July 2014 – Page 4 – Digital Finance Analytics (DFA) Blog

Banco Santander to refer small UK businesses to peer-to-peer lender

Further evidence of the continued importance of peer to peer lending is highlighted by the news that Spanish based bank, Banco Santander will start referring small UK businesses to peer-to-peer lending service Funding Circle as part of a new partnership between the two firms. As we highlighted in our recent review of the development of peer to peer lending, Funding Circle is an online marketplace for business loans aimed at small companies. Funding Circle, as a quid pro quo will point customers to Santander for day-to-day banking services such as advice, cash management or expertise.

“SMEs need access to multiple sources of finance, and Santander’s partnership with Funding Circle is a good example of how traditional and alternative finance can work together to help the nation’s SMEs prosper,” said Santander UK CEO Ana Botin. “Peer-to-peer financing is also a useful way to introduce people to the concept of investing in entrepreneurs; an important element in a healthy enterprise economy.”

So far Funding Circle has lent £306m to more than 5,000 businesses. The company says the opportunity is still massive, citing research estimating that some 250,000 businesses could qualify for alternative funding in the UK each year. The model has piqued the UK government’s attention, with the British Business Bank, which it backs, investing GBP60m (USD101m) to fund 10% of all business loans made on Funding Circle. This offers an alternative channel to funding to businesses which find it difficult to obtain financing through traditional channels. The traditional British banks seem unwilling to provide sufficient credit to small and medium-sized enterprises (SMEs) and the UK government is considering making it compulsory for them to direct failed loan applicants to alternative institutions, such as peer-to-peer lenders.

Funding Circle include the following facts on their web site (correct as at 1 May 2014):

~30,000 active investors registered with Funding Circle
The average amount an active investor has in their account is £6,000
Average net return is 6.1%* after fees and bad debt but before tax
Investors recently exceeded a total lending of £270 million
£130 million of this total was lent in 2013 alone
4,000+ businesses have borrowed via Funding Circle
More than £20 million lent to small businesses every month

Average loan amount is approximately £60,000
Approximately 1.4% bad debt ratio
The peer-to-peer lending industry is tripling in size each year, and has the potential to become worth over £12 billion per year within a decade according to independent research by Nesta
The top three platforms alone have already completed almost £1 billion of lending to date and will help lend another £1 billion over the next 12 months

Detailed Funding Circle Statistics are available here.

Will The Next Rate Movement Be Down?

Today Glen Stevens spoke at The Econometric Society Australasian Meeting and the Australian Conference of Economists in Hobart. He gave an economic update, and included a number of messages which when taken with economic data from the ABS today, suggests that interest rates may be cut later in the year.

Here are a few of his points:

“the most recent set of GDP figures, while certainly encouraging, probably overstate somewhat the true ongoing pace of growth in the economy. The Bank’s forecasts from early May, which we have not materially changed, embody ongoing growth but, in the near term, probably a little below trend”.

“The cash rate measured in ‘real’ terms is approximately zero. In either nominal or real terms the cash rate is well below ‘normal’ levels, and comfortably below even the mooted lower ‘new normal’ levels. Moreover, we still have ‘ammunition’ on interest rates – we have not got close to the zero lower bound that has afflicted some other countries”.

“Now, the terms of trade are falling, and the investment part of the boom has peaked. Mining investment, as a share of GDP, has probably already declined by about 1 percentage point, and is expected to fall by another 3 or 4 percentage points over the next few years”.

“Consumer demand has been rising moderately, even if recently perhaps a little more slowly than it did over the summer. Residential construction is moving up strongly, and intentions to invest outside the resources sector have started to improve, from very subdued levels. The labour market has also shown some early indications of mild improvement. But these signs remain early ones”.

“the exchange rate remains high by historical standards. There is little doubt that significant parts of the trade-exposed sectors still find it quite ‘uncomfortable’: it continues to exert acute pressure for cost containment, productivity improvement and business model change. When judged against current and likely future trends in the terms of trade, and Australia’s still high costs of production relative to those elsewhere in the world, most measurements would say it is overvalued.”

” if we think there is a need for higher construction, which we do, an environment of declining prices is probably not conducive to that outcome. Some pick-up in housing prices as a result of lower interest rates was to be expected; it shows that monetary policy is working and is part of the normal transmission process”.

“investors should take care in the Sydney market, which is the main area where a large increase in borrowing has been occurring. The total value of credit approvals for investor loans in New South Wales as a whole is about 130 per cent higher than in 2008, and it is in the investor segment where there has been evidence of some increase in lending with loan-to-value ratios above 80 per cent in the past couple of quarters”.

“in forming expectations about future price gains and deciding their financing structure, people should not assume that prices always rise. They don’t; sometimes they fall”.

“banks and other lenders need to maintain strong lending standards. APRA has helpfully been reinforcing this point directly with bank boards, as well as stressing the importance of having adequate, higher, interest rate buffers in place, given the current very low level of rates in the market.”

“Overall, the Bank has not seen developments in the housing market as warranting higher interest rates than the ones we have had, in the current circumstances.”

So the bank is happy with the housing market, concerned about the exchange rate, and thinks growth will be below trend. The ABS data today showed Retail spending down a tad, and building approvals were down in current terms. Given the comment that there is room to cut further, a reduction in the benchmark rate looks quite likely.

But then the BIS Annual Report contained a waning that ultra low interest rates are not necessarily effective, and may themselves lay the foundations on the next global financial crisis. If rates were to be cut further, the case for deploying macroeconomic measures to control house prices would become even stronger.

Building Approvals Fall Again In May – ABS

According to the ABS, in data released today, the number of dwellings approved fell 1.7 per cent in May 2014, in trend terms, and has fallen for five months. However, the seasonally adjusted estimate for total dwellings approved rose 9.9% in May after falling for three months. Approvals for units increased. The seasonally adjusted estimate for private sector dwellings excluding houses rose 27.2% in May after falling for three months. The seasonally adjusted estimate for private sector houses rose 0.5% in May after falling for three months.

Dwelling approvals increased in trend terms in the Northern Territory (8.2 per cent) and Tasmania (6.5 per cent). Dwelling approvals decreased in trend terms in the Australian Capital Territory (9.5 per cent), Queensland (3.2 per cent), New South Wales (3.0 per cent), South Australia (1.6 per cent), Western Australia (0.5 per cent) and Victoria (0.2 per cent). In trend terms, approvals for private sector houses fell 0.2 per cent in May. Private sector house approvals rose in Queensland (0.3 per cent), Victoria (0.2 per cent) and Western Australia (0.2 per cent). In trend terms, approvals for private sector houses fell in New South Wales (2.1 per cent) and South Australia (0.6 per cent).

The value of total building approved fell 3.3 per cent in May, in trend terms, and has fallen for six months. The value of residential building fell 1.1 per cent, while non-residential building fell 7.6 per cent in trend terms.

However, the seasonally adjusted estimate of the value of total building approved rose 26.1% in May after falling for four months. The value of residential building rose 13.5% after falling for three months. The value of non-residential building rose 59.5% after falling for four months.

So depending on your point of view, building approvals are either up or down in May! DFA’s view is that the seasonally adjusted data is probably a better read, indicating that the effects of low interest rates and the demand for property in a rising price market is stimulating approvals.

Credit Card Lending Portfolio Data to May 2014

Continuing our analysis of the APRA monthly banking statistics, today we execute a deeper dive into the credit card portfolios. The $40.5 billion portfolio is relatively static, fluctuating by about $200m in recent months. As we highlighted, previously, CBA has the biggest share, and Citigroup is the 5th largest player.

We can show the relative share trends as a percentage of total book. CBA has 28% of the market, and Westpac 23% – together holding more than half the market. Macquarie is a small, but growing player, as we will see in a moment. Citigroup’s share dropped just a little.

So. lets look at the changes in more detail. Here are the movements by percentage change of individual portfolios. Thanks to Macquarie’s acquisition of HSBC’s Woolworths white label credit card portfolio for $362 million in May, we see a significant swing away from HSBC, to Macquarie, who more than doubled their portfolio in the transaction. HSBC released a statement saying it was still committed to the Australian market, but the Woolworth agreement would terminate, although they would continue to provide card services through to 2015.

Looking at the data another way, in portfolio dollar terms, we see CBA growing a little, whilst nab, ANZ and Citigroup fell in May. The Macquarie transaction also shows up clearly. Overall in May the total across all banks fell just over $200 million.

So, we see household card debit is quite constrained at the moment. We also see Macquarie extending its reach across retail banking, including mortgage lending, and credit cards.

RBA Leaves Cash Rate Unchanged; Again.

At its meeting today, the Board decided to leave the cash rate unchanged at 2.5 per cent. “Monetary policy remains accommodative. Interest rates are very low and for some borrowers have edged lower over recent months. Savers continue to look for higher returns in response to low rates on safe instruments. Credit growth has picked up a little, including most recently to businesses. Dwelling prices have increased significantly over the past year, though there have been some signs of a moderation in the pace of increase recently. The exchange rate remains high by historical standards, particularly given the declines in key commodity prices, and hence is offering less assistance than it might in achieving balanced growth in the economy. Looking ahead, continued accommodative monetary policy should provide support to demand and help growth to strengthen over time. Inflation is expected to be consistent with the 2–3 per cent target over the next two years”.

“A strong expansion in housing construction is now under way. At the same time, resources sector investment spending is starting to decline significantly.”

Home Lending Portfolio Analysis To May 2014

Following on for our analysis of the APRA monthly banking statistics, today we explore some of the detail in the home loan statistics. The data shows the net monthly movement by lending institution, split by owner occupation and investment lending. We dropped a few of the smallest players from the data to make the picture clearer. We see some interesting segmental trends. First, lets look at the major changes amongst the main lenders between April and May. The most significant element relates to the CBA portfolio where there appears to be a big swing to investment lending (is this changes in policy, or a data coding issue?). Westpac continues to grow its investment portfolio so, We think CBA may be hunting investment loans more aggressively, but its a big monthly swing.

Now looking at the loan portfolios from January to May, we see again Westpac leading the investment lending, and we see CBA’s uptick in May, offset by a fall in owner occupation lending.

Another way to look at the data is by percentage movement, this view shows the change at the portfolio level, the sum of investment and owner occupied loans. It is worth highlighting the Macquarie Bank growth, much higher than system growth. Bendigo had quite a spike, and AMP had a bad March. What we do not know is how much is a data problem, and how much is a real response to business strategy and execution.

We can also split the data by loan type. This the owner occupation trend, note that at a marker level, it fell slightly overall in May. We see the fall at CBA in May, the spike at Bendigo, the consistent growth at Macquarie and the AMP hiccup.

Turning to the Investment Loan portfolio, the CBA spike shows clearly, the Macquarie Bank growth spurt, the growth at Members Equity, and strong overall spike in investment lending.

We should await the next months data, because the CBA data movements would mask, or change the outcomes. Our own data suggest investment lending is not as strong as suggested by the APRA data.