observations on current financial market disruptions and
TRANSCRIPT
Observations on current financial market disruptions and their implications
Presentation to the AHIA 2008 conference8 October 2008
Richard Sheppard, Deputy Managing DirectorMacquarie Group Limited
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Financial markets: 2007 – 08
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Wor
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Inde
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Subprime fears
Northern Rock
Bear Stearns sold
US Fed announces credit facility for
banksUS Fed announces
willingness to lend to Fannie Mae and
Freddie Mac
Bear Stearns hedge funds
BNP funds suspended
European inter-bank lending halted
US Fed cuts rates
ECB allots extra funds
US Fed cuts rates
Central banks increase lending
Recession fears spark global share
crash
US Fed cuts rates
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Financial markets: September ’08 –October ‘08
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Fannie Mae and Freddie Mac placed in conservatorship
Bank of America to buy Merrill
Lynch
Lehman Brothers files for bankruptcy
US Fed bails out AIG
US Fed liquidity facilities
Lloyds TSB to buy HBOS Fortis nationalised
(Belgium)
Bradford & Bingley nationalised (UK)
Hypo Real Estate guaranteed by
German government
Dexia bailed out
JPMorgan to buy Washington
Mutual
US bail out package fails in Congress
ECB and Fed liquidity measures
CBA to buy BankWest
Iceland nationalises second largest bank
Russian liquidity measures
Citigroup and Wells Fargo battle to buy
Wachovia
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Debt markets are disrupted
Source: Bloomberg, Macquarie Research, October 2008
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Jan 07 Apr 07 Jul 07 Oct 07 Jan 08 Apr 08 Jul 08 Oct 08
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50
100
150
200
250Aus US EU UK
LIBOR to 3m OIS spreadBps Bps
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The US Federal Reserve has been very active
Source: Federal Reserve, Macquarie Research, October 2008
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Sep 58 Sep 68 Sep 78 Sep 88 Sep 98 Sep 08
-50
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50
100
150
200
250
300
350
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450US Federal Reserve Loans to Domestic Banks
Annualised $USbn Annualised $USbn
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Market volatility is not a new phenomenonVIX (Implied Volatility Index)
Source: CBOE, October 2008VIX index is the option implied volatility on the S&P500
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Jan-90 Oct-93 Jul-97 Apr-01 Jan-05 Oct-08
Daily
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Inde
x Index
Recession
Global real estate crash
Mexico
Asian financial
crisis
Russian debt crisis
LTCM collapse
Dot com crash
9/11US recession
SARSCredit market
disruption
7Source: ABS, Macquarie Research, October 2008
The Australian economy remains resilient
-1
0
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Jun 98 Jun 00 Jun 02 Jun 04 Jun 06 Jun 08
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Jun-98 Jun-00 Jun-02 Jun-04 Jun-06 Jun-08
QoQ YoY
Quarterly
% %Real GDP Growth
8Source: RBA, Macquarie Research, October 2008
Australia’s financial system is in good shape
Non-performing housing loans as % of on-balance sheet loans
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0.5
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Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08
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Australia UK US
Quarterly
% %
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Australian policy responses
The RBA has acted to increase liquidity
— US$30 billion swap line with the Federal Reserve
— Increase daily repurchase arrangements
This week’s RBA rate cut
RBA measures to expand domestic market facilities
The Federal Government allocated $A20 billion from the “Building Australia Fund” to national infrastructure projects at the October COAG meeting
$A4 billion fund to support the mortgage market
Prime Minister and Treasurer have emphasised the strength of Australian banks
Federal Budget and debt situation remains very strong
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Macquarie’s positioning
Remains profitable
Most of its operating income from products and services to clients
Long-term record of successful risk management
— No problem trading exposures
— No material problem credit exposures
— No material exposures to US financial institutions which have been the subject of recent stress.
Diversified by business mix and geography
Regulated by APRA, the Australian banking regulator, as the holding company of an Australian bank
Has grown through the cycle and market downturns have typically created opportunities.
Well-funded and well-capitalised
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Where to from here?
US Emergency Economic Stabilisation Act of 2008
— Enacted 3 October 2008
RBA cash rate
— Likely to be followed by earnings in other major economies
Greater regulation of the banking industry
Deleveraging
Slower global economic growth
More cautious approach to business investment and employment
Australia and Australian banks remain well placed
The cycle will turn, the issue is timing
Observations on current financial market disruptions and their implications
Presentation to the AHIA 2008 conference8 October 2008
Richard Sheppard, Deputy Managing DirectorMacquarie Group Limited