idea of printing money seems like a great idea for a government. By simply churning out more cash the government has more money to pay off bills, buy assets and finance spending on jobs and infrastructure.

Of course if it was that easy then governments would continually be turning to the printing press to bolster their economies. The problem with quantitative easing is that it has the potential to create massive inflation and debase the currency. After all, quantitative easing simply creates more money to chase the same number of goods and services. This devalues the currency and also is likely to push up the price of goods, creating inflation. So while there are some short term benefits to quantitative easing, the long-term implications are frightening.

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