In the business world transactions speak louder than words.

In the business world transactions speak louder than words.

The Global Financial Recession is moving in mysterious ways and it would be fair to say that micro markets are now starting to feel the pain. Property market transactions are shrinking – so too is our economy and the best way to handle the situation is with patience – not panic.

Reserve Bank of Australia (RBA) Deputy Governor Ric Battellino, advised this week that the Australian economy is likely to shrink for a few more quarters and if we read between the lines, this means for the rest of 2009. Battellino said “These measures will go a long way to offsetting the negative influences on the economy coming from abroad, but the reality is that we can’t fully insulate ourselves from what is happening elsewhere in the world.” The RBA is in all probability our best barometer in the current environment given its independence in the Australian market place.

Alan Kohler wrote this week on his popular business site www.businessspectator.com.au “Wake up and smell the downturn” (always thought provoking) “Australia has so far been cocooned by political and economic insouciance and prettied up by well – targeted government mascara: the bank deposit guarantee, and state government debt guarantees, the short selling ban on financials, the first home buyers grant, the 30 per cent extra tax deduction for business investment until June 30 and of course the huge fiscal stimulus, and especially the cash handouts.”

The jury is still out as to whether Ruddy Fantastic’s December “cash splash” worked although this week’s announcement that February retail sales slumped by the greatest margin in nine years identifies a stark and different spin. Unemployment continues to over shadow our economy and employment prospects are worsening. RBA board member Roger Corbett, did add some perspective when he said “our retail figures would be the envy of other countries in the OECD.”

Next week’s meeting of our RBA will be most interesting. Will the cash rate be reduced further? The standard variable mortgage rate has already fallen by 375 basis points in the past six months. In Mosman, property transactions are reducing and so too are prices although we are now starting to see some clarity in the situation.

A home was auctioned last week at 11 Cyprian Street Mosman (mortgagee-in-possession) the first in 2009. We sold the property on 1 July 2005 for $4,725,000 and it has just sold for $4,000,000 a drop of 18 per cent. An excellent example of a recorded transaction speaking much louder than words that were talking a 30 per cent drop. So I went to RP Data to look at recorded transaction volumes for Mosman houses and apartments since 2000. Bear in mind that because of confidentiality restraints, a few 2009 house sales are yet to be recorded.

MOSMAN HOUSES

  • 2009 – 24 sales. Averaging 8 sales per month with a median sale price of $1,425,000
  • 2008 – 264 sales. Averaging 22 sales per month with a median sale price of $2,200,000
  • 2007 – 409 sales. Averaging 34 sales per month with a median sale price of $2,230,000
  • 2006 – 396 sales. Averaging 33 sales per month with a median sale price of $1,900,000
  • 2005 – 293 sales. Averaging 24 sales per month with a median sale price of $1,850,000
  • 2004 – 310 sales. Averaging 26 sales per month with a median sale price of $1,637,500
  • 2003 – 376 sales. Averaging 31 sales per month with a median sale price of $1,699,500
  • 2002 – 392 sales. Averaging 33 sales per month with a median sale price of $1,690,000
  • 2001 – 446 sales. Averaging 37 sales per month with a median sale price of $1,250,000
  • 2000 – 349 sales. Averaging 29 sales per month with a median sale price of $1,150,000

Source: RP Data

If you look closely at these figures you will note that since 2000 to 2008 the total number of houses sold in Mosman was 3235. The total number of houses in Mosman is 4,900 so this equates to 66 per cent of the market sold over this period. The average trade percentage per annum is 7.3 per cent.

Beware of agents quoting absurd sales results without revealing their source. One Mosman agency has fellow agents shaking their heads in total disbelief at the rubbish they are sending out. We are in the midst of a property market that requires truthful analysis, not distorted results – otherwise known as false advertising.

MOSMAN APARTMENTS – STRATA TITLE

  • 2009 – 44 sales. Averaging 4 sales per month with a median sale price of $520,000
  • 2008 – 494 sales. Averaging 41 sales per month with a median sale price of $526,000
  • 2007 – 637 sales. Averaging 53 sales per month with a median sale price of $525,000
  • 2006 – 456 sales. Averaging 38 sales per month with a median sale price of $501,000
  • 2005 – 484 sales. Averaging 40 sales per month with a median sale price of $522,500
  • 2004 – 474 sales. Averaging 40 sales per month with a median sale price of $473,500
  • 2003 – 570 sales. Averaging 48 sales per month with a median sale price of $475,000
  • 2002 – 725 sales. Averaging 60 sales per month with a median sale price of $452,000
  • 2001 – 679 sales. Averaging 56 sales per month with a median sale price of $410,000
  • 2000 – 415 sales. Averaging 35 sales per month with a median sale price of $390,000

Source: RP Data

Richardson & Wrench Mosman & Neutral Bay (RWM) have ten house sales yet to be recorded at RP Data – the total sales value $47,440,000. Our average house sale this year is $4,744,000.

There is anecdotal evidence that our top-end markets are struggling despite significant price reductions and in the last six months (we calculate) there were just eight house sales in excess of $5,000,000.

We at RWM believe the $5,000,000 + market is not far off an upward run given record low interest rates. Historically, this market since 2001, has been Mosman’s most volatile. Financial losses have been extreme, even though in Australia, the principal place of residence is tax free (unlike nearly every other country).

Why do I refer to 2001? Well in June 2001 RWM posted Mosman’s first ever double digit sale with the sale of a Hopetoun Avenue property for $15.500 million. Scroll back up and have a close look at what happened to median house prices from 2001 – 2008. Median house prices doubled yet the apartment median only recorded a 35 per cent increase. The reason why – Mosman apartments don’t have a strong top-end as against Mosman houses which historically are prolific performers. Properties are valued from the top-end down and the top – end has the greatest capital gains – tax free.

These statistics have me intrigued so next week I will extrapolate all the $5,000,000 + house sales since 2000 and see what that reveals (I am already seeing an interesting pattern).

The blog fired up last week and I was accused of writing ‘dribble’ (drivel). The Word Smith Award was easily won by Patricia.

Cheers ^__^

For this week’s recorded Mosman real estate, Cremorne real estate, Neutral Bay real estate and Cammeray real estate sales http://www.rwm.com.au/news/

30 Responses to “In the business world transactions speak louder than words.”

  • Nick says:

    Thanks Robert, so its not all doom and gloom as many would suggest and a lot of it is lazy media band wagon reporting. While there are issues in the US and some places in Europe, the Asia Pacific region by and large is faring well, and Australia is pretty resilient, albeit the financial sector has had a correction and its having a knock on effect.

  • Jane says:

    It’s good to see an approach that seeks to interpret the objective and factual rather than talking up the market in your own interest.
    Business leaders could restore some credibility with a similar stance!!

    Thanks Jane – all we are trying to do is add some clarity ^_-^

  • Patricia says:

    Very informative review and analysis, Robert.

    I hope ‘Brian’ and ‘Johnson’ aren’t crying (or ‘dribbling’) in their cornflakes!

    Patricia – I thought you would enjoy the data. Amazing when one takes the time to research what we can find. I believe that the internet will soften the impact of the recession given that history does repeat itself and many answers are sitting in the past to be utilised in our future. Thanks ^__^

  • stephen says:

    Nothing like a good friday blogging,excuse the pun, great to see Brian, Johnson and Patricia all fire up! At least everyone can have a go on this site, that if nothing else to some – is good entertainment!

    I also agree with wiping out state government altogether and pay good people good wages to come back into a political life, we are paying peanuts and not even getting good monkeys…more like donkeys!!

    Great to see Steve Patrick joining the blog ^_-^

  • Michael says:

    Hee Haw, Stephen the poor donkey, how could you classify them the same in the same class? The donkey or ass, Equus africanus asinus,[1][2] is a domesticated member of the Equidae or horse family, and an odd-toed ungulate. The wild ancestor of the donkey is the African Wild Ass, E. africanus. Traditionally, the scientific name for the donkey is Equus asinus asinus based on the principle of priority used for scientific names of animals. However, the International Commission on Zoological Nomenclature has ruled in 2003 that if the domestic species and the wild species are considered subspecies of each other, the scientific name of the wild species has priority, even when that subspecies has been described after the domestic subspecies.[2] This means that the proper scientific name for the donkey is Equus africanus asinus when it is considered a subspecies, and Equus asinus when it is considered a species.

    In the western United States, a small donkey is sometimes called a burro (from the Spanish word for the animal).

    A male donkey or ass is called a jack, a female a jenny, and offspring less than one year old, a foal (male: colt, female filly).

    While different species of the Equidae family can interbreed, offspring are almost always sterile. Nonetheless, horse/donkey hybrids are popular for their durability and vigor. A mule is the offspring of a jack (male donkey) and a mare (female horse). The much rarer successful mating of a male horse and a female donkey produces a hinny.

    Asses were first domesticated around 3000 BCE[3], approximately the same time as the horse, and have spread around the world. They continue to fill important roles in many places today and domesticated species are increasing in numbers (although the African wild ass and another relative, the Onager, are endangered species). As “beasts of burden” and companions, asses and donkeys have worked together with humans for centuries.

    Michael – this is deep! I am sure that Stevie Wonder will find this a riveting read. ^__^

  • Chris Dale says:

    I am surprised that your normally incisive perceptions perhaps overlooked the fact that during the early part of this century Mosman was a building zone with millions being poured into the existing housing stock. Further the number of new apartments being built was minimal when compared to the turnover of existing stock. Do you think that this might have contributed to the above figures you quote.

    Chris,

    You (as always) make a very interesting point. If one stands on Taronga Zoo wharf and casts an eye over to the Eastern Suburbs you will see a “dogs breakfast” of apartment blocks all built on the harbour foreshore. This can also be said from Kirribilli to Cremorne Point – now I must research this further in that from Little Sirius Cove around to Balmoral this prime real estate remained in the hands of state and federal governments and was stamped never to be developed. With the benefit of hindsight a wonderful decision given that the number of apartments that have sold in excess of $5.000 would still not get to ten sales which explains why capital appreciation for houses over the last eight years was four times greater than apartments.

    Cheers

  • Alicia Baron says:

    Dear readers,

    Just thought I would try and shed some reality from my perspective. I have 3 close friends who are in the finance game, who have all been severely hurt in that they are clinging on to their jobs. Between them, they know another 12 people. They all have 1 thing in common. All live in expensive Mosman homes and ALL need to sell. But only around 50% of them have done anything other than canvass a few agents. They all know the value of their properties has fallen by at least 30%. It isn’t 18% and “median” prices is an insignificant statistic. It means absolutely nothing.

    So now try and tell me that this market is about to take a runup. Whwere does that dribble come from? I suggest it comes from the brokers, ie the agents. It’s all very well to fight a trend, but the actual fact is, the market is its own reality. Any good trader knows and understands the forces of demand and supply.

    With the Australian economy lagging the rest of the world, we are at least 2 quarters behind the US. We have seen the last remnants of the commodity boom impetus finally leaving the system, and we are about to enter winter. Unemployment is exponentially increasing, we are in the worst banking and finance crisis since the great depression an d this may yet prove to be worse, and we have seen credit, housing and commodity bubble burst simultaneously, around the planet.

    So. you tell me where exactly the demand is going to come from? Where, exactly. and in Mosman? I dont think so. Just like the average Aussie investor thinks stocks always go up in the long term, they use the same logic with houses in “blue chip” areas. Yes. Over time that may have been the case, but those times are gone.

    Alicia – thank you for joining us here on the blog.

    I would like to clarify a few points that you raised ;-

    1. At this point in time there is absolutely no anecdotal evidence that I have seen that illustrates that Mosman house prices have fallen by 30 per cent. The example I illustrated, “A home was auctioned last week at 11 Cyprian Street Mosman (mortgagee-in-possession) the first in 2009. We sold the property on 1 July 2005 for $4,725,000 and it has just sold for $4,000,000 a drop of 18 per cent.” I did mention that some in the market were suggesting a 30 per cent decline since the home was purchased which latter proved to be incorrect.

    2. I agree totally that we have some “vendors flying under the radar” and I really hope that they remain on that flight path. On the flip side they are plenty of potential purchasers cashed – up and ready to pounce as is the case with all markets. Everybody is trying to pick the bottoming of our markets.

    3. As a result we have a large number of expats (in particular) all cashed – up who remain comfortably perched on the proverbial property fence for the time being. The latest announcements by the big banks is a great relief which is a stark contrast to their aggressive selling behaviour’s in the recession of the early nineties.

    4. When our markets move from economic growth to economic decline there are always winners and losers and that does just not apply to property owners solely. Everybody is tinkering something within their respective financial models.

    We will get a much clearer positioning on Wednesday when the Reserve Bank of Australia make their monthly announcement on our financial state of affairs. It was announced today – TD Securities – Melbourne Institute that the inflation gauge fell 0.1 per cent in March which now brings annual inflation down to 2.6 per cent (well within the RBA’s target band of 2 – 3 per cent). I believe the cash rate will remain unaltered at 3.25 per cent.

    Thanks for your contribution.

  • Ed says:

    Nick says “the Asia Pacific region by and large is faring well”. Not if you look at the last 9 months export figures for China, Japan and countries in SE Asia. These economies are not faring well at all.

  • Patricia says:

    To Alicia Baron – Robert provided a quantified analysis of reported sales prices and volumes since 2000. ‘Water cooler talk’, such as that conveyed in your post, is mob-mentality opinion. How does anyone ‘know’ that their property value is down 30%…and over what period of time? If your friends and their quantum of friends have to sell, what they are waiting for? The sheriff to knock on the door?

    The most illuminating information in this week’s VRN is the steep decline in volume. To date, the data does not indicate a market driven by forced or distress sales.

    Patricia – you have an amazing turn of phrase.

  • Nicholas says:

    Ed, The APAC region is faring well when compared to Europe and the US. Yes there are exceptions. Japan has been in decline for over a decade. India is having issues, but by and large the rest of APAC is doing a lot better than Europe (parts of it) and the USA. With regard to Alicia’s post, yes there are people struggling in the finance and banking space who have over committed and are now feeling it, but outside the ripples its having outside that industry (ie building, retail sales), by and large Australia is far better placed than just about anywhere else globally. It is the media who are talking us down, and fear breeds on fear. I know a quantity engineer who has never been as busy as now, I know IT firms who sell cost justified solutions with proven rapid paybacks who are also flat out and hiring and in fact are enjoying hiring cause its a buyers market.

  • Tim says:

    Here is one for the fans of “lies and lies and statistics”. The 11 Cyprian Street property sold, in 2005, for $4.725M. As such, your median price statistics show that it would have been worth $5.65M in 2008 (if it increased in line with the market). Therefore, a $4M price in 2009, is a 30% drop from 2008!

    Love the stats – please keep them up. However, it is clear that one thing stats will never show is the impact of 2 purchasers wanting the same one property.

  • J Mathers says:

    I, also, have many friends with properties not just in Mosman but the Lower North Shore area.

    Where do you people get your facts? Out of a 1980’s year end real estate alumni party post-mortum? Get real. There is stress out there tht you simply do not believe. All these people have registered their interests with some agents, and it aint pretty. Your apparent “facts” mean nothing. Things have got worse, not better. We are talking about illiquid investments and they dont move quickly, yet these people need cash. Now.

    Please. Get real. You people are delusional and think all is OK. Well guess what. It isnt. You just dont seem to munderstand. Only reality will wake you up, not me.

  • Dr Wharton Engasol Phd says:

    Alicia and J Mathers,

    I absolutely concur. Patricia doesn’t exactly place any meaningful clarity and this is not “water cooler” talk. Some people just do not “get it”
    Read the following link. It is sobering, indeed :
    http://www.theatlantic.com/doc/200905/imf-advice/4

    What people need to remember is that what has happened in the Uited States, has very much affected Australia. This is not a cyclical correction. It is a global financial catastrophe :
    Unemployment is surging
    Banks around the globe have collapsed
    Asset prices are falling sharply (deflation)
    Credit remains (still) completely inaccessable…And this is the case overseas.

    Guess what? It actually hasn’t started here as Australia lags the global economy by at least 2 quarters and the last remnants of upward velocity of money as a result of the commodity boom (now well and truly bust) has pretty much washed out of the system. Australia hasn’t actually seen the start of this.

    It’s amazing how everyone latches on to any positive piece of data to claim that the recession is over and a new bull market about to begin. Go back to prior recessions, and indeed you will see that ISM, new home sales and durable goods shipments have risen 38% of the time; retail sales have actually risen half the time and new home sales 30% of the time. It just goes to show that (i) it’s what is happening the rest of the time that matters more, and (ii) a reminder that nothing moves in a straight line.

    There are signs of far more deflation globally. Ask yourself why our interest rates are at all time lows of 3%. No one can tell me that way over-priced areas like Mosman are going anywhere but down. This is not a sentimental, feel good thing. It is the raw facts. You need to look both globally, then regionally and then under the surface, to find out the real story. China is a basket-case. If anyone wants analysis on that then just ask. I have it all. It is an urban myth that China will be our saviour.

  • Marianne Beaumosale says:

    Robert,

    what were you saying about rates remaining at 3%?

    I just read Dr Wharton Engasol’s comments. Intriguing. Valid. Probably correct

  • Patricia says:

    Dr Wharton, re-read my post of 30 March, which included ‘…In a few months, it’s likely you will be reporting on the micro forces (white-collar and executive job losses, mortgagee repossessions, business closures) that will be having an impact on the Mosman and Lower North Shore property market…’.

    I, like you and others, am anticipating bad tidings for the Mosman and Lower North Shore market over the medium-term. HOWEVER, I take issue with VRN readers who venomously attack Robert Simeon for not being a soothsayer and issuing forecasts that support your smug omniscience.

    BTW, the ominous signs of the financial cataclysm that was going to hit the world emerged to ‘Joe Bloggs’ in July 2007, if you knew where to look. And you didn’t have to look as far, or to as lofty a publication, as ‘The Economist.’ Did you know where to look? I did. 🙂

  • Patricia says:

    Dr Wharton – I meant ‘The Atlantic’, as per your post, not ‘The Economist’.

  • With all blogs everyone is entitled to their opinions where with most things in life we will always have with freedom of choice for being either a pessimist or an optimist. My personal preference is an active pursuit in the doctrine of optimism.

    I love what Australia stands for, I love my job and more importantly participating in the pursuit of opportunity. For example – after the recession of the early 1990’s I promised myself that I would create and build an online media platform that would be totally independent and raise the bar in our real estate industry. We are not fully there, however we are well on the way by setting an industry standard.

    Our banks have not failed nor are they toxic. One of the fantastic benefits of our industry is that we communicate with a wide ranging mix of industries and industry leaders for that matter where in the vast majority of cases their independent belief is that we are on top of things and well positioned.

    We didn’t ask for the Global Financial Recession – however we are right in the mix of it. One certainly does not give up. Rather use the opportunity to grow more market share over competitors.

    This would be a better world if we’d let opportunity do all the knocking 🙂

  • Ed says:

    Nicholas, with respect I disagree and I do so from Asia where I am based. Asian economies are not faring well. Recovery is still some time off. Look at Singapore’s growth figures released a couple of days ago. Look at Japan, China, Hong Kong, South Korea, Indonesia, Thailand and Philippines. None of these countries is travelling particularly well at present.

  • Ed – you are right about Singapore now that is one confused economy given that its share market has rebounded by 29 per cent (one of the strongest growths recorded in 2009) and their economy has shrunk by nearly ten per cent. Their central bank would be on medication given that the Singapore economy is from one extreme to the other. Many are simply fascinated with what is going on in Singapore and the world audience is captivated.

  • Dave says:

    As a Sinagpore resident, I can categorically say that things are not OK in Asia (as suggested by Nicholas). The American school waiting list has been slashed from 2 years to zero and student numbers have declined by 30% (I have heard higher).

    Patricia’s dismissal of “water cooler talk” would hold more weight if there weren’t increasingly empty seats in the vicinity of the water cooler.

    I’m afraid Australian residential property is a very vulnerable investment. To suggest otherwise, you’d have to be a real estate agent.

  • Patricia says:

    Dave- Those who still have seats in the vicinity of the water cooler don’t have to sell their homes.

  • Nick says:

    Yes I agree that Asia is not faring well at present, my point was that its faring better than the US and most of Europe’s markets. We have seen signs of a rebound in China this week. Parts of Asia will rebound quicker and I believe Australia will rebound among the quickest.

  • Dave – I would think that the reason why vacancies are in such decline at the American school would be a direct result of so many expats being sent home.

    Patricia and Nick make valid points given that a) many households can easily steer through the crisis without having to sell. And b) the banking system in Asia appears to be much stronger than that of the US and Europe.

    The sidelines have never been stronger with commentaries always in conflict – whatever the case it makes for interesting debate. As with every comment we learn something new.

  • Ed says:

    “Yes I agree that Asia is not faring well at present, my point was that its faring better than the US and most of Europe’s markets.”

    Thai exports to Australia are down over 50% (year on year). Japan car exports worldwide down 60% +.

    While Asia might be faring better than the US and Europe, it’s a bit like comparing rotten apples at the bottom of the barrel – which one tastes better than the rest.

    As for China’s rebound (and I agree that there are some signs of activity – even if mainly government-credit sponsored buying by consumers), be careful of any ‘massaged’ statistics coming out of there. Not as bad as the statistical information vacuum in Dubai, but not much better.

    I do agree that Australia has the potential to rebound quicker than many countries, subject to export demand and prevailing government policies (which is a polite way of saying ‘if the government doesn’t stuff up the recovery).

  • Ed says:

    Robert, I also agree that in general the banking system in Asia appears to be much stronger than that of the US and Europe.

    The non-performing loans in the Chinese banking system are horrendous (but not fatal due to government policy) – some other countries’ banks are faring better.

    To use Thailand as an example, the main banks are in reasonably good shape. They have exposure to the ailing property sector although not as bad as places like Ireland. They never bulked up on CDOs out of the US and Europe. A couple of banks have small exposure. One reason offered is that the CDO salesperson from THAT bank which collapsed wasn’t very good at jamming CDOs on the Thai banks.

    For the Thai economy, a key difference to 1997 is that the large banks and industrial companies (and the families behind them) were in pretty good financial shape at the start of this and therefore better able to ride out the storm. In 1997, they were all insolvent and playing a game of desperate catch up from the start.

    The politics in Thailand at the moment obviously complicates any recovery.

  • Ed, Thailand is my favourite holiday destination where I have been going there for years. I actually nearly purchased a home on Patong Beach last year – but got cold feet with the global economy. The problem is corruption which is endemic through politicitians to all forms of government.

    The people have had enough where their organic growth from Third World has been impacted by the greed of government. A sad state of events indeed. I would be interested just how many Thais actually have money in a bank? I would think not many at all as the vast majority that I know as friends live financially on a day to day basis with absolutely no financial planning – which is very sad.

  • Michael says:

    Ed – Yes Australia may just be one of the few leading countries that lead out out of recession. I have to disagree on Asia, there is good business there if you have stringent criteria to sort the wood from the trees.

  • Ed says:

    Michael, I’m not saying that deals can’t be done. Just that the Asian economies are ailing at present.

    Robert, I have no statistics but the vast majority of Thais would live pay day to pay day (or harvest to harvest) as you suggest. Most engage in little or no financial planning. While pension fund schemes exist, contributions can be accessed when you switch jobs. Draft proposals to enact a form of retirement superannuation similar to Australia gather dust in Parliament.

    Corruption is endemic although it is possible to maintain investments somewhat free of this. Obviously, any requirement for a government concession or license moves one closer to the bureaucracy and the prospect of corruption. I know of many foreign companies whose investments in Thailand (particularly the auto sector) have performed well over the years but also some investment horror stories. Obviously the return needs to reflect the risk involved.

  • Ed – I thought you may enjoy reading this article which appeared on http://www.businessspectator.com.au today.

    Banking on Asia
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    HSBC Australia CEO Stuart Davis, soon to be the bank’s India boss, tells Business Spectator’s Tony Boyd:

    It is a natural progression that the Australian banks should look to follow their customers into the Asia Pacific region
    The bank has seen movements in loan impairment charges over the past 12 months, but they have been fairly small
    The banking industry must stand on its own two feet in terms of the bank guarantee, but at this stage it’s too early to say when that will be achievable

    Tony Boyd: Stuart, why is India so important to HSBC and its global network in 85 countries?

    Stuart Davis: Well, certainly India is one of the fastest growing economies in the world and the strategy of the HSBC Group is to invest and grow in emerging markets, because the trends which our group sees is that emerging markets will grow faster than developed markets and we see that in terms of the growth which has been achieved by India over the last few years and the projections going forward. Even this year the expectation is that GDP growth will be over 6 per cent in India. It’s interesting that even today India is the ninth most profitable country for the HSBC Group in the 85 countries in which it does business.

    TB: So how much profit did it make in the last fiscal year just finished?

    SD: Yes. In the year to 31 December when our group balances India’s pretax profit was US$666 million.

    TB: So that sounds like it’s about four or five times more profitable than the Australian business you’ve been running.

    SD: Yes. That’s correct.

    TB: So I suppose this explains why India is so attractive to these bidders for the network being sold by RBS that I believe HSBC, ANZ and Standard Chartered are reportedly bidding for.

    SD: Yes. That’s correct. I’m a little bit restricted in terms of what I can say about reports that we’re one of the last three bidders, but certainly it is a franchise which covers a number of countries in Asia and like ourselves a number of financial institutions see that Asia is an area of growth over the next five to ten years.

    TB: And having been the CEO in Australia for seven years, you’d be very familiar with the big four banks. Why do you think it’s sensible for them to expand into Asia?

    SD: Because of the geographical location of Australia being with Asia actually being our closest neighbour together with the fact that we’ve seen particularly over the last five to ten years a strong growth in the trade between Australia and other countries in the Asia Pacific region, it is a natural progression that the Australian banks should follow their customers into Asia.

    TB: But you’d have to say they’ve been very slow to expand in Asia, haven’t they?

    SD: I think it’s probably been a case that for the last five to ten years there’ve been so many growth opportunities in Australia that a lot of the focus has been there. In fact if I’m correct over the last ten years, you know, loan growth in Australia has averaged 13 per cent, so that provides a tremendous ability to grow your business in a country where you both have a dominant market share as well as a tremendous amount of knowledge.

    TB: But do you think it’s right that Mike Smith says that it’s time to step up the expansion into Asia and really get a decent footprint there?

    SD: Well, I think it is a natural progression that the Australian banks should look to follow their customers into Asia Pacific. Probably the only question is at what speed should you look to actually expand into Asia Pacific? The reality is that Asia is not a homogenous area. There are a lot of countries there, a lot of very significant economies there and they’re very different cultures, very different languages, very different approaches to business, so it’s important that if you do move into that area that you have both the people expertise as well as the culture to be able to adjust and deal with what are very different economies and very different communities.

    TB: Now, just talking about Australia, why do you think the Australian economy has come through the crisis so well and also why the Australian banks have come through it so well?

    SD: I think there have been a number of things that have come well for Australia. Certainly from a macro-economic perspective, there is no doubt that Australia has benefited from its location and its growing integration into Asia. Asia has certainly been much more resilient to the global financial crisis and therefore while there has been an impact it has been less severe than what we see in the United States, the UK and Europe.

    I think also, Australia has benefited from a good regulatory regime overlaid with the fact that when the global financial crisis started, we had a federal government that was in surplus, we had a Federal government that had no debt and also we had relatively high interest rates, so therefore that has meant that Australia has had a lot of flexibility from a monetary policy and also from a fiscal policy perspective which has also assisted in cushioning to some extent the impact on Australia.

    TB: In your own bank which I think has a balance sheet of, is it $20 billion?

    SD: Yes, a bit over $20 billion, yes.

    TB: What are you seeing at the moment? Are there like bad debts rising as unemployment is rising? What’s the situation?

    SD: Well, we have seen a little bit of movement in loan impairment charges over the last 12 months, but have been fairly small. In fact they were actually moving from what was an unsustainably low level and I think that’s probably indicative of the whole market in Australia. You know the reality for a number of years in both the mortgage market as well as in the SME and corporate market, you know, delinquencies were below trend and at what I would call an unsustainably low level, so a little bit of really what we’re seeing at the moment is just a movement back towards what I call more normal levels.

    TB: Now, HSBC Australia has done very well under your guardianship and I think part of it goes back to a strategic review you did three or four years ago. Can you just tell us what happened? What decisions did you make that turned out to be so good?

    SD: Well, I guess we did quite an introspective review of ourselves about four years ago and I guess a little bit of it was for the size of the HSBC Group in Asia Pacific and the competitive advantages that we have through that. We weren’t achieving the level of earnings and presence and market share that we should actually have in Australia, so for us we undertook a fairly standard strategic review and really clearly identified what our areas of comparative advantage were and then decided to focus on those. So, as result, we sold some businesses. We sold our brokerage in originated mortgages because you only got market share based on pricing and we weren’t able to get any relationship there. We sold our online broking business; again it depended upon a scale which we didn’t have, together with our margin lending business. The previous year the group had also sold our asset management company in Australia; again a lack of critical mass and also it was run as a stand-alone business and wasn’t leveraging the skills of the group.

    TB: So in other words when the problems came, you had high levels of liquidity and a strong capital position?

    SD: Exactly and so, why I wouldn’t say that we saw the global financial crisis coming, the reality is it put us in a position where we had strong levels of liquidity, we had strong capital and we had a clearly focused business. That also assisted us because I compare with where we are today with where we were in 1990. In 1990 HSBC in Australia was conspicuous by its presence in all the high profile failures. This time around we’re conspicuous by our absence from all those high profile failures. And that’s not just good luck. It was as a result of some deliberate decisions which we made a few years ago where we said that we’d keep away from some of these highly leveraged transactions which we didn’t think were sustainable through the cycle and so therefore it means that we don’t have the divergence of management attention and management time to some of the difficult corporate situations which you see there at the present time.

    TB: So in terms of profitability, where do you rank in the 85 countries where HSBC operates?

    SD: We’re about 19 or 20 and I guess while it’s an internal measure I always think that Australia is about, depending on how you measure it, the 14th to 16th biggest economy in the world. For a truly international bank like HSBC Group you would expect us to be in the top quartile of countries within which our group does business.

    TB: And just going back to that point about capital and liquidity, do you find it ironic that that was one of the greatest criticisms of the HSBC Group as an entity before this crisis happened?

    SD: Well, it is a bit of irony, but it’s really part of the DNA of our group. It’s the way we’ve been for 150 years; always been strongly capitalised, always had a high level of liquidity and that has enabled our group to go through some incredible cycles. People talk about the current cycle being a one in a hundred year cycle. Well, you know, our group’s been through World Wars. It’s been through revolutions in countries like China. It’s been through where there’ve been seismic changes, both from an economic and civil perspective, which make the current global financial crisis in some respects a little bit modest.

    TB: Is it fair to say that you’re the world’s only truly global bank in that you have no more than 25 per cent of your profit coming from any one country whereas the big Americans are really reliant on the United States?

    SD: Well, a number of the banks will actually debate that issue, but you actually find that with a lot of the international banks that they still have a large proportion of their earnings come from their home country and that is understandable because that’s what gives them the base in which to expand overseas. The HSBC Group is quite unique in as much as we don’t have any one country that makes more than 25 per cent of the earnings of the group, so therefore you have this tremendous diversification of earnings around the group and that has certainly been a strength for our group during the current global financial crisis.

    TB: You’re competing against a whole lot of banks that are now owned by governments. You’ve raised $18 billion in a recent rights issue. Is it a level playing field at the moment?

    SD: Whoa. That’s an interesting one. If you ask my colleagues in different countries around the world, they may very well give you different answers. Certainly I think the intervention that we’ve seen by governments around the world was a proper response to the circumstances which they found themselves in, however the problem with such intervention is it has unintended consequences and you’re seeing it in some countries now where it’s actually creating either uneven playing fields or it’s perhaps creating behaviour which isn’t necessarily going to be in the best long term sustainable interest of those countries.

    In the Australian context, the guarantee of deposits it was something which was necessary and sensible at the particular time, but it is having some unintended consequences and certainly part of the challenge for the government and the industry is when do you start moving away from that, when do you start to have the industry stand on its own two feet and at this stage it’s too early to say when that time is.

    TB: And before we go, the $10,000 question: are the foreign banks pulling out of Australia?

    SD: Well, I’m certainly not seeing evidence of it. Certainly there is no doubt that demand in the sectors where the foreign banks were competing quite strongly in the last couple of years sees very weak demand, so therefore you won’t see as much lending by the foreign banks, but most of the foreign banks who are here are here for a reason and they will continue to be here for those same reasons.

    TB: Well, thank you Stuart and the best of luck in India.

  • Ed says:

    Thanks. I was in Hong Kong in March, the day after HSBC shares closed at HK$33, their lowest level since 1995.

    The media the next day reported that one of Hong Kong’s best known stock commentators burst into tears on camera when she saw this trade and was unable to say anything for more than 2 minutes until the broadcast ended.

    She later confirmed that she didn’t own any HSBC shares but that she thought it was so unfair that large market players would bully small investors. Interesting times.

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