The latest edition of our weekly finance and property news digest with a distinctively Australian flavour.
Contents
0:20 Introduction
1:05 Live Stream 19th Nov
1:30 US
2:00 US China Trade
2:50 US Economy
3:10 CASS Shipping
4:40 Fed Policy
5:20 US Markets
07:57 Hong Kong
8:25 UK
09:35 New Zealand
11:22 Australian Section
11:23 Employment
12:00 Wages
13:20 Sentiment
14:00 Home Prices
17:18 Auctions
17:50 Pay Day Research
19:10 Insolvencies
20:00 RBA on Mortgage Arrears
22:35 Australian Markets
November Live stream: https://youtu.be/dMaixx5Sf34
The latest on the Cash Restrictions Bill – with Treasury hiding a key submission from KPMG, the architect of the ban… I discuss with Robbie Barwick from the Citizens Party.
Something happened late last week, which superficially might
be attributed to positive news on the US China trade talks (later downplayed by
Trump) but it was wider and more significant than that.
In recent months many traders have been positioning for a
significant market correction, and potentially a US or global recession. Thus, risk
stocks were downplayed, while bonds and gold were all the rage.
This drove the yields on bonds down, to the point where in several
countries, like Germany they went negative, and at its peak, it was estimated
that around $17 trillion of bonds were effectively underwater. A couple of
weeks back, we pointed out that Gold had shot ahead of itself, and that the
Gold futures meant it would slide. It did, falling by more than $30 an ounce.
The 10-year US Treasury yield rose on Friday to 1.94%. up nearly 50 basis points from the lows at the end of August. Remember that the Fed cut its interest rate target twice, by a total of 50 basis points, and short-term Treasury yields have fallen by about that much. With the one-month yield now down to 1.56% and the 10-year yield up at 1.94%, the yield curve has un-inverted and steepened. Recession has been postponed, for now.
Germany’s 30-year bonds are interesting in that they tried
to sell them at a negative yield of -0.11% on August 21, with a 0% coupon – so
no interest payments for 30 years – and at a premium, in order to achieve the
negative yield of -0.11%. While €2 billion of these bonds were offered, only
€824 million were sold. And those investors may rue the day they bought.
This suggests the bank still thinks monetary policy – in this case
lowering interest rates to stimulate the economy – could help “support
sustainable growth in the economy, full employment and the achievement
of the medium-term inflation target”.
But in the wake of the bank last month lowering the official interest
rate to a record low and the current somewhat sad state of the
Australian economy, many commentators have speculated that monetary policy doesn’t work any more.
Is that right?
Reserve Bank cash rate
There are a number of variants of the “monetary policy doesn’t work”
argument. The most basic is that the Reserve Bank has this year cut
rates from 1.50% to 0.75% without any improvement to the Australian
economy.
This is a textbook example of one of the classic logic fallacies known as “post hoc ergo propter hoc” (from the Latin, meaning “after this, therefore because of this”).
Put simply, it assumes the rate cuts have had no effect and doesn’t
account for the possibility things might have been worse had there been
no cuts.
Things might have been even worse. We’ll never know.
It also ignores what might have happened if the RBA had cut sooner.
Again, we can’t know for sure. It is possible, though, to make an
educated guess.
When to cut rates
Had Reserve Bank governor Philip Lowe acted, say, 18 months earlier
to cut rates, he would have signalled that Gross Domestic Product growth
was indeed lower than desired, that the sustainable rate of
unemployment was more like 4.5% than 5%, and, most importantly, that he
understood the need to act decisively.
That would have sent a powerful signal.
It would also have ameliorated the huge decline in housing credit
that pushed down housing prices in Sydney and Melbourne by double
digits.
That, in turn, would have prevented some of the weakening in the
balance sheets of the big four banks that has occurred (witness this
annual general meeting season).
All of this would have pumped more liquidity into the economy and put
households in a much stronger position, likely leading to stronger
consumer spending than we have seen.
It is true there is a problem
with banks not being able to cut deposit rates below zero, and as a
result having less scope to cut mortgage rates, which are majority
funded from deposits.
But there are, of course, other ways monetary policy can work. The leading example is quantitative easing (QE).
This is where the central bank pushes down long-term interest rates
by buying government and corporate bonds. At the same time this expands
the money supply, thereby adding some upward inflationary pressure.
There is little reason to think such measures wouldn’t work.
The power of free money
Perhaps paradoxically, the closer interest rates get to zero the more powerful those rates may end up being.
To put it bluntly, if someone shoves a pile of money into your hand
and asks almost nothing in return, you’re likely to use it. In fact, you
would be pretty silly not to.
You might decide to redraw that and spend the money on a home
renovation or some other productive purpose. Or you might decide to buy a
more expensive house.
Such spending provides an economic boost.
The effect is all the more pronounced if people expect interest rates
to be low for a long period of time. Aggressive cutting coupled with
quantitative easing – which lowers long-term rates – signal just that.
But not only monetary policy
Just because monetary policy still has some effect at near-zero rates
doesn’t mean we should pin all of our economic hopes to it.
A near consensus of economists have argued repeatedly for the use of
more aggressive fiscal policy – including more infrastructure spending
and more tax cuts.
Indeed, Philip Lowe has raised eyebrows by speaking so forthrightly on this issue. That doesn’t make him wrong, though.
There is little doubt the Reserve Bank should have acted much earlier
to cut official interest rates. There is also a very good chance it
will need to begin to use other measures such as quantitative easing in
the relatively near future.
All of that says the Australian economy, like most advanced economies around the world, is in bad shape.
But it doesn’t mean monetary policy has completely run out of puff.
Author: Richard Holden, Professor of Economics, UNSW
The latest edition of our weekly finance and property news digest with a distinctively Australian flavour.
Contents:
00:24 Introduction
1:23 US China Trade Talks
3:04 US Markets
6:15 China
7:50 Australian Section
7:55 RBA on Monetary Policy
10:50 Household Confidence
11:10 Lending
11:40 REA
14:50 High Rise Construction
15:30 Property Market
16:20 Auctions
16:50 Bank Profit Results
17:50 Australian Markets
Nab reported a 13.6% fall in statutory net profit for 2019, at $4,798 million, compared with $5,702 million last year. Along with ANZ and Westpac, it is the same story of a massive hit from customer remediation (past results inflated by milking customers, and many customers still require remediation), margin compression, not helped by lower cash rates, weak loan growth, and higher mortgage delinquency and provisions. And again they expect 2020 to be a weak year economically speaking. So no growth story here.
Revenue was down 4.2%, although they at pains to point out that excluding customer-related remediation, revenue rose 1.1% mainly reflecting growth in business lending partly offset by lower margins. Of course they dismiss many of the writes-downs as a one-off, and there will be some “putting the trash out” as the new CEO takes up the reigns. $2,092 million for customer remediation all up, is a big number, and not yet final. But do not be misled, the underlying business is under extreme pressure, and competition for the meager loan volumes is intense.
Net Interest Margin (NIM) declined 7 basis points (bps) to 1.78%. Excluding Markets and Treasury and customer-related remediation, NIM declined 4bps with home lending competition an important driver.
Expenses rose 0.2%. Excluding large notable items, expenses were up 0.4% with productivity benefits and lower performance based compensation largely offsetting higher investment and increased spend to strengthen the compliance and control environment.
But the revenue excludes customer-related remediation $1,207m in FY19, $249m in FY18. Expenses excludes: customer-related remediation $364m in FY19, $111m in FY18; capitalised software policy change $494m in FY19; restructuring-related costs $755m in FY18.
In cash earnings terms, they fell by 10.6%, from $5,702 million in 2018 to $5,097 in 2019.
FY19 cash earnings includes charges of $1,100 million after tax for additional customer-related remediation. During FY19 they uplifted customer remediation practices with more than 950 people (including NAB employees and external resources) solely dedicated to remediating customers.
In combination with provisions raised in 2H18 which have not yet been utilised, provisions for customer-related remediation as at 30 September 2019 total $2,092 million. They warn that the final cost of such remediation matters remains uncertain.
Cost savings of $480 million were achieved in FY19 bringing total savings since September 2017 to $800 million.
Collective provisions rose to 0.96% of CRWA’s, which equates to $3,360 million.
Whereas specific provisions fell to 39.7%, but were also higher.
Credit impairment charges increased 18% to $919 million, and as a percentage of gross loans and acceptances rose 2bps to 15bps. FY19 charges include $60 million of additional collective provision forward looking adjustments for targeted sectors experiencing elevated levels of risk.
The ratio of 90+ days past due and gross impaired assets to gross loans and acceptances increased 22bps to 0.93%, largely due to rising Australian mortgage delinquencies.
While Australian housing arrears increased further, loss rates for this portfolio is 2bps. Collective provision forward looking adjustments for targeted sectors increased over FY19 and now stand at $641 million. In their scenario testing, they estimate a Peak Net Credit Impairment of $1.8bn in year 2, which equates to 57 basis points, based on an average home price fall of 25.2%
2.4% of mortgages in Australia are above 100% LVR (based on SA3 level CoreLogic data, so not very specific).
The final fully franked dividend of 83 cents per share (cps) has been held stable with the 2019 interim dividend, bringing the total for FY19 to 166 cps. This represents a 16% reduction compared with FY18.
Across the divisions in cash earning terms:
Business & Private Banking $2,840 were down 2.4% on last years, reflecting higher credit impairment, charges and higher investment spend. Revenue increased 1% reflecting good SME business lending growth.
Consumer Banking & Wealth $1,366 were down 11.2% where banking earnings decreased given lower margins with competitive pressures in housing a key driver, combined with increased credit impairment charges.
Wealth earnings also declined reflecting the impact of customer preferences and repricing on margins, and lower average funds under management and administration.
Corporate & Institutional Banking $1,508 down 2.1% reflecting higher credit impairment charges relating to impairment of a small number of larger exposures. Revenue increased 1% despite lower Markets income, with higher lending volumes benefitting from continued focus on growth segments.
New Zealand Banking NZ$1,055m up 5.1% benefitting from growth in lending, partly offset by increased investment spend and higher credit impairment charges.
The Group Common Equity Tier 1 (CET1) ratio is 10.38%, up 18bps from September 2018, and includes $1 billion (25bps) of proceeds received in July from the 1H19 underwritten Dividend Reinvestment Plan and 34bps adverse impact from regulatory changes relating to operating risk and derivative counter party credit risk measurement.
Leverage ratio (APRA basis) of 5.5%
Liquidity coverage ratio (LCR) quarterly average of 126% and Net Stable Funding Ratio (NSFR) of 113%
NAB expects weak credit growth ahead, a GDP result in 202 of around 2% and business confidence also weakened which may dampen business credit growth.