Engineering A Boom – Or Not – The Property Imperative Weekly 23rd November 2019

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

APRA consults on further amendments to the ADI leverage ratio

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 consultation letter and draft prudential standard are available on the APRA website at https://www.apra.gov.au/leverage-ratio-requirement-for-authorised-deposit-taking-institutions

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. 

DFA Live Property And Finance Q&A 20 Nov 2019 And Updated Scenarios

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.

Reserve Bank Increases Its Supervision of BNZ

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.”

Marked Slowdown In Dividends in Q3

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.

Auction Results 16 Nov 2019

Domain released their preliminary results for today.

The latest results continue the high clearance rates, with volumes now tracking closely to those a year ago (when momentum had ebbed away).

Canberra listed 66 auctions, reported 54 and sold 39, with 3 withdrawn and 15 passed, giving a Domain clearance of 68%.

Brisbane listed 86 auctions, reported 34 and sold 15, with 14 withdrawn and 5 passed in, giving an Domain clearance of 38%.

Adelaide listed 93 auctions, reported 32 and sold 27, with 14 withdrawn and 5 passed in, giving a Domain clearance of 59%.

DFA’s additional calculation:

Interestingly, the number of auctions advertised before the day was around 480, compared with the 763 reported in Sydney.