The latest edition of our weekly finance and property news digest with a distinctively Australian flavour.
Contents:
00:22 Introduction
01:20 US Trade War
02:30 US Data and Markets
03:40 US Debt Growing Too Fast Says Fed
05:30 Repo and QE
07:40 Europe
08:20 Germany Financial Stability
10:50 China Another Bank Bailed Out
11:50 OECD Growth Lower
14:55 Australian Segment 14:55 OECD On Australia 19:10 Westpac MI Index 20:30 Inflation Expectations 21:10 NAB Household Debt 21:30 Housing Affordability 25:10 Home Prices and Auctions 26:32 Markets 26:50 Westpac and AUSTRAC 28:00 RBA. Unconventional Monetary Policy, and Negative Rates
The Australian Prudential Regulation Authority (APRA) has released for consultation a response letter and draft prudential standard on the leverage ratio requirement for authorised deposit-taking institutions (ADIs).
This consultation sets out APRA’s response to industry’s previous submissions and also incorporates changes by the Basel Committee on Banking Supervision to the international standard.
The proposals outlined in this letter relate solely to the leverage
ratio requirement for ADIs that apply the internal ratings-based (IRB)
approach to credit risk.
Subsequent to APRA’s November 2018 consultation, the Basel Committee
released a revised leverage ratio standard that amended the treatment of
client cleared derivatives. The revised treatment allows banks to apply
the standardised approach to measuring counterparty credit risk
(SA-CCR) to its client exposures. This amendment seeks to ensure that
the leverage ratio does not discourage banks from providing client
clearing services.
APRA is proposing to adopt the Basel Committee’s revised treatment
for client cleared derivatives. The amendments that would give effect to
this proposal are marked-up in the accompanying draft revised APS 110.
The calculation of the leverage ratio as a minimum capital
requirement requires IRB ADIs to calculate counterparty credit risk for
derivative exposures using a modified version of SA-CCR. This approach
is different to the current calculation of the leverage ratio for public
disclosure, which requires the use of the current exposure method
(CEM).
APRA will allow IRB ADIs to adopt modified SA-CCR early for the
purpose of their leverage ratio disclosures under Prudential Standard
APS 330 Public Disclosure. IRB ADIs that intend to adopt modified SA-CCR
early will need to seek APRA’s prior approval. For this purpose, an ADI
must provide APRA with an outline of the implementation process and
testing conducted to ensure that the early adoption of modified SA-CCR
has been implemented correctly. The ADI must also provide a waterfall of
its leverage ratio exposure measure calculation using modified SA-CCR
that can be reconciled against its SA-CCR calculations under the
risk-based capital framework. Where APRA is satisfied with the ADI’s
implementation, it will provide the ADI with written approval to adopt
modified SA-CCR early.
Those IRB ADIs that adopt early will be required to state that they
are using modified SA-CCR in their public disclosures. This is a
transitional issue that will be resolved from 1 January 2022, at which
time all IRB ADIs will be required to use modified SA-CCR to meet both
the minimum capital and public disclosure leverage ratio requirements.
We ran our regular live event last night. This is the high quality edited edition, including some behind the scenes footage.
We discussed our scenarios on property prices and other economic metrics over the next couple of years as well as a range of other important questions from the community.
The original recording of the pre-show, show and live chat is also available here. The formal show begins at 32:30.
The New Zealand Reserve Bank has increased its supervisory monitoring of the Bank of New Zealand (BNZ) and applied precautionary adjustments to its capital requirements following the identification of weaknesses in BNZ’s capital calculation processes.
BNZ identified a number of
errors while undertaking a programme of remediation, which began in early 2018
and is expected to continue into 2020. These included three capital calculation
errors, which resulted in misreported risk weighted assets over a number of
years.
It is now required to
increase the risk weight floor of its operational risk capital model from $350
million to $600 million capital. The $250m increase is a supervisory capital
overlay.
The Reserve Bank requires
banks to maintain a minimum amount of capital, which is determined relative to
the risk of each bank’s business. BNZ has not been in breach of minimum capital
requirements at any point.
“However given the
likelihood that further compliance issues will be discovered during the review
and remediation, the Reserve Bank regards a precautionary capital adjustment as
prudent,” Deputy Governor Geoff Bascand says.
In 2017, the Reserve Bank
conducted a review of bank director attestation processes and noted that many
banks were attesting to compliance on the basis of negative assurance, ie they
did not have evidence to suggest that they were not in compliance.
Breaches are now being
identified as banks review their governance, control and assurance processes
and move from a negative assurance to a positive evidence-based assurance
framework. Over the past year, a number of banks have disclosed breaches of
their conditions of registration, Mr Bascand says. Many of these have related
to errors in the calculation of their regulatory capital or liquidity which, in
some cases, have gone undetected for a number of years.
“We are reassured by BNZ’s response to the issues along with the independent oversight from PWC,” Mr Bascand says. “BNZ has committed to providing the Reserve Bank with regular and timely updates of the details of issues as they are discovered and the remedial activity as this work progresses. “The additional capital overlay will be removed when remediation is complete. It is the Reserve Bank’s expectation that the current review will identify all outstanding compliance issues and potential breaches.”
We will run our monthly live stream event tomorrow, Tuesday 19th November 2019 at 20:00 Sydney. You can ask questions live in the chat, or send them to me beforehand before event via this blog.
A slowdown in global dividend growth is underway, according to the latest Janus Henderson Global Dividend Index (JHGDI). The trend began in the second quarter and continued in the third. Even at their slower pace, dividends are still growing comfortably, however.
Australia saw a big decline in dividends, with two fifths of companies in the index cutting dividends. The total dropped to $18.6bn, the lowest Q3 total since 2010 in US dollar terms, down 5.9% on an underlying basis. The biggest impact came from National Australia Bank, which made its first dividend cut in a decade, and Telstra. Australia already has the lowest dividend cover in the world among the bigger economies.
Globally, payouts rose 2.8% on a headline basis to reach a new third-quarter record of $355.3bn, equivalent to an underlying growth rate of 5.3% once the stronger dollar and minor technical factors were taken into account. This is exactly in line with the long-term trend, and Janus Henderson’s forecast. The Janus Henderson Global Dividend Index rose to 193.1, a new record.
Only US dividends reached an all-time record in Q3, up 8.0% on an underlying basis, well ahead of the global average. A slowdown in profit growth is however beginning to impact dividend payments. A rising proportion of US companies held their dividends flat – one in six companies in Q3, up from one in ten in Q1, though there remain few outright cutters. The largest dividend payer in the US this year will be AT&T, jumping ahead of Apple, Exxon Mobil and Microsoft. AT&T’s return to the top spot for the first time since 2012 is thanks to its acquisition of Time Warner in 2018; the combined company will distribute close to $14.9bn, though this will not be enough to dislodge Shell as the world’s largest payer for the fourth year in a row.
Allowing for seasonality Japan, Canada and the
United Kingdom all saw third-quarter records, though in the UK’s case this was
entirely due to very large special dividends from banks and miners. The
underlying trend in the UK remains lacklustre with underlying growth of just
0.6%.
From a seasonal perspective, Q3 is especially
important for Asia Pacific and China. Here there were distinct signs of
weakness. Almost half the Chinese companies in the index reduced their payouts,
and the modest growth that was achieved was dependent on big increases from one
or two companies. Chinese dividends totalling $29.2bn crept ahead 3.7%
year-on-year on an underlying basis and without Petrochina’s large increase,
they would have been lower year-on-year. The slowdown in the
Chinese economy is affecting the dividend-paying
capacity of its companies, particularly since in the short-term dividends are
more closely tied to profits in China than in other parts of the world such as
the US and UK due to companies largely adopting a fixed payout-ratio policy.
Across Asia-Pacific, Australia and Taiwan led
payouts lower, and only Hong Kong delivered strong growth. It was a difficult
quarter in Australia with two fifths of companies in the index cutting
dividends. The total dropped to $18.6bn, the lowest Q3 total since 2010 in US
dollar terms, down 5.9% on an underlying basis. The biggest impact came from
National Australia Bank, which made its first dividend cut in a decade.
Australia already has the lowest dividend cover in the world among the bigger
economies, so if the slowing domestic economy leads to a decline in corporate
profitability, it will be bad news for income investors, highlighting the
importance of taking a diversified global investment approach. Hong Kong’s
payouts jumped 8.1% on an underlying basis, contrasting with the mainland
trend. This was mainly due to dividends from oil company CNOOC and from the
real estate sector.
Q3 marks the seasonal low point for European
dividends. They rose 7.0% on an underlying basis, though the growth rate was
flattered by positive developments at just a few companies, and the total will
not be enough to affect the annual rate significantly.
The energy sector saw the strongest growth in
Q3, with dividends up by just over a fifth on an underlying basis. Most of this
came from Russian oil companies, but China and Hong Kong, Canada and the United
States also made a significant contribution to the increase. Basic materials
headline growth was boosted by special dividends, but telecoms companies around
the world were dogged by cuts, with the biggest impact from Vodafone in the UK,
China Mobile and Telstra in Australia. Only just over half of the telcos in the
index increased their payouts year-on-year.
Janus Henderson has left its $1.43trillion
forecast for global dividends unchanged for 2019. This represents a headline
increase of 3.9%, equivalent to underlying growth of 5.4%. By contrast 2018 saw
underlying growth of 8.5%. 2019 will mark the tenth consecutive year of
underlying growth for dividends.