ASIC to target poor investment advice

TWO of the fastest growing investment products, capital protected investments and individually managed accounts, are to be targeted by the corporate watchdog in its surveillance of the investment industry this year.

The Australian Securities & Investments Commission warned yesterday that it would take tough action against companies found to be giving poor advice in relation to these and other financial products.

“Where consumers have received, or are at risk of receiving, inappropriate advice, we will step in and take tough regulatory action,” ASIC commissioner Greg Medcraft said.

“Poor-quality advice cannot be tolerated. It is not just the individual client that suffers loss, but the reputation of the industry as a whole is damaged as consumers lose confidence in the advice process.”

ASIC said it would conduct a “health check” on capital guaranteed products, particularly those that required the client to borrow 100 per cent of the investment, after finding they had proliferated in the past 18 months due to the global financial crisis. Companies responded to the demand for products that would protect a retiree’s capital after many were financially devastated by the plunging sharemarket.

But ASIC warned many of these products were highly complex and financial advisers needed to fully explain the risks to clients.

“If an adviser recommends these products to clients, it is vital the adviser fully understands how the products work and carefully considers whether they are appropriate to the client’s circumstances and investment goals,” ASIC said.

The watchdog was also concerned about the growing use of managed discretionary accounts, commonly known as individually and separately managed accounts, as an alternative to managed funds.

“While the use of MDAs might be appropriate for some clients, we are concerned there is real potential for their misuse,” ASIC said.

Among its concerns were that gearing strategies within MDAs should not be too risky, that clients had genuine ownership of the underlying assets and that clients had not been placed in unregistered schemes.

Macquarie could miss profit target

MACQUARIE Group has warned it could miss its annual earnings target if global financial markets do not strengthen in the next few months.

The worldwide weakness drove the investment bank’s first-half profit down by 16 per cent.

Macquarie recorded a $403 million net profit for the September half, which exceeded expectations after the bank forewarned that earnings could be down by 25 per cent.

The bank’s chief executive, Nicholas Moore, said the poor conditions during May — prompted by the European sovereign debt crisis and Wall Street’s flash crash — had dramatically hit the bank’s trading businesses.

Mr Moore said the Australian and international markets had to build on the gains made in September and October for Macquarie to match its $1.05 billion profit generated in 2010.

“The improvements that we have seen in August and September give us some degree of comfort,” Mr Moore told The Weekend Australian.

“In May we had the debt crisis and the flash crash, we just saw people leave the market.

“It was across the spectrum, retail investors, hedge funds, corporates. Everyone said we have just gone through 2008. The result was a real pause in most global markets.

“But more activity seems to be coming back, October is coming back again. We think there’s a trend going on and if that trend continues, that will get us there (the target).”

The bank’s trading business experienced a 32 per cent fall in income to $600m. One of the bank’s traditionally strongest performers, the fixed income, currencies and commodities division, recorded a 15 per cent drop in income and a 55 per cent decline in profit contribution.

Macquarie Securities, which encompasses most of the equities trading businesses, saw income drop by 21 per cent and profit contribution by 71 per cent.

Macquarie’s non-trading businesses, Macquarie Funds, Corporate and Asset Finance and its banking division, covered the shortfall and contributed two thirds of the group’s profit.

The bank’s group operating income was $3.7bn, up 18 per cent on the same time last year, while expenses also rose by 23 per cent.

The expenses increase was attributed to the 1400 workers that Macquarie inherited through its string of business acquisitions, predominantly in the US.

The bank now employs 15,500. Mr Moore was criticised by analysts for the bank’s income not rising by more because of the larger workforce.

Mr Moore said an increasingly competitive investment banking market in Australia and offshore had pushed up the prices the bank had to pay for some new staff.

“So we have existing players in the sector, particularly here in Australia and in Asia, actually stepping up their activities,” he said. ” We’re seeing new players actually come into the market, so we’re looking at what’s happening in Asia and Australia, we have new players entering the market. If you look at Europe, we have a number of people who are actually building businesses up there.”

Citi analyst Wes Nason said the compensation ratio of 48 per cent was ahead of the market’s consensus of 45 per cent.

“The compensation ratio gives management more flexibility in the second half to wind back staff costs and still deliver a bottom line,” Mr Nason said.

He said Macquarie did not believe in “revenue per staff member” calculations. The results showed Macquarie’s capital was recently inflated by moving its popular cash management trust, worth $9.5bn, on to its balance sheet.

The deposits now account for 37 per cent of Macquarie’s funding sources, up from just 24 per cent a year ago.

“From a balance sheet viewpoint, we expect to have excess funding,” Mr Moore said. “But we expect to deploy the balance sheet over the next six months.”

The bank has $11.6bn worth of capital, almost $3bn above the regulatory minimum.

Mr Moore said he was not surprised by the increased political and regulatory focus on the Australian banking system, and that the Senate inquiry was an opportunity for the industry to silence its critics.

“It’s a fine question for people to ask and the banking industry will have a fine answer for it,” he said.

Macquarie’s earnings per share was $1.19, down 21 per cent on the same time last year.

The return on equity was 7.1 per cent, which Mr Moore said was well below the historical average and the bank’s management was keen to boost the ratio.

The board declared an 86c half-year dividend, unfranked, which was 14 per cent down on the second-half dividend last year.

Macquarie’s shares rose $1.65, or 4.78 per cent, to $36.20 yesterday.

Dunn talking up Axa may rile target

CRAIG Dunn remains a confident man.

In delivering a first-half profit that missed consensus by 5 per cent and as the competition regulator prepares to rule on the NAB and Axa Asia Pacific proposed transaction, Dunn is still upbeat about his chances on buying his arch rival.

Whether that confidence is well placed is yet to be determined.

The AMP’s argument that buying the Australian assets of APH remains economically and strategically sensible for the group was rolled out once more yesterday, along with the claim that AMP was watching with intent.

In a submission due to be lodged with the ACCC by Monday, AMP will vehemently argue that NAB’s offer to offload the contentious North retail investment platform to IOOF will have no impact on the competition stranglehold the bank will hold if a deal is to proceed.

It will be argued that the North platform, worth about $5 million, is small fry in the scheme of a transaction worth almost $14 billion.

The only problem for AMP and Dunn is that the opposition to the deal and the associated rumblings are fast beginning to tread water.

First, AMP does not have a live bid at the moment. The rejigged offer rejected by the APH board in December was declared best and final, and subsequently allowed to lapse.

Second, given that AMP’s shareprice has been well, smashed, in the first six months of 2010, the group is battling the mere existence of an all-cash component to NAB’s offer.

When the deal was rejected, AMP’s share price was $6.10 and yesterday it closed at $5.09, its low point for the year.

The AMP’s cash and scrip bid of 0.6896 AMP shares plus $1.92 values APH at $5.43.

The valuation is equal to APH’s current share price but a full $1 below the $6.43 cash offer put on the table by NAB.

Looking into the future, if the ACCC knocks back NAB’s North concession and blocks the deal again that would realistically crush the bank’s ambition to buy APH.

The bank, however, has history on its side.

The ACCC has carried out market soundings on nine “remedy bids” in the past and subsequently approved each one of them.

Nine out of nine.

On the off-chance it is knocked back, Dunn and the board of AMP, led by former investment banker Peter Mason, need to design a cash bid that at least matches or preferably exceeds NAB’s $6.43.

AMP’s public opposition and arguments to the ACCC against NAB is unlikely to be winning friends on the APH board.

Given the frostiness that already exists between the two groups, Dunn and AMP are going to have to come up with some special tricks to bring APH back to the negotiating table if NAB is forced to ultimately walk away.

Bank the target of Storm class action

INVESTORS who lost their savings in the collapse of Storm Financial will today file a class action against the Commonwealth Bank.

The class action to be filed in the Federal Court will be on behalf of former Storm investors unhappy with a compensation deal agreed with the bank.

The Townsville-based financial services group collapsed in 2008 at the height of the global financial crisis, owing millions of dollars to investors.

Many were burned after they took Storm’s advice to borrow against their homes to invest in the share market.

The strategy failed spectacularly when the global economy took a dive.

Storm negotiated loans for customers with major banks, including the Commonwealth Bank.

In February, the bank agreed to a deal with lawyers for more than 2,000 former Storm clients, involving cash payouts and mortgage reductions for those affected by bad lending practices and a failure to call in margin loans.

But lawyer Stewart Levitt, of Levitt Robinson, said many people were unhappy with the deal and had decided to pursue a class action against the Commonwealth Bank.

Mr Levitt said the class action against the Commonwealth Bank would be the first in a series against major banks, focused on whether the relationship between the major players was an unlawful scheme.

Stephanie Carmichael, also from Levitt Robinson, said the class action involved about 300 disaffected clients.

“They’ve decided to pursue their legal interests,” she said.

“It’s a potential class action of 1,200.”

AAP

Shorts target Prudential on AIA risks

PRUDENTIAL is racing to complete a Hong Kong listing for its shares amid renewed doubts that investors will approve its record $US35.5 billion ($39bn) acquisition of AIA, the Asian division of American International Group (AIG).

Blair Stewart, an analyst at Bank of America Merrill Lynch, said it was by no means certain that Pru investors would approve the AIA takeover, the largest in insurance history.

For the Pru to buy from the American insurer, 75 per cent of shareholders must back it.

The Pru said that it was accelerating its Hong Kong listing in an effort to ensure that Asian investors were eligible to buy into its record $US21bn rights issue, a price for which is expected to be set in late April or early May.

The proceeds will be used to part-pay for AIA. Asian tycoons and other high-net- worth investors are expected to buy shares in the listing, which bankers working for the insurer said they hoped to complete towards the end of April. Foreign involvement would also boost the rights issue if, as critics fear, demand in Britain is weak.

British investors, who are being courted in earnest by the Pru this week, have raised concerns about the price being paid for AIA, as well as the lack of detail about the structure of the rights issue and the eight-week delay before a firm price is set.

Pru shares came under renewed pressure in the latest London session after it emerged that short-sellers had dramatically increased their bets that the company’s share price would fall. The stock closed 0.4 per cent lower and has fallen about 14 per cent since the takeover was announced a week ago.

According to Data Explorers, a market-analysis company, almost 2 per cent of the Pru’s shares — worth about ₤286 million ($474m) — were out on loan as of Friday. This compares with an average during the past three months of 1.5 per cent. Short-sellers sell borrowed shares in the hope of profiting from buying them back more cheaply once the price has fallen.

One leading investor, who asked not to be named, said that his fund had sold almost all its stake in the Pru during the past fortnight because of rising doubts over the way in which the insurer was being run.

The investor said that the rights issue had not been properly discussed in advance with the Pru’s largest shareholders, adding: “Prudential management seems to be taking on risk at levels that long-term investors in the company would never have bought into.”

The insurance company’s management, led by Tidjane Thiam, the chief executive, met half a dozen of its biggest UK investors in London last night in an attempt to convince them of the merits of the deal.

Sources close to the Pru said that the meetings with shareholders had gone well, with many supportive of the insurance group’s Asian expansion plans.

Credit Suisse, HSBC and JP Morgan Cazenove are the lead underwriters of the rights issue, but were joined last week by a further 30 banks which will also assume some of the risks of the cash call in exchange for a fee. Asian sovereign wealth funds are also expected to buy Pru shares.

Mortgage Choice on target

RESULTS: Mortgage broker Mortgage Choice has reported an 18 per cent rise in first-half net profit, but says full-year profit under its preferred accounting rules is likely to be up to 35 per cent lower than in fiscal 2009.

According to the broker, it recorded profit in the first half of fiscal 2010 of $9.761 million, up 18.3 per cent on the previous corresponding half year.

Revenue was $74.376m, down 6.8 per cent and the company declared an interim dividend of 5.5c a share, fully franked.

Applying accounting rules under Australian International Financial Reporting Standards, which take into account the value of trailing commissions, Mortgage Choice announced full-year net profit was likely to be 30 per cent to 35 per cent below those in fiscal 2009, after a 39 per cent increase between 2008 and 2009.

According to the broker, its outlook was affected by house prices increasing by less than in calendar 2009, tight lending, “single-digit” credit growth, rising interest rates, and the return of investors to the property market.

But it described its result as “on target”, claiming that on a cash basis, net profit was $7.8m, up 21.9 per cent on the previous corresponding half-year and its loan book was at $37.7 billion, up 9.6 per cent, ahead of 8.1 per cent system growth.

Cash commission revenue was up 1 per cent, but on an AIFRS basis, was down 8 per cent.

The company generated $5.4bn in housing loan approvals, up 17 per cent, and cash flow from operating activities was $1m, after net outflow of $5.1m in the first half of 2009.

Total operating revenue on a cash basis for the period was $69.5m and, under AIFRS, was $72.2m. This included $28m from new mortgage origination.

Trailing commission revenue on a cash basis for the year derived from the existing loan book was $41.5m, and $44.2m under AIFRS.

“Emerging from the rapidly evolving housing finance market with head held high, Mortgage Choice’s interim result was in line with expectations,” a company statement said.

Chief executive Michael Russell said: ” Mortgage Choice is on target for a sound FY10 result.”

Its shares closed down 4c at $1.28.

AAP

Hedge funds target insurers

SOME of the City of London’s shrewdest hedge fund investors, who made millions of pounds betting that UK bank shares would fall, have turned their guns on insurers amid heightened worry about the financial strength of the sector

Lansdowne Partners, which spent three years gambling on the collapse of Northern Rock, and made huge profits when the bet paid off in the fourth year, has gambled tens of millions that the share prices of four household-name insurance companies will fall.

Lansdowne, founded in 1998 by Paul Ruddock and Steven Heinz, has disclosed that it had a short position in Prudential, Britain’s No 2 insurer, worth about 10.5 million ($24 billion); a 26.2 million bet against Aviva, owner of Norwich Union; and further gambles against Legal & General (L&G) and Old Mutual. With the exception of the Pru, insurers’ shares have continued to fall.

Although they are relatively small, the short positions — disclosed under regulatory requirements — underscore worries about the future of household-name insurers.

Last week Landsowne’s fellow hedge fund, Odey Asset Management, run by Crispin Odey, revealed a short position in L&G equivalent to 0.35 per cent, or 7.1 million, of the market value of the fourth-largest insurer.

Concern about the impact of economic shocks on big insurers has grown since late last year, despite their persistent attempts to reassure the market. The Financial Services Authority, the regulator, has renewed its scrutiny of the capital buffers held by insurers to safeguard their investments if markets go against them.

Working with the regulator, Aviva, the Pru, L&G and Standard Life have all strengthened their capital bases as worries grew over rising debt defaults in their corporate bond portfolios.

Lansdowne’s position in the Pru was immediately loss-making. The shares rallied after it emerged that Resolution, Clive Cowdery’s financial services consolidator, had expressed interest in buying the Pru’s UK division. The shares ended up 3p, or 1.32 per cent, at 288p.

Lansdowne, which specialises in long-term bets linked to macroeconomic forecasts, made substantial losses on its Rock holdings before cashing in when the bank’s share price tanked.

The loss of confidence in the domestic insurance sector comes as both the fund managers have decided to bet on recovery in the UK banking system.

Mr Odey told investors last month that he had turned bullish on Britain’s banks, while Lansdowne told investors in its January newsletter that it was now “materially long banks”, including several investment banks.

Critics argue that short-selling undermined the bank sector. Hedge funds respond that big sell-offs by traditional investors caused more harm and proved that hedge funds’ sentiments were correct.

theaustralian.news.com.au