Do exchange raes affec he sock performance of Ausralian Banks? Auhors: Jing Chi (Massey Universiy) Address: Deparmen of Finance, Banking & Propery, Massey Universiy, Privae Bag 11-222, Palmerson Norh, New Zealand, Phone: +64-6-3505799-7369, Fax: +64-6-3505651, Email: J.Chi@massey.ac.nz David Tripe (Massey Universiy) Address: Deparmen of Finance, Banking & Propery, Massey Universiy, Privae Bag 11-222, Palmerson Norh, New Zealand, Phone: +64-6-3505799-2337, Fax: +64-6-3505651, Email: D.W.Tripe@massey.ac.nz Marin Young (Massey Universiy) Address: Deparmen of Finance, Banking & Propery, Massey Universiy, Privae Bag 11-222, Palmerson Norh, New Zealand, Phone: +64-6-3505799-2482, Fax: +64-6-3505651, Email: M.Young@massey.ac.nz JEL classificaion: Keywords: G12, G21 Exchange Raes, Offshore Asses, Sock Reurns, Ausralia banks Corresponding auhor 1
Do exchange raes affec he sock performance of Ausralian Banks? Absrac There is an expecaion ha he performance of banks wih significan foreign business should be impaced by relaive changes in he values of he currencies of he foreign counries in which ha business is underaken. Using daa from 1 Jan 1997 o 31 March 2007 and he capial marke mehod, his sudy explores his relaionship for he four major Ausralian banks, whose sock reurns are compared wih hose of he so-called Ausralian regional banks, which do no have foreign business. Conrary o expecaions, almos no significan relaionships beween Ausralian bank sock reurns and foreign exchange raes are found, raising quesions as o he efficiency of sock markes in recognising banks foreign exchange exposures arising from heir offshore asses and business. JEL classificaion: Keywords: G12, G21 Exchange Raes, Offshore Asses, Sock Reurns, Ausralia, bank inernaional expansion 2
1. Inroducion A number of heories have been proposed as o why banks should expand inernaionally, alhough all of hese, ulimaely, relae o banks abiliy o earn profis from doing so. Major heories o explain inernaional expansion include he indusrial organizaion heory, he comparaive advanage heory, he inernaional invesmen heory, porfolio heory, he inernalisaion heory and he eclecic heory. The indusrial organisaion heory has a number of differen srands, including banks following heir cusomers ino foreign markes, higher concenraion in he home counry marke providing higher profis o suppor expansion, greaer srengh or imporance of he home counry currency and a desire o secure (reail) deposis in he hos counry. The comparaive advanage heory proposes ha banks expand from counries wih a comparaive advanage in he supply of banking services. Inernaional invesmen heory is based on he idea ha banks will expand inernaionally in order o exploi or avoid marke exernaliies, while porfolio heory argues ha inernaional expansion is a risk diversificaion decision. Inernalisaion heory recognises he marke imperfecions prevening he efficien operaion of inernaional banking, and suggess ha a bank expands inernaionally o overcome exernaliies. The eclecic heory combines a number of srands, largely from he inernalisaion heories: hese are ownership-specific advanages, inernalisaion specific advanages and locaion-specific variables. 1 Wihin his range of opions, relaively lile aenion has been given o porfolio heory, which could be used o argue ha banks ough o expand inernaionally o reduce he risks of 1 This summary of he heories and heir srenghs and weaknesses is very brief. For a more exensive review, please refer o Cho (1985), Williams (1997), and Tripe and Mahews (2003). 3
invesing solely in heir home markes. Grosse and Goldberg (1991) found ha banks from counries considered risky were more likely o have a foreign office, bu an alernaive perspecive has been ha counries can diversify heir loan porfolios inernaionally wihou an exensive nework of foreign offices (alhough a bank s lending porfolio migh hen be limied o low-margin, wholesale business). Oher sudies have considered exchange raes as a facor in banks foreign invesmen decisions, bu he focus of hese has ofen been on he issue of wheher an invesmen is likely o generae a foreign exchange gain or a loss (e.g. Hulman and McGee, 1989; Moshirian and Pham, 1999; Moshirian, 2001). Relaively lile aenion has been given o looking a inernaionally-acive banks asses as a porfolio, wih sub-porfolios in differen counries exposed o differen risks and reurns. This paper aemps o fill some of he gap in he exploraion of he porfolio heory of he inernaional expansion of banks by looking a he four major Ausralian banks, each of which has significan operaions ouside Ausralia. The specific focus is on he impac of changes in he exchange rae of he Ausralian dollar relaive o he currencies applying o he main counries ino which hese major Ausralian banks have expanded heir operaions. The effec is measured in erms of he effec on sock reurns for hose Ausralian banks; he sample period is from 1 Jan 1997 o 31 March 2007 and he mehodology employed is he capial marke mehod. Surprisingly, we find no significan foreign exchange impac on he four major Ausralian banks sock reurns, or on he sock reurns of he five Ausralian regional banks. Quesions are hen raised as o he efficiency of sock markes in recognising banks foreign exchange exposures arising from heir overseas asses and business. The res of he paper is srucured as follows. The nex secion provides some deail on he inernaional operaions of he major Ausralian banks and heir hisory. The hird secion 4
oulines he key hypohesis ha will be explored in his sudy, while secion 4 inroduces he daa ha are used for he analysis. Secion 5 repors and reviews he resuls and discusses heir implicaions, while secion 6 concludes and idenifies issues for furher research. 2. The major Ausralian banks and heir inernaional expansion The Ausralian banking marke is dominaed by four major banks, which ogeher conrol around 67% of he marke by asses (as a January 2006). These are he Ausralia and New Zealand Banking Group Limied (ANZ), Commonwealh Bank of Ausralia (CBA), Naional Ausralia Bank (NAB), and he Wespac Banking Corporaion (Wespac). Each of hese banks is lised on he Ausralian Securiies Exchange (ASX), where hey are among he larges lised companies, and each of hem has boh reail and oher banking business ouside Ausralia. 2 The CBA is he younges of hese banks, originally esablished as a governmen-owned insiuion in 1911, bu fully privaised since 1996. Like all he major Ausralian banks, i has offices in he major financial cenres of London, New York, Tokyo, Hong Kong and Singapore. I expanded ino New Zealand wih he acquisiion of 75% of ASB Bank in 1989, wih he remaining 25% acquired in 2000. Is oher significan inernaional expansion has been ino Fiji, where i acquired a business wih he acquisiion of Colonial Limied (an Ausralian bancassurance group) in 2000. There are some small operaions in oher counries, bu he New Zealand business is he larges ouside Ausralia. The rend in all banks inernaional aciviies is shown in Figure 1. [Inser Figure 1 Here] 2 The following summary of Ausralian banks and heir inernaional operaions is relaively brief. For a more exensive discussion, please see Tripe and Mahews (2003) and Wilkins (2003). 5
Wespac is he longes esablished of he Ausralian banks, having been originally esablished as he Bank of New Souh Wales in 1817. I has had business in New Zealand since he Bank of New Souh Wales acquisiion of he New Zealand business of Orienal Bank in 1861, wih he New Zealand business increasing in imporance following he acquisiion of Trus Bank New Zealand in 1996. Wespac embarked on an ambiious plan o ry and urn iself in o a major mulinaional bank in he lae 1980s, bu he somewha disappoining ensuing performance and lending losses in is home marke forced he abandonmen of his sraegy. 3 Is inernaional aciviies now comprise he sandard nework of offices in major financial cenres and business in New Zealand and a number of smaller counries in he Pacific. The NAB was originally among he more Ausralian focused of he major banks, bu in 1987 i purchased a nework of reail banks in Scoland and Ireland. This was followed by furher expansion by acquisiion ino he Unied Kingdom, New Zealand and he Unied Saes, alhough in more recen years i has sold boh is Unied Saes business and ha in Ireland. In addiion o is nework of offices in inernaional financial cenres, i hus now has significan business in England and Scoland (rading as he Clydesdale and Yorkshire Banks) and New Zealand (where i rades as Bank of New Zealand). Some argumens have been pu forward o sugges ha a major benefi of he NAB s expansion ino he UK marke was o relieve he bank from he consequences of is previous concenraion of exposures in he Ausralian banking marke (Robinson, 1990), consisen wih he porfolio heory. For he period from 1988 o 2000, he correlaion coefficien 3 For a more exensive discussion of hese evens, refer o Carew (1997). 6
beween he reurns on asses for he Ausralian and UK businesses was 0.22, which does lend suppor o he porfolio effec argumen. The ANZ is now he major Ausralian bank wih he greaes proporion of is business ouside Ausralia. All of is major consiuen banks, he Union Bank, he Bank of Ausralasia and he English Scoish & Ausralian Bank (ES&A), sared life as Briish overseas banks, wih boh he Union Bank and he Bank of Ausralasia having operaed in New Zealand. The bank sough o increase is inernaional involvemen sill furher in 1984 wih he acquisiion of Grindlays, alhough his was no wholly successful, and afer successive scaling back of he Grindlays nework, he remains of he bank were sold in 2000. In 2003, he ANZ increased he proporion of is business in New Zealand hrough he acquisiion of he Naional Bank of New Zealand. Is inernaional nework now comprises he sandard nework of offices in major financial cenres, is New Zealand business (comprising nearly 25% of asses as a 30 Sepember 2006), and in he smaller counries of he Pacific and hrough a number of offices in Eas and Souh-Eas Asia. The posiion of he preceding big four banks conrass wih ha of he oher Ausralian banks lised on he ASX. These oher five so-called regional banks, Adelaide Bank (ADB), Bank of Queensland (BOQ), Bendigo Bank (BEN), S George Bank (SGB) and Suncorp Meway (SUN), are much smaller and do no, in general, have any non-ausralian business. We would hus no expec hese banks o show he same sensiiviy o exchange raes for he Ausralian dollar as he big four, and hey have been included in his research in he expecaion ha here should be differen effecs for hese banks. 4 4 Macquarie Bank is also lised on he Ausralian Securiies Exchange, bu is business is primarily in invesmen banking, and bears only limied resemblance o he banks included in his sudy. 7
Agains his background, he nex wo secions of he paper describe he mehodology used o explore he significance of any porfolio effecs in he inernaional expansion of he Ausralian banks, and look a he daa used o underake his analysis. 3. Hypohesis There are in fac hree ways in which banks can be exposed o changes in exchange raes. I is common o recognise he shor run exposure ha arises from foreign exchange rading, and he medium erm exposure arising from mismaches beween he currencies in which a bank s asses and liabiliies are denominaed. There is also, however, a longer-erm exposure, which migh be relaed o a ranslaion exposure ha arise from banks invesmens in he banking business in oher counries where differen currencies are used. In he case of he major Ausralian banks, exposures from foreign exchange rading and from asse and liabiliy mismaches are small. Alhough he banks raise significan porions of heir funding in inernaional markes, he vas bulk of his is hedged ino Ausralian dollars (Saff, 2000; 2002). Value-a-risk from rading exposures is also very small (Saff, 2000). The Reserve Bank of Ausralia furher noes ha he main foreign exchange exposure of banks arises on he asse side from heir equiy invesmen in offshore operaions (Saff, 2002). Becker e al. (2005) showed ha banks coninued o have relaively low levels of foreign currency exposure, oher han in respec of heir offshore business. The general principle in his research is o perceive banks as conaining a porfolio of asses. Our proposiion is ha he marke performance of banks should respond o changes in he value of heir underlying asses making up hese porfolios. If hese underlying asses are held 8
in differen currencies, changes in he values of hese currencies ough o impac on he marke value of he banks, excep insofar as he ne foreign currency posiion relaive o hose asses is hedged ino Ausralian dollars. Such hedging would indicae ha he bank did no wan he relaive currency exposures. While he banks we consider primarily in his sudy do no sae precisely heir hedging policy in relaion o he value of asses held offshore, he common pracice is o hedge offshore profis bu no he offshore asses hemselves. There are hus alernaive hypoheses ha may apply o he differen scenarios. I may be ha banks do no hedge heir currency exposures, and ha markes are efficien, in which case a srenghening of ha foreign currency relaive o he Ausralian dollar will resul in an increase in he bank s relaive share price (refleced in posiive sock reurns). Alernaively, if banks hedge heir foreign currency posiions, we would expec no relaionship o be eviden. The hird possibiliy is ha share markes fail o adequaely reflec informaion abou he currencies o which he banks are exposed: his is no he expeced oucome, bu i is noed ha relaively lile aenion is given o he effecs of exchange rae changes in he discussion of bank performance. 5 In our sudy, we use he sock reurns o evaluae he four major Ausralian banks, wih five regional banks included o provide a comparison (and for which differen resuls migh be expeced). We hypohesize ha hree major exchange raes, namely US dollar (USD) o Ausralian dollar (AUD), Serling Pound (GBP) o Ausralian dollar and New Zealand dollar (NZD) o Ausralian dollar, would have an impac on he bank s sock performance. The higher he exchange raes, he sronger he Ausralian dollar is and he weaker he foreign currencies are. The weak foreign currencies will reduce he value of he overseas asses of he 5 An excepion o his is he case of Wespac, where exchange rae differences relaive o he New Zealand dollar in paricular are idenified as impacing on repored resuls. 9
Ausralian banks. Oher hings being equal and if he banks do no hedge heir foreign exchange exposure, we expec banks sock reurns o be impaced negaively when exchange raes increase, due o he high proporion of banks foreign asses. In our sudy, we also consider he impac from he marke index reurns and ineres rae and real GDP differenials beween wo counries on he bank sock reurns. Marke index reurns are considered direcly, bu ineres rae and GDP differenials are considered hrough heir expeced impac on he exchange rae, as oulined in Secion 5 below. 4. Daa In his sudy, we focus he sample of he four major Ausralian banks (ANZ, NAB, CBA and WBC) and use quarerly daa from 1 January 1997 o 31 March 2007. We also sudy five regional Ausralia banks as a comparison wih he four major banks, since he five regional banks have lile overseas asses in comparison wih he major four. We sar our sample period in January 1997 o avoid possible problems caused by wo significan evens ha ook place in 1996, namely Wespac s acquisiion of a major New Zealand asse, Trus Bank New Zealand, and he compleion of privaisaion of CBA. The sock reurns of nine banks, he marke index reurns (ASX200), foreign exchange raes beween he Unied Saes dollar, Pound Serling, New Zealand dollar and Ausralian dollar, 3-monh iner-bank raes of he US, Briain, New Zealand and Ausralia, and real GDP of hese four counries are colleced from he Daasream. The summary saisics for our daa is provided in Table 1. 10
[Inser Table 1 Here] 5. Empirical resuls and heir implicaions We use he capial marke approach o esimae he sensiiviy of sock reurns o he change of foreign exchange raes while conrolling for he marke movemens. This approach is shown in he Equaion 1: R = β 0 + β m Rm, + β X X + ε (1) where R is he sock reurn adjused for dividend and righ issues for ime ; R m, he marke index reurn for ime ; X he exchange rae facor for ime which comes from Equaion 2; β 0 he inercep; error erm for ime. β m he marke exposure; β X he foreign exchange exposure; and ε is he Previous effors o find significan exchange rae exposure have no been very successful, alhough mos research so far has used a rade-weighed exchange rae index. Since in his sudy, we are ineresed in how overseas asses and business affec he sock performance of he four major Ausralian banks, we choose key currency pairs ha are mos relevan o our sudy and use hem individually in he equaion o avoid any offseing exposure among foreign exchange raes. We also include all hree exchange rae facors in he same equaion o check how he exchange rae facors impac joinly on banks sock performance. Besides using key currency pairs, anoher adjusmen o he radiional approach, following Marin and Mauer (2005), is ha he exchange rae facors are consruced o be orhogonal o he ineres rae and real economic aciviy differenials. The orhogonal exchange rae facor 11
is generaed from x j,, he residual or he unexplained par of he exchange rae which is no capured by macroeconomic variables. The model o esimae x j, is shown in Equaion 2: XRT j, = 0 + α1int j, + α 2GDPj, + x j, α (2) where XRT j, is he value of he Ausralian dollar in erms of counry j currency a ime ; INT j, he difference in 90-day ineres raes of counry j and Ausralia a ime ; GDP j, he raio of he real economic aciviy level in counry j o Ausralia a ime ; x j, residual exchange rae facor for counry j currency a ime ; α 0 -α 2 are regression coefficiens for counry j. The exchange rae facor used in Equaion 1 is he residual exchange rae facor, x j,, defined in Equaion 2. Recen sudies have also modified he radiional capial marke model o allow an asymmeric sensiiviy of reurns o exchange rae risk. Miller and Reuer (1998) and Koumos and Marin (2003) argue ha sock reurns likely respond differenly o currency appreciaion and depreciaion. Koumos and Marin (2003) find ha asymmeric exposure is common in he financial secor. Since our samples are banks, we would also like o employ an asymmeric version of he radiional capial marke model, which includes a dummy variable o capure he poenial asymmeries. When X > 0, hen D = 1. The significance of shows he asymmeric exposure: β D, X R = β ) + 0 + β m Rm, + ( β X + β D, X D X ε (3) The correlaion marix among independen variables in Equaions 1-3 is shown in Table 2. The resuls of he regressions using Equaions 2 and 1, which have been correced for heeroskedasiciy whenever necessary, are presened in Tables 3 and 4. Before running 12
Equaion 2, we used he Dickey and Fuller (1979) uni roo es o check he saionariy of he daa and found he daa series of foreign exchange, ineres and real GDP differenials o be non-saionary, as were he residuals of he regressions. We herefore ook a firs difference of all variables and re-ran Equaion 2 as a resul of which he residuals become saionary. Resuls from hese regressions are repored in Table 3, which show ha, looking a quarerly daa, a high proporion of exchange rae variabiliy can be accouned for by macroeconomic facors. [Inser Tables 2 (2.1-2.3), 3 and 4 Here] The residuals from Equaion 2 are hen used in Equaion 1 o invesigae he foreign exchange effecs on he bank sock reurns. We run Equaion 1 for all nine banks. For each bank, here are four regressions, including hree regressions wih hree foreign exchange facors respecively and one wih all hree facors ogeher. Full resuls are repored in Table 4, and we noe ha he marke index has a significan posiive impac on he bank reurns, excep for Bank of Queensland 6. However, in all individual foreign exchange facor regressions, he coefficiens of he foreign exchange facors are insignifican, wih no difference beween he major four banks and five regional banks. When puing all hree foreign exchange facors ogeher in he same regression, he New Zealand dollar facor has some impac on Adelaide Bank and Wespac. The P-values for he wo coefficiens are 9.69% and 2.39% respecively. Due o he reasonably high correlaion beween US Dollar effec and Serling Pound effec, we need o view hese resuls wih 6 The Bank of Queensland has been subjec o some aciviy by large invesors, which would be likely o accoun for he differences in is share price performance relaive o he wider marke. 13
cauion. Moreover, because we have run a oal of 36 regressions, chance is likely o cause some o appear o be significan, even if here were no valid relaionships in realiy. 7 The adjused R 2 saisics for he regressions repored in Table 4 are, excep for Wespac, all below 0.3, and in Wespac s case he highes adjused R 2 repored was 0.441. A significan proporion of he variabiliy in banks sock reurns is hus no explained, and may hus be aribuable o ineres rae levels, bank-performance specific facors, ec. Because here is a corpus of lieraure (e.g. Samuelson, 1945 and Flannery & James, 1984) ha has looked a he impac of ineres raes on banks share prices, we ried including ineres rae reurns as an addiional explanaory variable in our regression analyses (Equaion 1). Ineres rae facors were no in general found o be significan, and here was no clear improvemen in he explanaory power of our new regressions. We also sough o use Equaion 3 o es he asymmeric exposure of he hree currencies on he bank sock reurns. However, when we explored he correlaions among he independen variables, we found ha each foreign exchange residual and he produc of he residual and he dummy variable are highly correlaed (Table 2.3). Therefore, we could no use Equaion 3 o furher our sudy. 6. Discussion and conclusions The findings of our research are surprising. There is no evidence ha he marke reacs o he changing value of bank asses held ouside of Ausralia for he four major Ausralian banks. 7 On he oher hand, unil 2003, Wespac was he bank wih he larges proporion of is asses in New Zealand, alhough is figures were no much larger han for ANZ. Adelaide Bank has no a any sage had any New Zealand business. 14
The basic heoreical proposiion ha we seek o explore is he porfolio heory of he inernaional expansion of banks, which suggess ha banks expand inernaionally o diversify heir risks, and o reduce heir relaive exposure o heir home counry markes. I also enails a view of banks as a porfolio of businesses operaing in differen counries, and ha banks marke values should reflec he inernaional composiion of heir porfolios, wih share values rising (and posiive sock reurns) as he home counry s currency weakened agains hose of he foreign counries in which he bank invesed. In presening our research hypohesis in Secion 3 of he paper, however, we idenified a number of poenial oucomes, no dependen on he porfolio heory of he inernaional expansion of banks. We suggesed ha banks migh no hedge heir currency exposures, and ha markes are efficien, in which case a srenghening of ha currency relaive o he Ausralian dollar would resul in an increase in he bank s relaive share price (refleced in posiive sock reurns). Alernaively, if banks hedged heir foreign currency posiions, we would expec no relaionship o be eviden. The hird possibiliy is ha share markes failed o adequaely reflec informaion abou he currencies o which he banks are exposed. Review of he banks repored risk managemen policies and he commenary provided by he Reserve Bank of Ausralia boh sugges ha banks do no hedge heir srucural foreign exchange exposures arising from heir inernaional business operaions. This would herefore sugges ha markes are no efficienly pricing he shares of Ausralian banks. We also need o look for ways in which our analysis could be exended, wih he objecive of seeking ou any weaknesses in our approach. The period from 1997 o 2007 (as covered by his research) has been a remarkably posiive one for he Ausralian economy in general, and 15
for he banks. Banks have also enjoyed posiive oucomes in New Zealand. Differen resuls migh be found if here were o be some less benign economic experience. I would also be ineresing o look a banks from oher counries which have underaken significan inernaional expansion. Marin & Mauer (2005) have applied an approach similar o his one o look a a group of Unied Saes banks, bu i would also be possible (and meaningful) o look a banks from Canada, he Unied Kingdom, Spain and a number of oher counries whose banks have expanded ino differen currency areas. 16
References: Becker, C., Debelle, G., Fabbro, D., 2005. Ausralia s foreign currency exposure and hedging pracices. Reserve Bank of Ausralia Bullein December, 1-8. Carew, E., 1997. Wespac: The Bank ha Broke he Bank. Sydney: Doubleday. Cho, K.R., 1985. Mulinaional banks: Their ideniies and deerminans. Ann Arbor: UMI Research Press. Dickey, D.A., Fuller, W.A., 1979. Disribuion of he esimaors for auoregressive ime series wih a uni roo. Journal of he American Saisical Associaion 74, 427-431. Flannery, M.J., James, C.M., 1984. The effec of ineres rae changes on he common sock reurns of financial insiuions. Journal of Finance 39(4), 1141-1153. Goldberg, L.G., Kabir, R., 2002. The sock marke performance of he cenral banks of Belgium and Japan. Journal of Economics and business 54, 137-152. Grosse, R., Goldberg, L.G., 1991. Foreign bank aciviy in he Unied Saes: an analysis by counry of origin. Journal of Banking and Finance 15, 1093-1112. Hulman, C.W., McGee, L.R., 1989. Facors affecing he foreign banking presence in he U.S. Journal of Banking and Finance 13, 383-396. Koumos, G., Marin, A.D., 2003. Asymmeric exchange rae exposure: heory and evidence. Journal of Inernaional Money and Finance 22, 365-383. Marin, A.D., Mauer, L.J., 2005. A noe on common mehods used o esimae foreign exchange exposure. Journal of Inernaional Financial Markes, Insiuions and Money 15, 125-140. Miller, K.D., Reuer, J.J., 1998. Asymmeric corporae exposures o foreign exchange rae changes. Sraegic Managemen Journal 19, 1183-1191. Moshirian, F., Pham, T., 1999. Cos of capial and Ausralia s banking invesmen abroad. Applied Financial Economics 9, 295-303. Moshirian, F., 2001. Inernaional invesmen in financial services. Journal of Banking and Finance 25, 317-337. Robinson, D., 1990. Aussie charmers nab he profis. Euromoney Augus, 44-45. Samuelson, P.A., 1945. The effec of ineres rae increases on he banking sysem. American Economic Review March, 16-27. Saff, 2000. Foreign exchange exposures of Ausralian banks. Reserve Bank of Ausralia Bullein Augus, 43-49. 17
Saff, 2002. Ausralia s foreign currency exposure and hedging pracices. Reserve Bank of Ausralia Bullein Augus, 56-60. Tripe, D., Mahews, C., 2003. The inernaional expansion of Ausralian banks. In Lőnnborg, M; Olsson, M.; Raffery, M. & Nalson, I (eds), Money and Finance in Transiion. Huddinge, Sweden: Sőderőrns hőgskola. 155-180. Wilkins, S., 2003. The inernaional diversificaion of Ausralian banks. In Lőnnborg, M: Olsson, M.; Raffery, M. & Nalson, I (eds), Money and Finance in Transiion. Huddinge, Sweden: Sőderőrns hőgskola. 181-196. Williams, B., 1997. Posiive heories of mulinaional banking: eclecic heory versus inernalisaion heory. Journal of Economic Surveys 11(1), 71-100. 18
Figure 1: Percenage of Asses Ouside Ausralia Four Major Ausralian Banks Figure 1 shows ha he four major Ausralian banks all have significan operaions ouside Ausralia, which implies ha hey have long-erm foreign exchange exposure due o he high proporion of offshore asses and business. Figure 1: Percenage of Asses Ouside Ausralia - Major Ausralian Banks 60% 50% 40% 30% ANZ CBA NAB Wespac 20% 10% 0% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 19
Table 1: Saisical Summary of Variables in he Sudy Table 1 provides he saisical summary for he variables in our sudy. The variables include he sock reurns of four major Ausralian banks (ANZ, NAB, CBA and Wespac) and five Ausralian regional banks (Adelaide Bank, Bank of Queensland, Bendigo Bank, S George Bank, and Suncorp-Meway); he ASX200 marke index reurns; hree exchange raes (AUD/USD, AUD/GBP, and AUD/NZD); he difference beween he 3-monh iner-bank raes of New Zealand, US, UK and Ausralia; and he raio of he real GDP of New Zealand, US, UK and Ausralia. Since we use GDP figures, he frequency of our daa is quarerly. The sample period is from 1 Jan 1997 o 31 March 2007. Mean Median SD Min Max ADB 0.037 0.027 0.074-0.083 0.194 BOQ 0.036 0.040 0.078-0.132 0.169 SGB 0.048 0.038 0.068-0.056 0.177 BEN 0.041 0.038 0.108-0.207 0.254 SUN 0.052 0.071 0.084-0.152 0.235 ANZ 0.045 0.045 0.085-0.140 0.282 NAB 0.035 0.047 0.080-0.219 0.241 CBA 0.047 0.054 0.076-0.160 0.185 WBC 0.041 0.046 0.079-0.138 0.248 ASX200 0.032 0.033 0.052-0.090 0.109 AUD/NZD 0.858 0.864 0.045 0.770 0.938 AUD/GBP 2.537 2.527 0.200 2.076 2.882 AUD/USD 1.547 1.532 0.232 1.280 1.984 Iner-bank (NZ-A) 0.998 1.010 1.070-0.620 3.960 Iner-bank (US-A) -1.380-1.069 1.795-4.820 0.910 Iner-bank (UK-A) -0.110-0.305 1.308-1.794 2.611 Real GDP (NZ/A) 0.120 0.120 0.007 0.108 0.132 Real GDP (US/A) 19.137 19.010 2.931 15.510 24.766 Real GDP (UK/A) 3.340 3.307 0.267 2.824 3.801 20
Table 2: Correlaions Marix of Independen Variables in he Sudy from 1 January 1997 o 31 March 2007 Table 2.1: This able shows he correlaion marix among all independen variables in Equaion 2. Since here are hree regressions involved in Equaion 2, only he hree numbers wih sars are relevan o es wheher here is any mulicollineariy in each of he hree regressions. The resuls show ha here is no mulicollineariy in each of he hree regressions using Equaion 2. NZ, US, UK and A sand for New Zealand, he US, he UK and Ausralia. NZ-A US-A UK-A NZ/A US/A UK/A Iner bank (NZ-A) 1.000 Iner bank (US-A) 0.340 1.000 Iner bank (UK-A) 0.496 0.751 1.000 Real GDP (NZ/A) 0.266* -0.494-0.252 1.000 Real GDP (US/A) -0.147 0.197* 0.264-0.649 1.000 Real GDP (UK/A) -0.173 0.064 0.200* -0.572 0.907 1.000 Table 2.2: This able shows he correlaion marix among all independen variables in Equaion 1. When running Equaion 1, we have four regressions for each bank. The firs hree regressions include he independen variables of ASX200 index reurns and one of he residuals showing he foreign exchange facor. The fourh regression includes he independen variables of ASX200 index reurns and all hree foreign exchange residuals. RENZ, REUK and REUS sand for residuals of NZD, GBP and USD. For individual foreign exchange facor regressions, he correlaions are low enough o avoid mulicollineariy. However, since he correlaion beween Serling Pound residual and US dollar residual is 0.6, we need o analyse he regression consising all hree foreign exchange facors wih cauion. ASX200 RENZ REUK REUS ASX200 1.000 RENZ -0.052 1.000 REUK -0.290 0.433 1.000 REUS -0.144 0.336 0.604 1.000 Table 2.3: This able shows he correlaion marix among all independen variables in Equaion 3. D sands for he dummy variable showing he asymmery effec of foreign exchange movemen. Due o he very high correlaions among he independen variables, we can no use Equaion 3 o es he asymmeric foreign exchange exposure on bank sock reurns. RENZ REUK REUS RENZ*D REUK*D REUS*D ASX200 RENZ 1.000 REUK 0.433 1.000 REUS 0.336 0.604 1.000 RENZ*D 0.858 0.308 0.254 1.000 REUK*D 0.139 0.816 0.422 0.096 1.000 REUS*D 0.141 0.404 0.753 0.170 0.413 1.000 ASX200-0.052-0.290-0.144-0.165-0.412-0.288 1.000 21
Table 3: Regression Resuls on Unexpeced Facors of Foreign Exchanges Table 3 shows ha regression resuls on Equaion 2. XRT j, = α 0 + α1int j, + α 2GDPj, + x j, where XRT j, is he value of he Ausralian dollar in erms of counry j currency a ime (in our sudy, hey are AUD o NZD, AUD o GBP and AUD o USD); INT j, he difference in 90-day ineres raes of counry j and Ausralia a ime ; GDP j, he raio of he real economic aciviy level in counry j o Ausralia a ime. In order o solve he non-saionary problem of daa series, we ake he firs difference of all variables and obain he following resuls. Consan INT GDP Adjused R-square Durbin- Wason sa AUD/NZD 0.001-0.0002 7.015 0.915 2.349 (0.776) (-0.111) (20.555)*** AUD/GBP 0.004-0.001 0.737 0.981 1.999 (1.944)* (-0.278) (28.245)*** AUD/USD 0.001-0.011 0.077 0.987 1.751 (0.885) (-2.743)*** (31.736)*** Noes: The numbers in he parenheses are -saisics. *, **, and *** denoe saisical significance a he 10%, 5%, and 1% level, respecively. 22
Table 4: Regression Resuls on Foreign Exchange Exposure of Ausralian Banks Table 4 shows he resuls on Equaion 1: R = 0 + β m Rm, β + β X + ε X where R is he sock reurn adjused for dividend and righ issues for ime of nine banks; R m, he marke index reurn (ASX200) for ime ; X he exchange rae facor for ime which are he residuals from Equaion 2. RENZ, REUK and REUS sand for residuals of NZD, GBP and USD. We run he Equaion 1 for all nine banks. For each bank, here are four regressions, including hree regressions wih hree foreign exchange facors respecively and one wih all hree facors ogeher. The numbers in he parenheses are -saisics. *, **, and *** denoe saisical significance a he 10%, 5%, and 1% level, respecively. Consan ASX200 RENZ REUK REUS Adjused R-square Durbin- Wason Sa ANZ 0.017 0.875-0.601 0.253 2.648 (1.257) (3.853)*** (-0.409) 0.020 0.802-0.968 0.276 2.581 (1.432) (3.437)*** (-1.153) 0.017 0.873-0.303 0.251 2.609 (1.257) (3.802)*** (-0.217) 0.020 0.795 0.066-1.340 0.980 0.241 2.629 (1.412) (3.318)*** (0.040) (-1.190) (0.557) NAB 0.013 0.699 1.664 0.184 2.202 (1.025) (3.412)*** (0.942) 0.012 0.741 0.687 0.169 2.333 (0.841) (3.152)*** (0.811) 0.013 0.704 0.743 0.161 2.364 (0.933) (3.078)*** (0.533) 0.012 0.724 1.422 0.339-0.037 0.140 2.239 (0.865) (3.013)*** (0.858) (0.300) (-0.021) CBA 0.023 0.775 1.006 0.247 2.399 (1.857)* (3.807)*** (0.764) 0.022 0.803 0.452 0.242 2.460 (1.756)* (3.769)*** (0.589) 0.024 0.747-0.828 0.244 2.370 (1.920)* (3.630)*** (-0.660) 0.022 0.802 1.019 0.941-2.067 0.244 2.344 (1.758)* (3.751)*** (0.691) (0.938) (-1.317) WBC 0.010 0.977 1.861 0.398 2.312 (0.875) (5.125)*** (1.510) 0.012 0.900-0.768 0.380 2.290 (1.059) (4.457)*** (-1.057) 0.012 0.930-1.350 0.383 2.208 (0.990) (4.773)*** (-1.136) 0.014 0.868 3.136-1.106-1.267 0.441 2.287 (1.204) (4.509)*** (2.361)** (-1.223) (-0.897) 23
(Table 4 coninued) Consan ASX200 RENZ REUK REUS Adjused R-square Durbin- Wason Sa ADB 0.019 0.588 1.986 0.166 2.020 (1.483) (2.824)*** (1.476) 0.020 0.554-0.221 0.118 1.946 (2.076)** (2.483)** (-0.299) 0.019 0.582 0.435 0.119 1.984 (1.984)* (2.714)*** (0.399) 0.021 0.518 2.592-1.142 0.727 0.148 1.966 (1.622) (2.350)** (1.706)* (-1.104) (0.449) BOQ 0.026 0.315 1.496 0.014 2.017 (1.829)* (1.320) (0.971) 0.026 0.307 0.060-0.011 2.110 (1.800)* (1.221) (0.067) 0.027 0.284-0.761-0.004 2.148 (1.874)* (1.172) (-0.514) 0.027 0.292 1.933 0.103-1.474-0.020 2.049 (1.824)* (1.148) (1.104) (0.086) (-0.791) SGB 0.027 0.656 1.130 0.221 2.018 (2.447)** (3.537)*** (0.942) 0.027 0.657 0.122 0.203 1.979 (2.387)** (3.355)*** (0.173) 0.027 0.664 0.719 0.211 2.002 (2.402)** (3.523)*** (0.625) 0.028 0.638 1.208-0.474 0.798 0.185 2.026 (2.411)** (3.206)*** (0.881) (-0.508) (0.547) BEN 0.019 0.699 0.680 0.066 2.035 (0.988) (2.171)** (0.327) 0.016 0.786 1.147 0.086 2.102 (0.844) (2.364)** (0.959) 0.019 0.700 0.303 0.064 2.098 (0.982) (2.154)** (0.153) 0.016 0.794-0.110 1.626-1.245 0.041 2.123 (0.810) (2.323)** (-0.047) (1.013) (-0.496) SUN 0.027 0.769 1.884 0.211 2.028 (1.987)* (3.349)*** (1.268) 0.027 0.770 0.201 0.178 2.086 (1.921)* (3.148)*** (0.228) 0.027 0.783 1.225 0.192 2.170 (1.928)* (3.339)*** (0.856) 0.029 0.738 2.012-0.808 1.374 0.182 2.076 (1.996)* (3.011)*** (1.190) (-0.702) (0.764) 24