Australia Market Report of July 30: Banks to Claw Back the Margin Lost

Sydney, July 30, 2008 AEST (ABN Newswire) - The Australian share market fell 1.5% on Tuesday after a disappointing lead from the US triggered nervousness over local financial stocks.

Wall St was buoyed by a drop in the oil price and positive consumer confidence data. A survey shows in the US home prices in the 20 large cities declined 0.9 per cent on a monthly basis to May. US stocks rocketed higher as the latest slide in crude oil and news that investment giant Merrill Lynch was taking steps to shore up its finances energised the market.

Crude prices have doubled over the past two years but have fallen from record highs of $US147 a barrel earlier this month. They were trading at around $US125 yesterday.

Yesterday the Australia market benchmark S&P/ASX200 index dropped 74.7 points, or 1.52%, to 4847.4, while the broader All Ordinaries dipped 66.6 points, to 4923.3. Today at 6.39am on the Sydney Futures exchange, the September share price index futures contract firmed 83 points, or 1.72%, to 4910.

Key Economic Facts and Figures

The big banks are set to boost profit margins by continuing to raise rates independently of the Reserve Bank -- and refusing to pass on any interest-rate cuts predicted for later this year or next. Aussie Home Loans boss John Symond is predicting the big banks will exploit the lack of competition caused by the credit crunch and lift rates and fees. "Banks will claw back a good deal of the 2 per cent margin they lost because there is nothing to stop them -- there are not enough non-bank lenders able to compete," he said. The big five banks now control 90 per cent of all new mortgages, says Fujitsu Consulting, the research company, up from 75 per cent before the crunch began a year ago.

Australian business conditions have fallen to the lowest point since the aftermath of the 2001 US terror attacks as firms battle slowing demand and high interest rates. As a result, National Australia Bank, the nation's second biggest bank, expects economic growth to slide next year as domestic demand eases. A NAB survey released yesterday shows business conditions for the June quarter fell by 7 index points to 6 points. It is the lowest index reading since the December quarter of 2001, when the business conditions index was -2 points.

Today, Australian Bureau of Statistics building approvals data for June is released.

IPO and M&A News

Australand Property Group (ASX:ALZ) was yesterday in negotiations with its investors about the company's one-for-one renounceable entitlement offer. Singapore-based CapitaLand will take up its $302 million but the other A$255 million of the raising is expected to be harder to sell.

Electronics retailer Harvey Norman (ASX:HVN) has increased its stake in consumer finance group Flexirent after Gerry Harvey earlier this year caused a rout on Flexirent's shareprice by suggesting most families couldn't afford its product.

Strike Resources (ASX:SRK) has become the latest WA miner to be targeted by Russia's billionaire oligarchs, with Alisher Usmanov poised to take a 27 per cent stake in a move that will raise $103 million to advance its Peruvian iron ore projects into production. Under the agreement, Gallagher Holdings, Mr Usmanov's investment vehicle, will take up a placement of A$37.4 million new Strike shares at A$2.75 - a 39 per cent premium to Strike's pre-announcement share price on Friday.

Important Corporate News

Lihir Gold (ASX:LHG) has reported a 27 per cent rise in second quarter gold production compared to the previous quarter, putting it on track to meet its full year production guidance. Lihir said group production in calendar 2008 was expected to be over 850,000oz, in line with previous guidance.

Rio Tinto (ASX:RIO) is to invest $US2.15 billion on a major expansion of its iron ore mine in Brazil. The expansion will also capitalise on increasing demand for iron ore in South America and the Middle East, and increase Rio Tinto's presence in Europe, the company said.

GM Holden turned a loss into a positive yesterday, calling a A$140 million turnaround in its fortunes last year a "good-news story" in tough global conditions. Managing director Mark Reuss said the company's "almost break-even" result in 2007 - a A$6 million loss compared with a A$146 million loss in 2006, despite higher fuel prices, fierce competition from small car makers and cheaper imports.