Mortgage Price War Hots Up

The recent fall in the BBSW has offered a window of opportunity for CBA and Westpac, the two mortgage behemoths to cut fixed rates.

This will put more pressure on smaller players (see BOQ yesterday) and likely trim some deposit rates as pressure on margins accelerates.

This from Australian Broker.

Just days after CBA announced it was cutting its rates and stepping away from its competitors, another big four has matched the changes across the board – and likely triggered a continued decrease in fixed rates at lenders of all sizes.

The newly announced decreases go into effect at Westpac tomorrow for fixed rate loans paying P&I and are open to both new and existing customers switching into a fixed rate.

“As expected, it hasn’t taken Westpac long to match the fixed rate cuts this week from Commonwealth Bank,” said Steve Mickenbecker, Canstar group executive of financial services.

“These decreases are a further sign that the big banks are wanting to fight back to regain the market share losses to the local arms of foreign banks and other domestic lenders over the past 12-months.”

At Westpac, the three- and five-year fixed rates for owner occupiers paying P&I are to decrease by 0.10% while the four-year rate will drop by 0.20%.

Fixed rates will also decrease for investors paying P&I, by 0.06% for two-year, 0.20% for three-year, and 0.10% for five-year, demonstrating “the bank’s desire to increase investment lending in the face of declining demand,” according to Mickenbecker.

Other lenders have already been making moves of their own to stay competitive.

Suncorp has announced a discount for its three-year fixed package rates for eligible new home lending, meaning the non-major currently has the lowest three-year fixed rate in the market at 3.49% for owner occupied and 3.69% for investment.

“We are now eagerly awaiting the response from the other two major banks and the rest of the market, in light of these competitive fixed rates from the country’s two biggest lenders,” concluded Mickenbecker.

Fitch Affirms Australia’s Four Major Banks

Fitch Ratings has affirmed the ratings of Australia’s four major banking groups: Australia and New Zealand Banking Group Limited (ANZ), Commonwealth Bank of Australia (CBA), National Australia Bank Limited (NAB) and Westpac Banking Corporation (WBC). The Outlook on each bank’s Long-Term Issuer Default Rating (IDR) is Stable.

The rating review focuses on the Australian-domiciled entities within each group and therefore does not encompass their overseas subsidiaries.

KEY RATING DRIVERS

VIABILITY RATINGS, IDRS AND SENIOR UNSECURED DEBT
The Long- and Short-Term IDRs and Stable Outlook on all four banks are driven by their Viability Ratings and reflect their dominant franchises in Australia and New Zealand as well as robust regulatory frameworks. Stable, transparent and traditional business models have proven effective in generating consistently strong profitability, while the banks maintained a conservative risk appetite relative to many international peers. High exposure to a heavily indebted household sector and increased focus on conduct related issues from authorities offset some of these strengths.

Australia’s banking regulator has been critical in helping the banking system manage rising macroeconomic risks – including historically high household debt and house prices, low interest rates and subdued wage inflation – through strengthening underwriting standards and increasing capital requirements. This has contributed to improving the banks’ ability to withstand a severe downturn in the housing market and household sector should it occur.

However, a severe downturn is not Fitch’s base case. We expect Australian house prices to remain high relative to international markets, with modest price rises in 2018. Overall, property prices should be supported by low interest rates and population growth. Offsetting this is high household debt, falling rental yields, increasing supply and rising dwelling completions.

Household debt could increase further, driven by historically low interest rates and high house prices, as residential mortgages make up almost 70% of household debt. Household debt reached 188% of disposable income at end-September 2017. Combined with low wage growth and high underemployment, this leaves households increasingly susceptible to higher interest rates and deteriorating labour market conditions.

The four major banks dominate their home markets. Their combined loans accounted for 80% of Australia’s total loans at end-December 2017 and 87% of New Zealand’s gross loans at end-September 2017. The banks have simplified their businesses and footprints with a strong focus on their core banking operations in Australia and New Zealand, or are in the process of doing so. They have well established and long standing competitive advantages and strong pricing power – manifested in strong earnings, profitability and balance sheets – which is likely to be maintained over the next two to three years.

The increased focus on conduct and competition by authorities has resulted in the establishment of a number of inquiries, the outcomes of which are uncertain. This could limit the banks’ growth potential and pricing power, pressuring the banks’ company profiles and ultimately affecting their ratings, although any significant impact appears unlikely to arise within the next two years.

Conduct related issues may also negatively affect our view of risk appetite and ratings if they indicate widespread failing within a bank’s risk-management framework. All four banks have faced a number of conduct related issues in the previous few years, although we continue to see these as isolated cases and believe risk-management frameworks remain robust. CBA has faced particular scrutiny following the August 2017 announcement of failures related to its anti-money laundering and counter-terrorism financing requirements. This, combined with a number of other infractions, prompted a regulatory inquiry into CBA’s governance, culture and accountability. Findings of systemic failure by this inquiry could pressure CBA’s ratings.

Disruptors, particularly in the digital sphere, are increasing in prominence, although they remain a small part of the system. The disruptors also pose some longer-term risks to the franchises of the major banks, although management appears to be addressing this pro-actively with strong IT investments, which we expect to continue.

Fitch expects the banks’ credit risk appetite to remain tight. We believe the banks have robust risk management frameworks. Regulatory intervention and oversight provide an additional restriction on the banks’ ability to take larger risks by weakening underwriting standards. Fitch expects additional regulatory scrutiny on serviceability testing in 2018, particularly around the assessment of borrowers’ expenses, which should further strengthen underwriting. Limits on growth rates for investor and interest-only loans has seen the pace of growth in these products slow; we see these as riskier types of mortgages relative to amortising owner-occupier mortgages. The growth rates of these products could be further curtailed by proposals by the regulator to have them carry higher risk-weights than amortising owner-occupier loans.

We believe the banks’ asset quality is likely to remain a strength relative to similarly rated international peers, although some weakening is possible through 2018. Large losses are not probable without an economic shock, such as may occur if there was a sharper-than-expected slowdown in China. Industries, such as retail, may come under pressure from soft consumer spending due to low wage growth, high household debt and competition from online retailers. However, given the banks’ limited exposure to the retail sector, our base case means any deterioration should be manageable.

Fitch believes the Australian major banks are well-capitalised and will meet Australian Prudential Regulation Authority requirements for “unquestionably strong” capital ratios well ahead of the proposed deadline. Implementation of the final Basel III framework should not be onerous either. Comparisons of risk-weighted ratios with international peers are difficult due to the Australian regulator’s tougher capital standards relative to many other jurisdictions. These include, among other factors, higher minimum risk-weightings for residential mortgages through Pillar 1 and larger capital deductions.

Funding remains a weakness relative to similarly rated international peers. Fitch expects the banks to continue relying on wholesale markets in the medium-term, although strengthened liquidity positions and swapping borrowings into the functional currency – usually either Australian or New Zealand dollars – help offset some of this risk. The banks’ funding profiles are also supported by access to contingent liquidity through the central bank, if needed, and the likelihood that they would benefit from a flight to quality in a stress environment.

Profitability growth is likely to slow in 2018, reflecting Fitch’s expectations for slower asset growth, competition for assets and deposits, higher funding costs and a rise in loan-impairment charges from cyclical lows. Cost management will remain a focus, but could be affected by continued technology investment and regulatory-related costs.

The Next Round In The Payments Wars

The Commonwealth Bank, Westpac, and National Australia Bank are working together to build the next generation of mobile payments and wallets in Australia.  These banks are not offering the Apple Pay solution, unlike ANZ. They sought unsuccessfully  to negotiate collectively with Apple in order to gain access to the iPhone’s near-field communications (NFC) chip which would allow their own apps to make contactless payments.

The first initiative of the new joint venture will be the development of a payment app that will enable instant payments for all Australians, including small businesses, regardless of who they bank with.

Beem will be a simple and convenient free app enabling anyone to make an instant payment using their smartphone, and request payment from someone who owes them money or to split a bill. The hope is that it will become an industry-wide payment solution, and is open to interest from other banks, industry, and retail players.

Beem will work on both iOS and Android smartphones, and will be compatible across devices and different banks – users won’t need to be customers of CBA or Westpac or NAB.

Commonwealth Bank Group Executive of Retail Banking Services, Matt Comyn, said Beem will give Australians a simpler way to pay and request payments, a pain point for both consumers and small businesses.

“Two thirds of small businesses say they are owed money for completed work, with around $7,300 owed to small traders. Beem will give small businesses a cost effective and easy way to collect payments instantly and on the go for their goods and services, without having to take the larger leap into using merchant credit facilities, or issuing invoices to be paid later,” Mr Comyn said.

Beem will benefit from bank level security and encrypted user account information. Every transaction will be authenticated and subject to real-time fraud monitoring.

Westpac Chief Executive, Consumer Bank, George Frazis, said Beem expands payment choices for customers, and is the latest offering in Australia’s long history of innovative payment solutions, including EFTPOS, Pin@POS, chip, tap and pay, and wearable payment devices.

“We are committed to giving our customers more choice by supporting a range of convenient ways for them to pay and transfer their money. Customers will soon be able to ‘Beem’ free payments instantly using any smartphone, regardless of who they bank with and without the need to add account details.

Innovations such as Beem and wearables are leading the way in payment solutions because they’re convenient, easy to use, and fit in with people’s lifestyles – we firmly believe in going to where our customers are and providing them with greater choice,” Mr Frazis said.

NAB Chief Operating Officer, Antony Cahill, said the bank is continually looking for opportunities to make banking easier, simpler, and more convenient for its customers, both consumers and businesses.

“Think about all the times you’ve gone out for dinner and split the bill – this app will make it easy for Australians to pay their family and friends instantly. Or, when you go to the local market and need to pay the butcher – this means instant payment through your phone. This is the industry working together to deliver an innovative payments solution, no matter who you bank with,” Mr Cahill said.

Commonwealth Bank is currently conducting user testing of a Beem prototype, with the app to be available for download on iOS and Android smartphones later this year.

Beem will initially have a sending limit of $200 a day ($6,000 per month), with a monthly receiving limit of $10,000 as an initial risk control measure.

Beem will be available to all bank customers and small businesses that hold a global scheme debit card issued by an Australian Authorised Deposit-taking Institution (ADI).

The joint venture will be independently run, with a mandate to actively seek new participants to join the initial three participants. Future product initiatives beyond the payments facility are being planned, including digital wallet features and capabilities.

Weighing up the risks behind the profits of Australia’s big four banks

From The Conversation.

The biggest Australian banks are fairing well in a year of increased pressure to reform from politicians, international events like the Britain’s exit from the European Union and more regulation from the Australian Prudential Regulation Authority (APRA).

A number of interrelated factors have contributed to the relatively strong performance of the Australian banks. For instance, the banks have limited exposure to the types of securities which led to massive losses for their counterparts in other countries. The banks also heavily rely on domestic loans, particularly the low risk household sector, so better lending standards and a proactive approach to prudential supervision by APRA may have contributed.

The Basel III regulatory requirements, brought in after the 2008 financial crisis, emphasise holding an increased amount of subordinated debt, as a measure of market discipline. However all the big four banks are holding less and less subordinated borrowings. More specifically, it declined by more than 50% from 2007 to 2014, according to our calculations.

APRA limits banks’ holdings of higher risk securitised assets, these are loans packaged into securities, to a maximum of 25% of the banks’ loan portfolio. These are high risk if not properly understood or defined, as happened with United States home loans, blamed for the start of the global financial crisis.

When Australian banks calculate bank capital requirements, they need to fully account for securitised assets. This is a rule from APRA that goes beyond international standards, to reflect the risk inherent in these products.

Inter-bank liquidity tightened significantly with all banks increasing their holdings of Exchange Settlements Accounts at the Reserve Bank, this a form of low risk liquidity. Australian banks have lower interbank deposits compared to their Europe and USA counterparts and are also heavily involved in long term wholesale funding and are required to hold more liquid assets including government debt to deal with liquidity. All of this makes Australian banks less risky in times of crisis because spillover effects from other banks are less likely.

The big four CC BY

There has been a significant increase in concentration in the Australian banking industry since the global financial crisis. For example with Westpac and the Commonwealth Bank of Australia taking over St. George Bank and Bank West, respectively.

Following mergers, the big four account for 88% of the Australian banking system assets. This reinforces the idea that the banks are “too big to fail”.

The banks have also moved to more fee generating activities, which increases risk, but to a lesser extent in Australian banks. Data shows between 1998 and 2014, on average, 1.2% greater interest income was generated relative to non-interest income for Australian banks, according to our analysis. However, there is also similar evidence for the top eight publicly-listed Canadian banks. They exhibit on an average, a 2.5% increase in net interest revenue relative to non-interest income over the same time period.

This reinforces that Australian and Canadian banks demonstrated extra ordinary resilience during the credit turmoil in the global financial crisis. The World Economic Forum in 2008 reported that Australia and Canada were among the top four safest banking systems in the world.

Large banks in Australia are active in international markets through direct ownership of foreign based banks and having offshore operations as a source of capital. Deregulation of banking in countries such as the USA, Canada, Australia and many developing countries has opened up new markets for foreign banks. Australian banks’ largest international exposure is to New Zealand, where all big four banks retain sizeable operations.

Although the growing interdependence among international economies and financial markets is certain to continue, the impact of Brexit on Australian banks remains minimal. It remains to be seen in the long-run how Australian banks will weather the international banking/economic developments.

As a last measure of the bank health, we can measure the domestic systemic risk with a methodology based on one used by the official Basel Committee on Banking Supervision. Based on July 2016 monthly data, the big four banks account for 80.38% of the systemic risk in the financial system and the riskiest, from highest to lowest, are the National Australia Bank, the Commonwealth Bank of Australia, Westpac and ANZ.

New CEO Announces New Structure At Westpac

On his first day as the Westpac Group CEO, Brian Hartzer today confirmed his Executive team and their responsibilities, and detailed some of his immediate priorities for the Group.

There are no changes to the individuals within the Executive team.  However, some responsibilities and reporting lines have changed.  These include:

  • As a division, Australian Financial Services (AFS) will no longer exist, with the CEOs of Westpac Retail & Business Banking, St.George Banking Group and BT Financial Group will now report directly to Mr Hartzer.
  • The Technology function will now report directly to the Group CEO (previously reported to the Chief Operating Officer
  • All retail product development, marketing and analytics functions previously within AFS, along with Group-wide operations, will now be the responsibility of the Chief Operating Officer
  • David McLean has been appointed as the CEO of Westpac New Zealand.  Mr McLean has been acting CEO of Westpac New Zealand since August 2014

Mr Hartzer also today outlined his key priorities for the Group.

“We have a clear customer-centric strategy, which has consistently delivered. We are building good momentum and have a number of growth opportunities that over time will help us to continue to increase the value of our franchise. These include digitally transforming our business, increasing our investment in wealth, business banking and Asia, and working more closely with innovation industries and disruptive technologies that are transforming our economy. At the same time, we will continue to improve productivity, and make sure that our risk and business practices continue to set the standard for sustainability, in line with changing regulatory and community expectations. Above all we will continue to invest in our people and the distinctive strength of Westpac’s culture, delivering a service revolution for our customers and strong, consistent, returns for shareholders.”

Westpac Profit Up 12%

Westpac released their full year results today. Headline was a 12% uplift in statutory net profit, to $7,561 million for the 12 months to 30 September 2014, compared with 2013 results of $6,751 million. Continued focus on the Australian market is clearly paying off. “While all divisions performed well, Australian Financial Services (AFS) has had a particularly strong year. All businesses in AFS delivered double digit earnings growth, with well managed margins and a 6% increase in banking customer numbers. We provided more than $87 billion in new lending to Australian retail and business customers over the year, while growing in line or above system across all key markets in the second half.”

Looking at cash profit, WBC recorded $7.63 billion, an 8 per cent increase on the previous year and slightly ahead of analyst estimates at $7.62bn.

The Group grew at or above system in all key markets in the second half of 2014, including growing at system in Australian mortgages, 1.3x system in household deposits and 1.4x system in business lending.

Net interest income was $13,496 million, up 5%, with an 8% rise in average interest-earning assets and a 7bps decrease in net interest margin to 2.08%. The full year decline in net interest margin principally reflects a lower Treasury contribution, higher levels of liquid assets and lower interest rates impacting returns on capital.

Non-interest income was $6,324 million, a 7% increase, driven largely by another strong performance from the Australian wealth and insurance business, BT Financial Group.

WBC reported an expense to income ratio of 41.6%, which is sector leading; and a further decline in impairment charges which were 23% or $197 million lower.

WBC will pay a fully franked final dividend of 92c to shareholders on the register at November 12. Westpac’s total distribution for the year is$1.82, a 5 per cent lift on the previous year.

We note their continued focus on customer centricity, and the emerging digital strategy, both of which position well for future performance.