The contagion effect: how much will Australian banks be buffeted by Europe?

Posted on November 25, 2011
Filed Under ACFS Commentary, Banking, Financial Institutions and Markets, Funds Management & Superannuation, Media Watch, Publications | Leave a Comment

Published in The Conversation, 24 November 2011

Westpac chief executive Gail Kelly this week warned about Australian banks are vulnerable to “the contagion effect” of Europe’s ongoing financial woes, after the Commonwealth Bank of Australia delayed a Euro-denominated fund raising issue.

Professor Kevin Davis, Research Director at the Australian Centre for Financial Studies explains contagion and what could be in store for Australian banks.

What was it that the CBA planned to do and why is the significance of delaying it?

The CBA planned to do a covered bond issue in Europe – that’s a new facility available to Australian banks that is different from “traditional” securitisation and which is commonly used in Europe and is quite attractive to European investors. It’s only been available to Australian banks for a couple of months.

But one of the issues the banks are facing is the unsettled state of financial markets, particularly in Europe, with investors wary about lending funds to banks – even when they are secured against very good assets like the Australian mortgages involved here.

Although Australian banks have had a fairly large presence as borrowers in Europe, I think everybody is looked at suspiciously at any new security issues into the market the moment. Even though Australia’s four major banks are among only nine banks in the world that have AA ratings, when you get into a situation of general uncertainty, as you saw during the global financial crisis, markets just dry up. Investors aren’t confident about the safety of any assets….

So what does this lack of confidence mean for Australian banks?

Are we likely to see the same sort of credit crunch experienced in 2008-2009?

Is the term contagion alarmist or reasonable? And what does contagion actually mean?

Read full article

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Media Release: Self-managed super funds change the game: KPMG/ACFS

Posted on November 24, 2011
Filed Under Contracted Research and Consulting, Funds Management & Superannuation, Media Release, Publications, Sponsorship Support | Leave a Comment

For immediate release 24 November 2011

• Scale not necessarily delivering economies
• Institutional funds need to be more competitive

The extraordinary growth in self-managed super funds to June 2011 has potentially limited the growth of assets within superannuation institutions and will continue to do so, according to research conducted by KPMG and The Australian Centre for Financial Studies (ACFS).

The report: Superannuation trends and implications examines performance and challenges in the Australian superannuation sector from 2000 – 2011, a period marked by the impact of the global financial crisis and government changes to administration delivery and member choice¹.

KPMG and ACFS found the growth of the self-managed super fund segment since 2000, and the ageing Australian population, provide the greatest threat to the future of superannuation institutions.   The self-managed fund segment increased by 461 percent and the industry funds segment by 410 percent, against a more somber growth in retail funds of 177 percent, and public sector funds, 100 percent².

“Many superannuation institutions face increased rollovers to self-managed superannuation funds and increased benefit payments at the same time their contribution inflows slow. This perfect storm potentially threatens their future viability,” said Sean Hill, head of KPMG’s superannuation group.

Institutional funds are struggling to reduce member costs despite the phenomenal growth in the average size of superannuation institutions in recent years.  “As superannuation funds increase in size, trustees should be able to exploit economies of scale and reduce costs.  However, only in 2009 did costs per member decrease, before rising slightly the following year,” said Professor Deborah Ralston, Director ACFS.

The report found that superannuation institutions that fail to adapt and respond to changing landscape face the prospect of negative funds flow, diminishing assets and terminal decline.

“Superannuation institutions need to recognise that their growth strategy, which may have been successful over the last decade, may no longer be appropriate,” Sean Hill said.

“They must review the competitiveness of their offering, particularly with regard to fees and cost, consider alternatives to organic growth and, formulate a strategy and transition plan specifically in relation to the upcoming Stronger Super reforms,” he added.

KPMG and ACFS cite the attractiveness of the self-managed super fund segment to members as the single greatest challenge to institutional funds.  “The popularity of self-managed funds could potentially lead to the decline in institutional funds as more members transfer benefits and contributions to self-managed funds.  As their assets diminish, superannuation institutions’ operating costs per member will increase, thereby perpetuating a vicious cycle,” Professor Ralston said.

The growth options for superannuation institutions are limited but achievable provided they can reduce costs per member. “This may be achieved through an increased focus on operational efficiency, or by merging with a larger, more efficient institution,” Mr Hill said.

1. A KPMG-ACFS Monograph, Superannuation trends and implications, September 2011
2. Growth measured by the change in nominal assets.

Download Full Report from KPMG website

Further information:
Professor Deborah Ralston
Director, ACFS
03 96661010
Deborah.ralston@australiancentre.com.au

Mr Sean Hill
Partner, KPMG
03 9288 6948
seanhill@kpmg.com.au

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