Global banking turmoil to spur shake-up of foreign banks operating in Australia: MinterEllison

Ructions in US and European banking markets and rate hikes will change the mix of foreign banks operating in Australia, as some rein in activities while others capitalise.

Ructions in US and European banking markets and aggressive monetary policy tightening will change the mix of foreign banks operating in Australia in 2023, as some rein in activities while others capitalise on opportunities for growth.

That’s the view of law firm MinterEllison’s Foreign Bank Tracker 2023 report, which notes a risk some players repatriate capital to their home market to navigate the more difficult operating environment, but highlights that others may seize on that to pick up market share.

The report comes amid fragile sentiment in the US banking system, higher funding costs and softer investor confidence which will affect how foreign banks conduct their business in Australia this year.

MinterEllison partner John Elias expects market instability and slowing economic and credit growth will likely see foreign bank assets in Australia decline this year, but he doesn’t see the drop being as stark as that during the Global Financial Crisis.

“There’s clearly going to be a bit of a shake-out across all these banks that we’re talking about. For some of them it’s going to present a tremendous opportunity … If you’re cashed up and in the right position, it’s actually going to be a really fantastic opportunity to grow your asset base,” he said.

“For some who are more challenged it won’t be so rosy. There are going to be winners and losers.”

Mr Elias said Australia was still viewed as a strong investment destination, although the banking market here would feel the effects of events happening globally.

“We are just a small fish in a large pool of capital and that means we get impacted … we’re obviously more price-takers rather than price-makers,” he added.

The demise this year of several US regional financial institutions, including Silicon Valley Bank, and waning sentiment continues to cause problems in the market there, with Los Angeles-based PacWest last week reporting a sharp decline in deposits. In Europe, UBS was pushed by regulators to acquire Credit Suisse in a deal that has ramifications in markets internationally, including Australia.

MinterEllison partner John Elias.

The instability in banking markets also has implications for funding costs. The federal budget papers last week warned that the international outlook remained highly uncertain as vulnerabilities lingered in some banking markets.

“Swift and co-ordinated regulatory responses have helped to avert a broader systemic financial shock, allowing financial markets to stabilise,” Treasury said. “Nevertheless, stresses have exposed vulnerabilities in parts of the global banking system, heightened investor risk-aversion and generated tighter financial conditions for households and firms.”

The Foreign Bank Tracker ­assesses all resident assets – including loans – held by offshore-based banks, by drawing on Australian Prudential Regulation Authority data. MinterEllison also garners feedback from banks it counts as customers and the report suggests foreign bank activity often acts as “a proxy for offshore investment” as banks typically follow their customers into jurisdictions.

The report found 5.4 per cent growth last year in the total Australian assets of foreign banks, with six out of the 10 fastest-growing players headquartered in Asia, including Japan’s MUFG Bank and Bank of China.

Already in the past three years some offshore-based players have pulled back from their Australian presence. Citigroup sold its domestic retail banking operations to National Australia Bank in a transaction that was completed about a year ago.

Investec Australia in 2021 agreed to offload its $1.2bn corporate and acquisition finance loan portfolio to Metrics Credit Partners.

Citigroup had the biggest 2022 decline in assets in Australia in percentage terms, given the retail bank divestment, followed by The Northern Trust Company and Credit Suisse. BNP Paribas Securities’ unit saw its Australian licence revoked last year due to a restructuring.

Players including Barclays and Societe Generale have left and then re-entered the Australian market, with Barclays getting back in via a holding in investment bank Barrenjoey.

In 2022, APRA granted banking licences to two new foreign players, Korea’s NongHyup Bank and France’s Credit Agricole Corporate and Investment Bank.

The growth in foreign bank assets comes against the backdrop of a highly competitive local mortgage market, which has two of the big four banks ditching cash-back offers on home loans in coming weeks, as players warn some mortgages are being written below the cost of capital.

It will be interesting to see how the largest foreign banks in this market, including ING and HSBC, respond to the competitive dynamics.

In Europe, UBS was pushed by regulators to acquire Credit Suisse in a deal that has ramifications in markets internationally, including Australia. Picture: Getty Images

European institutions in Australia had the biggest share of foreign bank assets here, accounting for 46 per cent, and posting growth of 7.4 per cent last year. That rate was surpassed by Asian banks, which expanded their assets by 17.5 per cent in 2022

The MinterEllison report showed after adjusting for Citigroup’s retail bank sale, the remaining North American participants’ Australian assets contracted slightly.

Mr Elias said that if the latest trade discussions with China helped to improve relations, that would likely feed through to Chinese bank activity in Australia.

“Consistently for 10 years, other than 2021 which perhaps was at the height of the tensions, it’s been pretty consistently at 15-16 per cent year-on-year (growth). So if the trade discussions go the way they seem to be heading, that has to be a substantial positive,” he added.

Separately Mr Elias noted while HSBC had exited the Canadian market via a sale, he didn’t expect it to leave Australia, and wasn’t sensing a big near-term retreat from others in this market either.

“I don’t as yet hear talk of anyone exiting the market. That would more likely be reactive to some sort of event offshore which would cause them to need to repatriate the cash,” he said.

A Fitch Ratings report, released on Friday, said the continued strength of economies in the Asia Pacific region would “be conducive for the stability” of bank credit profiles.

The report noted Fitch had revised the US banking sector’s outlook to “deteriorating” late last year from “neutral” due to expectations of increasing loan-loss provisions, tighter liquidity and earnings pressure.

“On the other hand, we expect the key rating drivers and credit fundamentals of most Fitch-rated APAC banks to remain little changed in 2023,” it said.

MinterEllison’s Foreign Bank Tracker 2023 report will be made public in coming weeks.

Originally published as Global banking turmoil to spur shake-up of foreign banks operating in Australia: MinterEllison