While the media preoccupied itself with Labor’s investment mandate for the Future Fund, the fund itself has quietly revealed it has given the cold shoulder to Australia’s four major banks. It slashed the amount of money it lent them by nearly two thirds in the 2023-24 financial year.
It’s an unprecedented cut in the amount of cash the fund had on deposit at the four major banks and the lowest amount for more than 12 years, according to Future Fund annual reports. Notes in the fund’s 2023-24 annual report reveal that the share of its assets in interest-bearing securities issued by the big four banks (via negotiable certificates of deposit) was just 1.52% at June 30, less than a quarter of the 6.75% share at June 2023. There was no explanation for the marked reduction, nor was it picked up by fund analysts.
It means the fund cut its lending to the Commonwealth Bank, ANZ, NAB and Westpac via negotiable certificates of deposit (NCDs) to just $3.5 billion in total at June 30, down from $13.9 billion at the end of 2022-23 and $13.5 billion at June 2022. It’s not that the fund ran down its overall cash holdings (which is made up of cash and deposits of less than three months’ maturity) in the year to June — the fund held cash and equivalents of $10.8 billion at June 30, up sharply from the $2.4 billion a year earlier.
ANZ and Commonwealth both seemed to have been singled out: ANZ had $306.3 million of the fund’s money on deposit at June 30 this year, down from more than $3.8 billion a year earlier. Was that a fall perhaps influenced by the bank’s 2023 bond trading scandal (which is still ongoing)? Market leader CBA had just over $177 million of the Future Fund’s cash at June 30 this year, down sharply from $3.2 billion a year earlier. NAB saw its deposits from the Future Fund fall 50% to $1.7 billion from $3.4 billion, while Westpac’s deposits from the fund dropped 63% to $1.3 billion.
But it’s not just domestic banks that the fund wasn’t happy with: NCDs issued by international banks and held by the fund had fallen to just $363 million at June 30 from $1.3 billion a year earlier. Clearly the fund doesn’t think bank NCDs are now a good deal for its cash, and found other homes for the extra $8.3 billion in cash it had over the year. It explains its allocation decision in a note on “credit risk”:
Credit risk is the risk of loss that arises from a counterparty failing to meet their contractual commitments in full and on time, or from losses arising from the change in value of a traded financial instrument as a result of changes in credit risk on that instrument.
The board sets limits on the credit ratings of debt investments. These limits are reflected in the underlying investment mandates and are monitored by the agency with compliance reported to the board.
The fund’s maximum exposures to credit risk at reporting date in relation to each class of recognised financial assets is the carrying amount of those assets as indicated in the statement of financial position.
The fund had, at June 30, 2024, an exposure of 1.52% (2023: 6.75%) of its net assets to interest bearing securities issued by domestic banks.”
A most interesting juxtaposition — credit risk and domestic banks. If the placement of the text wasn’t accidental, it’s a veiled warning of something quite alarming — and not just for local banks. It’s certainly not a vote of confidence in the interest rates on offer from Australia’s banking oligopoly.
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