Month: July 2015

Australian Major Banks’ Repricing of Residential Investor Loans Is Credit Positive – Moody’s

From Moody’s.

Over the past week, three major Australian banks increased their lending rates for residential property investment loans and interest-only (IO) loans. Australia and New Zealand Banking Group Limited and Commonwealth Bank of Australia each lifted the standard variable investor rate by 0.27%. National Australia Bank Limited increased the rate it charges for IO loans and line of credit facilities by 0.29% (investors, rather than owner-occupiers, primarily take out IO loans).

Increased lending rates are credit positive for the banks because they re-balance their portfolios away from the higher-risk investor and IO lending toward safer owner-occupied and principal amortizing loans. They also help to preserve net interest margins (NIM) and profitability amid higher capital requirements and increased competition from smaller lenders.

The banks’ moves follow increasing regulatory scrutiny of residential property lending. Investment and IO lending has grown rapidly in the recent past, reaching a record proportion of overall mortgage lending that has contributed to rapid house price appreciation, particularly in the Sydney and Melbourne markets.

In December 2014, the Australian Prudential Regulation Authority (APRA) announced a set of measures designed to ensure residential mortgage underwriting standards remain prudent and to curb growth in investment lending to 10% per year. The major Australian banks have since undertaken a number of initiatives to ensure compliance with APRA’s guidelines. Notably, these include the imposition of higher down payment requirements for investment lending and these most recent pricing changes.

Although investment and IO loans performed well during the global financial crisis of 2007-10, they inherently carry higher default probabilities and severities, and a larger proportion of such loans risks higher delinquencies for Australian banks at times of stress.

Investment loans typically have higher loan-to-value ratios: our data indicates that the average loan-to-value ratio for investment loans is 60.2%, versus 57.8% for owner-occupier loans. In addition, since the underlying properties are not the primary residence, they are more sensitive to changes in house prices and borrower employment status and thus are more likely to default if the borrower’s conditions change. IO loans are more exposed to rising interest rates than principal-and-interest loans.

We see APRA’s and the banks’ efforts to slow the growth in investment lending as an important credit support for the system. We also expect that the remaining major Australian bank, Westpac Banking Corporation will follow the other banks in repricing its investment mortgage book. Over time, these steps are likely to slow investment lending growth rates to below APRA’s 10% cap from current annualized growth rates of 10.6% for ANZ, 9.9% for CBA, 14.1% for NAB and 10.0% for Westpac, according to APRA data.

Curbing investment lending is particularly positive for those banks with significant investment loan portfolios. NAB and Westpac, when it follows suit, are especially well-placed to derive benefits from pricing changes. Westpac has the highest proportion of investment lending in its portfolio (46% of total housing loans), exposing it to a higher-risk segment, and NAB has opted to reprice its IO loans and line of credit facilities (together they constitute 47% of its overall portfolio), allowing it to capture a greater NIM benefit.

NAB announces $50 million innovation fund

National Australia Bank (NAB) has announced that it will establish a $50 million fund to further accelerate the bank’s focus on customer-led innovation.

The NAB Ventures fund will enable NAB to access leading ideas and capabilities from around the world through entering into partnerships, alliances and making investments in innovative companies.

“This is an investment in our business designed to improve customer experience through innovative solutions, making banking easier, better and simpler,” NAB CEO Andrew Thorburn said.

“Banking globally is undergoing a digital transformation and NAB Ventures will ensure NAB is able to embrace these changes to deliver innovative solutions for our customers.”

It is envisaged the $50 million will be deployed over 3 years and will be invested both in Australia and overseas.

NAB Ventures will be part of NAB Labs, a dedicated innovation capability designed to build a culture of innovation and customer-led design within NAB, and position the bank to be agile and adaptive to rapidly changing digital advancements.

The fund will have two key objectives:

  • Deliver accelerated access to new capability, technology, intellectual property, and businesses that could be deployed into NAB and its customer offering; and
  • Enhance NAB’s insight into and connection with emerging business models and technology. Key areas of focus include mobile platforms, payments and data and analytics.

NAB has also introduced a Digital Acceleration Program to enable digital innovation to be developed and put in the hands of customers and bankers quickly.

“It’s critical that we are able to act quickly and be nimble in bringing digital innovation to market,” Mr Thorburn said.

NAB Labs has a dedicated team but also draws on people from across the bank and external partners – as well as extensive customer engagement – to design, experiment and develop new products and capability.

Mr Thorburn added: “We want our team to be among the best global thinkers in the innovation space and give our customers access to the best innovative thought – and we recognise that won’t all necessarily come from inside NAB.

“NAB Ventures will further enable us to access the best minds and cutting edge ideas.”

ING Direct Tightens Investment Loan Criteria

The AFR is reporting that ING has said new investor borrowers will need to find a 20% deposit, a hurdle which had previously applied only to loans in Sydney. They will also end discounts rates for new investor borrowers and tighten serviceability assessments.

This is further evidence that smaller banks are reacting to the APRA 10% threshold. APRA data shows ING has about $9bn of investment loans but is not growing above the 10% limit. Their move looks like preemptive action to avoid a flood of applications as investors seek loans from smaller players in response to the majors throttling back, or a reduction in focus on mortgages in Australia.  Macquarie purchased a mortgage portfolio of $1.5bn from ING in September 2014.

ING-Profile

AMP Bank Stops Property Investor Lending and Lifts Rates

In a media release, AMP say that in response to  regulator guidelines to limit growth in investor property lending across the  market to 10 per cent, AMP Bank will increase variable rates on all existing  investor property loans by 0.47 per cent per annum from 7 September 2015.

All investor  property loan applications that have been approved will be subject to the 0.47 per cent  increase on settlement.

In addition, AMP  Bank will not be accepting new or assessing existing investor property lending  applications from today.  This is expected to last until later in 2015, depending on market conditions.

“We appreciate the  position this puts our customers in and will be working with our distribution  network to actively communicate with them,” said Michael Lawrence, Managing  Director, AMP Bank.

AMP Bank remains  committed to helping Australians own their homes and, effective 27 July,  reduced interest rates for new owner occupied variable loan rates on the AMP  Bank Professional Package to as low as 4.12 per cent per annum.

“Australia’s  property market is experiencing high levels of investor property lending growth  and we are supportive of the regulator’s intention to slow this growth to  appropriate levels,” said Mr Lawrence.

AMP has a small share of the market (around 1%), as shown in the APRA monthly banking statistics, but has been growing its investment loans by well above the 10% APRA guidance rate. Their investment book is worth around $2.9bn, and is half the size of its owner occupied loan book.

As we highlighted, if growth was strong in the first half, and above 10%, then the corollary is that in the second half the growth must be significantly lower to net out at 10%.

Their reduction in rates for new owner occupied loans highlights that the upcoming battleground will be refinancing of owner-occupied loans in substitution of the investment sector.

New Home Commencements Have Peaked – HIA

New home commencements have peaked, but will remain at a very high level in 2015/16 according to new analysis from the Housing Industry Association (HIA). “It is likely that new dwelling commencements peaked at a record level of 215,000 in the financial year just passed, and indeed the risk is for this apex to be even higher,” said HIA Chief Economist, Dr Harley Dale. “This is an extraordinarily high level which is 15 per cent above the previous cyclical record of 187,000 dwelling commencements achieved in 1994.”

HIA expects a cyclical peak of nearly 214,500 new dwelling commencements for the 2014/15 financial year, although there is the risk that the 2015 calendar year delivers an even higher record. It is expected that both detached house and ‘multi-unit’ commencements have reached cyclical highs, but a further surge in unit construction could yet deliver a 2015 calendar year peak. Detached house commencements are expected to have reached a level of 113,700 in 2014/15, 9 per cent above the long term average. Multi-unit construction has shot the lights out, hitting a level 117 per cent above the long term average with the number of commencements expected to reach 100,747.

“The approaching down cycle is likely to be considerably smaller for detached house commencements than for multi-units. Governments’ policy failure means that there is unrealised demand for new detached housing due to a range of supply side constraints led by a lack of shovel ready land,” concluded Harley Dale.

Housing-Starts-HIA-July-2015

Getting free trade right can be good for workers and exporters

From The Conversation.

Agreement on the controversial Trans-Pacific Partnership could come as early as this week, with negotiations now focused on “the last few issues,” according to Trade Minister Andrew Robb.

Movement towards finalising the TPP comes as unions step up a campaign supported by Opposition Leader Bill Shorten against what is seen as anti-labour provisions in the China-Australia Free Trade Agreement, taking political debate over free trade to a new level.

“Dry” economists on the right don’t like “trade distorting” bilateral agreements (they don’t even like calling them “free trade” agreements), while many on the left are concerned about trade agreements going too far, beyond reducing tariffs and quotas, and getting involved in social policy, labour standards and the provision of public goods.

But even beyond the political debate, there is the question of what Australian businesses want from public policy as they engage themselves in global markets.

The DHL Export Barometer gives us a pretty good handle on what exporters think. It surveys 600 Australian exporters annually, and has done since 2003.

For the most part, trade agreements have traditionally played a small part in impediments to exporting. Most businesses worry about the exchange rate – when it is too high their goods and services become expensive, when it’s too low their input costs soar (as 80% of exporters also import). They also worry about border regulations and business culture differences. For the most part they didn’t think about FTAs and certainly not the GATT or the WTO.

But in the DHL Export Barometer for 2015, there’s good news about free trade agreements, which will be music to the ears of Andrew Robb.

In surveying existing and new agreements there is evidence that exporters like Australia’s FTAs and that they actually work in a practical business sense despite the recent controversy.

According to the DHL Export Barometer, the USA FTA (AUSFTA) is at last helpful after a decade of implementation. Other agreements deemed helpful include those with New Zealand, Singapore and ASEAN. The survey finds AUSFTA is benefiting exporters, with increased sales and a larger proportion of exporters claiming the agreement has had a positive impact on their business (55%).

This occurred despite the USA hitting the sub-prime crisis just three years after the deal was forged in 2005. The US unemployment rate has now returned to pre-GFC levels, notwithstanding the commentators who predicted that the AUSFTA would “kill a country” (I assume they meant Australia).

The support for AUSFTA was followed by that for New Zealand (47%), AANZFTA – the agreement between Australia, New Zealand and ASEAN on 41% and Singapore on 38%.

The new “trifecta” of FTAs – Japan, South Korea and China – has got the endorsement of the Australian exporter community. In fact, Japan is more beneficial than expected and all FTAs to North East Asia are enticing new exporters. Some 61% of exporters think the China FTA will have a positive effect, 36% think South Korea will and 35% think Japan will deliver.

In terms of the Japan FTA, 59% thought the trade pact would increase exports to that destination, and 38% thought they would start exporting to Japan as a result of the FTA. Many also thought the FTA would help enhance an online presence and help develop new products and services for that destination.

In terms of future FTA destinations, exporters think that India, Indonesia, the Gulf Co-operation Council and Latin America should now be on Andrew Robb’s dance card. But of all the future pacts, India drew the most negative ratings, consistent with the view about increased competition from India.

Perceptions matter

But what about the controversial TPP? It received a positive response among exporters, with 69% saying they’d increase exports to TPP countries and 25% saying they’d start exporting to TPP countries as a result of the TPP.

But the TPP has some complications not always apparent in up and down trade deals, including the investor provisions that have been controversial in other jurisdictions. As Princeton economist Dani Rodrik pointed out in his book “Has Globalisation Gone too Far?”, when trade agreements stray onto the turf of the provision of public goods, or legislation like plain packaging for tobacco, they are likely to lose public support.

Even in the China FTA the labour market provisions have overshadowed the benefits the overall agreement would bring. And it is important to remember Rodrik’s finding that economies that are open to trade have well developed labour market institutions and social insurance.

This is reflected in my own research that showed that exporters, on average, paid 60% higher wages than non-exporters, provided better levels of occupational health and safety, more education and training, equal opportunity provisions and were more likely to be unionised.

The research has shown free trade can grow side by side with union support. An open economy is bolstered by improvements in productivity, efficiency and fairness in the labour market. These are important lessons to heed as we strive to benefit from the next round of FTAs.

Author: Tim Harcourt, J.W. Nevile Fellow in Economics at UNSW Australia

NZ Monetary policy supporting growth and inflation goal

The NZ Reserve Bank confirmed that at this stage some further monetary policy easing is likely to be required to maintain New Zealand’s economic growth around its potential, and return CPI inflation to its medium-term target level.

Further exchange rate depreciation is necessary, given the weakness in export commodity prices and the projected deterioration in the country’s net external liabilities over the next two years, Governor Graeme Wheeler said.

Speaking to an ExportNZ/Tauranga Chamber of Commerce audience, Mr Wheeler said that in mid-2014, New Zealand’s terms of trade were at a 40-year high, but over the past 15 months the economy has experienced several shocks. Export prices for whole milk powder have fallen 63 percent since February 2014, and oil prices are currently more than 50 percent below their June 2014 level. Net immigration and labour force participation are at historic highs, and the real exchange rate has declined steadily since April 2015.

Over the past two years, annual CPI inflation has been in the lower half of the 1 to 3 percent target band, except for the period since the December quarter 2014 when the fall in oil prices brought CPI inflation to very low levels. The Bank expects annual CPI inflation to be close to the midpoint of the 1 to 3 percent target range by the first half of 2016.

“Under the Bank’s flexible inflation targeting framework, the Policy Targets Agreement specifically recognises that annual CPI inflation will fluctuate around the medium-term trend due to factors such as exceptional movements in commodity prices – like those experienced since mid-2014,” Mr Wheeler said.

“There are, however, several risks and uncertainties around the inflation outlook. These include the future path of the exchange rate, which will be influenced by future commodity prices, and the speed with which the recent depreciation feeds through to higher inflation.”

Mr Wheeler said that, despite recent declines, the exchange rate remains above the level consistent with current economic conditions.

“At current levels of export prices, a more substantial exchange rate depreciation will be required to stabilise the net external liabilities position relative to GDP.”

Mr Wheeler added that there is potential for further downward pressure on global dairy prices. “Also, over coming months, the Federal Reserve and the Bank of England are likely to begin the process of normalising their interest rates, which could assist our currency lower.”

Turning to interest rates, Mr Wheeler said that current monetary policy settings are providing stimulus to the economy at a time when output looks to be growing around 2.5 percent, slightly below potential, and core inflation remains a bit below the mid-point.

He said that some local commentators have predicted large declines in interest rates over coming months that could only be consistent with the economy moving into recession. “We will review our growth forecasts in the September Monetary Policy Statement but, at this point, we believe that several factors are supporting economic growth. These include the easing in monetary conditions, continued high levels of migration and labour force participation, ongoing growth in construction, and continued strength in the services sector.”

Mr Wheeler said that, in returning inflation to the mid-point of the target band, the Bank has to avoid unnecessary volatility in output, interest rates, and the exchange rate.

“Our judgement in the current circumstances is that aiming to return inflation to around its medium-term target level in about nine to 12 months’ time is an appropriate speed of adjustment. This may not always be the appropriate speed of adjustment. Nor does it mean that the Bank will necessarily deliver a precise outcome as the economy is constantly experiencing shocks and disturbances that policy may need to counter or accommodate.

“Having the scope to amend policy settings, however, is a key strength of the monetary policy regime. In response to these developments, the Bank will review and, if necessary, revise its policy settings to meet its price stability objective. The time path of inflation may change as monetary policy is recalibrated, but the overall goal of meeting the specifications of the PTA will remain the central focus of policy.”

Mr Wheeler also noted that the Bank is conscious of the impact that low interest rates can have on housing demand and its potential to feed into higher house price inflation. Lower interest rates risked exacerbating the already extensive housing pressures in Auckland by stimulating housing demand, although, outside of Auckland, nationwide house price inflation is currently running at an annual rate of around 2 percent. However, in the present situation, raising interest rates would be inappropriate as it would put upward pressure on the exchange rate and further dampen CPI inflation.

“The Bank continues to be concerned about the financial stability risks and risks to the broader economy that would be associated with a major correction in Auckland house prices. In the current circumstances, macro prudential policy can be helpful in reducing some of the pressures arising from the Auckland housing market. The proposed LVR measures and the Government’s policy initiatives that it announced in the 2015 Budget should begin to ease the impact of investor activity.

“While a strong supply response over several years is needed to address Auckland’s housing imbalance, macro-prudential policy can help to lower the financial and economic risks while important regulatory and infrastructure issues are addressed and additional investment in new housing takes place.”

Does A Regional Trade Agreement Lessen or Exacerbate Growth Volatility?

A timely working paper from the IMF. “Does A Regional Trade Agreement Lessen or Exacerbate Growth Volatility? An Empirical Investigation” by  Kangni Kpodar and Patrick A. Imam. They suggest the benefits outweigh the costs and countries that are more prone to shocks are more likely to join a RTA.

The paper assesses how regional trade agreements (RTAs) impact growth volatility on a worldwide sample of 170 countries with data spanning the period 1978-2012. Notwithstanding concerns that trade openness through RTAs can heighten exposure to shocks, in particular when it leads to increased product specialization, RTAs through enhanced policy credibility, improved policy coordination, and reduced risk of conflicts can ease growth volatility. Empirical estimations suggest the benefits outweigh the costs as RTAs are consistently associated with lower growth volatility, after controlling for trade openness and other determinants of growth volatility. Furthermore, regression results also suggest that countries that are more prone to shocks are more likely to join a RTA, in particular with countries with relatively less volatile growth, additionally enhancing the stabilization effect.

Note: The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Macroprudential Policy: from Tiberius to Crockett and beyond

In a speech to TheCityUK Jon Cunliffe charts the development of macroprudential policy and the establishment of the macroprudential policy framework in the UK by the Bank of England’s Financial Policy Committee (FPC) since the Committee’s inception in 2011. He also looks ahead at some of the policy questions facing the FPC.

A key outcome of the financial crisis was the recognition that international standards were needed not just to ensure that individual banks were safe but also to ensure that the financial system as a whole was safe. The crisis showed that there are powerful dynamics in the financial system itself which drive booms in good times and busts in bad times. Seven years on from the crisis and four years from the establishment of the FPC, Jon says it is fair to ask how well regulators have done in putting in place the machinery to manage those risks and whether these have come at the expense of economic growth.

The contours of the new regulatory framework are clear and agreed and implementation is well underway, Jon notes, citing rules on bank capital and liquidity, resolution and work on addressing risks from outside the banking system, for instance from derivatives.

But he argues that this “standing framework” can only go so far in addressing risk. The role of macro-prudential authorities like the FPC is not just to ensure that regulations address the risk that financial firms and banks can pose to the financial system as a whole. It is also to monitor the build-up of risk and the development of new types of risk and to take action to address them.

In this area, macroprudential policy is at a much earlier stage of development, partly because the focus has so far been on creating the framework for policy, partly because there are still differing views internationally as to what time-varying, countercyclical macroprudential policy should and could do. Nonetheless, the FPC has taken some important steps here.

First, using macroprudential policy to address changing risks depends upon a clear assessment of risks and of the action necessary to address them. This is why the FPC has changed the structure and content of the Financial Stability Report. “The intention is that such a shorter, more focussed report will create a discipline for the FPC’s thinking, aid its communication and make it easier for others to hold us to account.”

Second, the Committee is developing the use of stress testing to assess macroprudential as well as microprudential risk. “At present we are using stress testing to help us judge how resilient the banking system is to different, severely adverse, but plausible, scenarios. A development of this approach would be to use stress testing more countercyclically. Rather than testing every year against a scenario of constant severity, the severity of
the test and the resilience banks need to pass it would be greater in boom times when credit and risk is building up in the financial system and it has further to fall, and then reduced in weaker periods when there is less risk in the system and the economy needs the banking system to maintain lending.”

Thirdly, the FPC has been looking at macroprudential risks beyond the banking system. Its recommendation on portfolio limits for high loan-to-income mortgages is an example of the committee taking a broad view of financial stability that goes wider than direct risks to the banking system.
On the question of whether financial regulation has gone too far, Jon says only now that reforms are being implemented is it possible for policymakers to see the whole picture of how they work together in practice and that some adjustments will be needed. “Given the depth and complexity of the financial crisis and the corresponding depth and complexity of the reforms, we should expect rather than be surprised that we will need to refine and adjust some of the regulatory reforms.”

However, while some adjustments may be necessary as we see how the reforms work in practice, Jon warns against seeking more generally to trade-off between financial stability and growth and notes that the post-crisis world requires a major adjustment in bank business models.
Jon also points out that in the long build-up of the credit cycle ahead of the crisis, while lending nearly doubled this did not lead to a very large increase in the financing of companies. Instead, lending was mainly directed to other financial institutions, mortgages and real estate.
“While we have relearned some familiar lessons in recent years, we have also learned some new ones. We have had to develop a new regulatory framework, macroprudential institutions like the FPC, and new policy approaches. Over the next few years we will certainly need to refine all of these. The implementation of the detailed reforms will inevitably throw up unforeseen effects in particular places, and where it is justified, we
will need to revisit issues. But we should be careful about talking about turning back the overall regulatory dial or trying to trade off the risk of financial instability for short-term growth.”

Is Amazon the New King of Retail?

From Brandchannel.

When Jeff Bezos founded Amazon as an online purveyor of books and then expanded the online giant into more and more verticals, he continually explained to investors that he wanted to forego short-term profits in favor of long-term diversification and domination of the businesses that Amazon entered. Has Amazon accomplished that? Check.

And obviously it’s not finished yet, as recent predictions indicate that Amazon will surpass Macy’s as America’s biggest apparel retailer in the next couple of years. And according to reports from Silicon Valley, it’s exploring more offline options for pickup and brick-and-mortar stores in the US, building on tests now underway in Europe and Canada.

When Amazon reported a quarterly breakthrough into the black on July 23rd, investors furiously bid up the stock. And in the process, Amazon crossed another historic threshold: It became worth more to investors than Walmart, the king of “old-fashioned” retailing.

Wall Street cognoscenti had predicted another loss and a more modest sales gain than the nearly 20 percent increase Amazon reported, which certainly helped its appeal. The 14 percent jump in its stock price on Thursday added more than $30 billion to Amazon’s market value and pushed its capitalization snapshot for the first time past Walmart’s, which ended the day at $230 billion versus Amazon’s $250 billion.

“The retail king has lost its crown,” declared Quartz. “The changing of the guard reflects the growing consensus that online retailing will play an increasingly central role in the global economy over the coming decades and underscores the high premium investors are placing on the growth they expect Amazon to deliver.”

That’s not the whole story, of course. Walmart is hardly giving up. Under new CEO Doug McMillon, it is fighting back furiously to become a true rival force to Amazon in e-commerce—witness Walmart’s attempts to echo the Amazon Prime Day promotion on July 15. And Walmart has recovered some of its mojo in the crucial bricks-and-mortar space, stemming sales declines and boosting wages for its lowest-paid workers.

Amazon is at a new sort of pinnacle vis-a-vis Walmart right now. But it promises to be a continuing game of king of the hill.