Banks Compete for FX Hedging Business of Australia Pensions
Wall Street banks like Bank of America BAC, Goldman Sachs GS and Citigroup Inc. C are competing to handle oversea investments of Australian pension funds.
Particularly, Australian pension funds are increasingly investing more of their funds overseas, given the limitation of investment options in the small domestic private and public markets. Hence, banks like GS, BAC and C can offer foreign currencies trading services and handle foreign exposure hedging needs of the funds.
In recent years, Australian pension funds’ overseas investments accounted for almost 50% of their holdings. Moreover, the largest pension funds have more than $650 billion in assets invested outside Australia. AustralianSuper and Australian Retirement Trust, the two biggest pension funds in Australia, together oversee around $390 billion. AustralianSuper raised the notional amount of swaps by 53% to A$55 billion ($36 billion) last year, according to data from the fund. Australian Retirement Trust, on the other hand, doubled notional exposure in the derivatives used for FX hedging to A$70 billion over the past five years.
Hence, given the rapid growth of Australia’s pension industry and increasing overseas investments, the demand for banks to manage the risks involved has risen. By helping pension funds manage hedging their overseas investments, banks can increase revenues from global trading operations.
BAC’s management noted increased focus to cater to superannuation clients and higher investment into the same.
Per GS management, “As these funds gain more international exposure in their portfolios, which they will have to as they receive inflows, they will by definition have to think about FX exposure.”
Citigroup’s management noted that super funds are a significant target for the bank, given the expected growth in assets.
Over the past six months, shares of BAC, GS and C have returned 41%, 30.5% and 51.2%, respectively.
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BAC, GS and C carry a Zacks Rank #3 (Hold) each at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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