February 2016 – Page 8 – Digital Finance Analytics (DFA) Blog

ANZ extends partnership with Macquarie to provide wrap solutions

ANZ today announced it has entered into an agreement for Macquarie Investment Management Limited to develop a new wrap platform for ANZ’s advice partners that will be available from May 2016.

As part of the agreement, Macquarie will also provide administration services that are currently delivered through ANZ’s wholly owned business, Oasis.

As services are transitioned to Macquarie, staff numbers in the Oasis business will be progressively reduced over the next 18 months. At the end of the transition the majority of services provided by the 146 roles currently supporting the Oasis business will be provided by Macquarie.

ANZ Managing Director Pensions and Investments Peter Mullin said: “Detailed plans are being developed to support staff during the transition, which ensures they have time, support and notice to consider other options. Their entitlements are protected and a full range of career support services will be provided.

“The decision to partner with Macquarie was made following an extensive business and market review and is the right decision for our customers. We are now focussed on making sure the transition to the new business is done in a respectful and well-organised manner,” Mr Mullin said.

Oasis currently has $6.9 billion in funds under management and serves more than 50,000 customers. Transition of the Oasis wrap platform to Macquarie’s technology and administration services is expected to take up to 18 months.

No Change To The Cash Rate Today – RBA

At its meeting today, the Board decided to leave the cash rate unchanged at 2.0 per cent.

Recent information suggests the global economy is continuing to grow, though at a slightly lower pace than earlier expected. While several advanced economies have recorded improved growth over the past year, conditions have become more difficult for a number of emerging market economies. China’s growth rate has continued to moderate.

Commodity prices have declined further, especially oil prices. This partly reflects slower growth in demand but also very substantial increases in supply over recent years. The decline in Australia’s terms of trade, which began more than four years ago, has therefore continued.

Financial markets have once again exhibited heightened volatility recently, as participants grapple with uncertainty about the global economic outlook and diverging policy settings among the major jurisdictions. Appetite for risk has diminished somewhat and funding conditions for emerging market sovereigns and lesser-rated corporates have tightened. But funding costs for high-quality borrowers remain very low and, globally, monetary policy remains remarkably accommodative.

In Australia, the available information suggests that the expansion in the non-mining parts of the economy strengthened during 2015 even as the contraction in spending in mining investment continued. Surveys of business conditions moved to above average levels, employment growth picked up and the unemployment rate declined in the second half of the year, even though measured GDP growth was below average. The pace of lending to businesses also picked up.

Inflation continues to be quite low, with the CPI rising by 1.7 per cent over 2015. This was partly caused by declining prices for oil and some utilities, but underlying measures of inflation are also low at about 2 per cent. With growth in labour costs continuing to be quite subdued as well, and inflation restrained elsewhere in the world, consumer price inflation is likely to remain low over the next year or two.

Given these conditions, it is appropriate for monetary policy to be accommodative. Low interest rates are supporting demand, while regulatory measures are working to emphasise prudent lending standards and so to contain risks in the housing market. Credit growth to households continues at a moderate pace, albeit with a changed composition between investors and owner-occupiers. The pace of growth in dwelling prices has moderated in Melbourne and Sydney over recent months and has remained mostly subdued in other cities. The exchange rate has continued its adjustment to the evolving economic outlook.

At today’s meeting, the Board judged that there were reasonable prospects for continued growth in the economy, with inflation close to target. The Board therefore decided that the current setting of monetary policy remained appropriate.

Over the period ahead, new information should allow the Board to judge whether the recent improvement in labour market conditions is continuing and whether the recent financial turbulence portends weaker global and domestic demand. Continued low inflation may provide scope for easier policy, should that be appropriate to lend support to demand.

BMW Finance pays $391,000 penalty for breaching responsible lending and repossession laws

Car finance provider, BMW Australia Finance Ltd (BMW Finance), has paid penalties totalling $391,000 and had a condition placed on its Australian credit licence following concerns raised by ASIC.

The licence condition requires BMW Finance to appoint a compliance consultant after ASIC found it breached important consumer protection provisions relating to responsible lending and the repossession of motor vehicles.

ASIC found that between November 2014 and May 2015, BMW Finance:

failed to make reasonable inquiries about, and take reasonable steps to verify, consumers’ stated living expenses, income and cash at bank when there was an unexplained discrepancy in the figures provided, and made insufficient inquiries about consumers’ capacity or plans to repay substantial balloon repayments due at the conclusion of the loan term;
failed to assess credit contracts it entered into with consumers as unsuitable, and entered into unsuitable credit contracts, when documentation provided by consumers showed there was insufficient income available after expenses to service monthly loan repayments; and
failed or delayed in its obligations to provide customers with statutory information setting out their rights and the options available to them after a finance company repossesses a mortgaged vehicle or the consumer voluntarily returns that vehicle.

These failures by BMW Finance to comply with the requirements of the law resulted in customers entering into unsuitable loans and losing the benefit of important protections to reduce the impact of financial hardship.

ASIC Deputy Chair Peter Kell said, ‘The outcome with BMW Finance shows failing to comply with important consumer protection provisions can result in significant penalties. ASIC will continue to monitor compliance with these provisions to reduce the risk of borrowers being placed into unsuitable loans, and to ensure that borrowers are informed of their rights and options available to them when facing financial hardship.’

In addition to the penalties, the licence condition requires BMW Finance to appoint an independent compliance consultant to conduct a review of, and report to ASIC on BMW Finance’s policies and procedures on a quarterly basis over 12 months to ensure compliance with consumer credit laws.

Commodity Price Shocks and Financial Sector Fragility

A newly released IMF working paper investigates the impact of commodity price shocks on financial sector fragility.

Using a large sample of 71 commodity exporters among emerging and developing economies, it shows that negative shocks to commodity prices tend to weaken the financial sector, with larger shocks having more pronounced impacts. More specifically, negative commodity price shocks are associated with higher non-performing loans, bank costs and banking crises, while they reduce bank profits, liquidity, and provisions to nonperforming loans. These adverse effects tend to occur in countries with poor quality of governance, weak fiscal space, as well as those that do not have a sovereign wealth fund, do not implement macro-prudential policies and do not have a diversified export base.

The recent decline in commodity prices, especially for oil, has revived once again interest in their economic impact. Most commodities prices have declined by about 50 percent between mid-2014 and mid-2015, leading to significant losses in export earnings for commodity exporters. While commodity markets may be undergoing a transition to an era of low prices, such a sharp decline is not unprecedented.

Adverse commodity price shocks can also contribute to financial fragility through various channels. First, a decline in commodity prices in commodity-dependent countries results in reduced export income, which could adversely impact economic activity and agents’ (including governments) ability to meet their debt obligations, thereby potentially weakening banks’ balance sheets. Second, a surge in bank withdrawals following a drop in commodity prices may significantly reduce banks’ liquidity and potentially lead to a liquidity mismatch.

If large enough, commodity price shocks can also adversely affect bank balance sheets by weighing on international reserves and increasing the risk of currency mismatches. Third, a decline in commodity prices can reduce commodity exporters’ fiscal performance (by lowering revenue), which in turn may push government to adjust their budgets to accommodate revenue shortfalls. Often this can happen in a disorderly manner through the accumulation of payment arrears to suppliers and contractors, who in turn are unable to adequately service their bank loans.

Macro-prudential policies are gaining attention internationally as a useful tool to address system-wide risks in the financial sector. Macro-prudential policies act as an important factor for the stability of the financial sector. Macro-prudential instruments cover policies related to borrowers, loans, banks’ assets or liabilities, foreign currency credit, reserve requirements and policies that encourage counter-cyclical buffers (capital, dynamic provisioning and profits distribution restrictions). They may act as a tool to monitor the financial sector, therefore reducing the risk-taking and allowing the government to intervene on time.

The results show that negative commodity price shocks increase NPLs and bank costs, and decrease bank profits only in countries without macro-prudential policies. In contrast, countries with macro-prudential instruments are better able to cope with the detrimental impacts of adverse commodity price shocks. The implementation of macroprudential policy does not matter when it comes to provisions to NPLs as commodity price slumps lower provisions to NPLs in countries with or without macro-prudential policy.

Adverse commodity price shocks tend to lead to financial problems in non-diversified economies. The results also highlight that the detrimental effects of commodity price shocks are more common in countries with a low diversification of their export base. A lack of diversification may increase exposure to adverse external shocks and vulnerability to macroeconomic instability. While a diversified export base may allow countries to better handle declines in commodity related revenues with alternative sources.

In terms of policy implications, the findings underscore the necessity of adopting policies to increase the resilience of resource rich-countries. First, developing countries should promote sound economic policies and good governance that will ensure the effective use of natural resource windfalls and build fiscal buffers, including through sovereign wealth funds or similar arrangement. The presence of a sovereign wealth fund can effectively mitigate the impact of commodity price shocks and stabilize the economy. More generally, sound fiscal policy, characterized by low debt levels is an important buffer against exogenous shocks. Second, countries should implement macro-prudential policies in order to limit or mitigate systemic risk. Finally, countries should diversify their production and exports base in order to have more alternative sources of revenues allowing them to deal with the volatility of commodity exports related revenues.

Note: IMF Working Papers describe research in progress by the authors and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the authors and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Three factors pushing Australian banks into a retreat home

From The Conversation.

History shows that successfully becoming a multinational bank operating in many countries is difficult.

While many banking skills are transferable across national borders, there are institutional and cultural impediments to overcome. And as ANZ’s strategy shift away from Asia announced last week might demonstrate, the regulatory barriers are significant, particularly for expansion into Asia.

First among these is the ASEAN Banking Integration Framework (ABIF) initiated at the end of 2014. This involves the designation of banks headquartered in the ASEAN region as Qualified ASEAN Banks (QABs).

Such a designation – not available to Australian banks – means that they will be able to operate in other ASEAN countries under exactly the same regulatory arrangements as domestic banks. While the specific competitive advantages this will provide over non-QABs are unclear (and may vary from country to country), this is in essence a barrier to entry for banks from outside the ASEAN region.

It remains to be seen whether the ABIF will succeed, given the vast differences in banking structure and development across the region, not to mention political factors. Nevertheless, the development is not conducive to an Asian expansion strategy for Australian banks.

A second factor is the regulatory arrangements driven by the Basel Committee, and implemented in Australia by banking regulator, APRA. Capital requirements associated with offshore subsidiaries or joint ventures can be higher than for purely domestic operations.

The Australian banks have complained about this in the past and given bankers’ aversion to higher capital, that also creates a disincentive to offshore operations. (Given generally poor experience with bank offshore expansion over the years, that may be a good result for bank shareholders arising from such regulation).

A related regulatory consideration is the imposition of higher capital requirements on banks which are regarded as systemically important. The major Australian banks are already subject to a higher capital charge for being Domestic Systemically Important Banks (D-SIBS), but offshore expansion could ultimately lead to a Global SIB categorisation and further capital imposts. In general, the thrust of post-crisis regulation is towards disincentives for banks becoming “too big”.

A final factor, virtually unique to Australia, arises from tax considerations. An increasing share of earnings generated offshore would reduce the ability of Australian banks to pay fully franked dividends. This is equivalent to banks facing a higher cost of capital for overseas activities than for domestic activities.

For shareholders (such as this writer) in ANZ or other Australian banks, this would mean that offshore expansion would need to be even more profitable than domestic activities to be value adding. Then, and it is an unlikely outcome, higher partially franked dividends could be paid to offset the reduction in franking.

So: the cost of capital is probably higher for overseas versus domestic activities of Australian banks (due to dividend imputation); capital requirements are a bigger problem; and the ASEAN region is putting some potential roadblocks in place which hinder ease of foreign bank entry and competitiveness.

And added to all that is the massive potential disruption to traditional banking being posed by innovation and Fintech, requiring a focused response to preserve competitive advantages in existing markets and products.

Retreat to Australia sounds like a sensible response for Australian banks.

Author: Kevin Davis, Research Director of Australian Centre for FInancial Studies and Professor of Finance at Melbourne and Monash Universities, Australian Centre for Financial Studies

Melbourne takes over as the best performing capital city over the past twelve months – CoreLogic RP Data

Dwelling values across Australia’s capital cities were 0.9% higher in January driven partially by a rebound in Sydney and Melbourne. The recent growth conditions have pushed the Melbourne market into first place for annual growth in dwelling values with an 11.0% rise compared with Sydney where values are 10.5% higher over the past twelve months.

According to the January 2016 CoreLogic RP Data Hedonic Home Value Index results released today, dwelling values across Australia’s combined capital cities showed a 0.9 per cent rise in January after recording no change in December and a 1.5 per cent drop in November.

According to CoreLogic RP Data head of research Tim Lawless, this month on month rise wasn’t quite enough to pull the rolling quarterly rate of growth back into the black, with capital city dwelling values remaining 0.6% lower over the past three months. Hobart led the monthly figures with a 4.7% jump in values, followed by Melbourne where values were 2.5% higher and Canberra with a 2.8% lift. Sydney values also showed a rise of 0.5%, while the remaining four capital cities showed dwelling values to be either flat or down.

Index results as at January 31, 2016

The rolling quarterly trend was looking similarly diverse, with four of Australia’s eight capital cities recording negative dwelling value movements over the past three months, with Sydney dwelling values showing the largest fall, down 2.1 per cent. Values are down over the rolling quarter in Darwin (-1.4%), Adelaide (-0.9%) and Melbourne (-0.1%) as well. The strongest growth in home values over the quarter across the capital cities was found in Hobart with a 3.0% capital gain.

Despite recording the largest annual decline in home values (-4.1%), Perth dwelling values posted a 1.7 per cent rise over the three months to the end of January. Other capital cities to record a rise over the rolling quarter were Brisbane (+0.8%) and Canberra (+1.2%).
Over the past twelve months, capital city dwelling values have risen by 7.4% with Sydney’s capital gains of 10.5% no longer the highest annual rate across the capitals. “While still a high rate of annual growth, Sydney’s annual rate of capital gain is now at a 29 month low and has been progressively softening since peaking at 18.4% in July last year,” Mr Lawless said.

“Melbourne’s housing market has been more resilient to slowing growth conditions which has propelled the annual growth rate to the highest of any capital city, with dwelling values 11.0% higher over the past twelve months. Previously, during the height of the growth phase, there was a large separation between Sydney’s housing market, which was streaking ahead, and Melbourne’s, where the rate of capital gain was substantial but still well below the heights being recorded in Sydney. The latest data reveals Sydney’s housing market is now playing second fiddle to Melbourne’s, at least in annual growth terms.”

“In fact, over the past six months, the performance gap between Sydney and Melbourne is stark. Sydney dwelling values have reduced by 0.6 per cent between July last year and the end of January 2016, compared with a 3.0 per cent rise across Melbourne dwelling values. The last six months have also seen both Brisbane and Canberra dwelling values rise by 2.0 per cent while Hobart values are 1.3 per cent higher and Adelaide dwelling values have been virtually flat with a 0.1 per cent rise,” Mr Lawless said.

The annual pace of growth across the Canberra market has been progressively improving, with values up 6.0% over the past twelve months; the strongest annual gain since November 2010. The nation’s capital has benefitted from improved buyer confidence while rising demand has seen much of the housing oversupply absorbed, particularly across the detached housing market where gains have been the highest.

While the pace of growth in dwelling values across the combined capitals has eased from the heights of mid last year, rental growth across the capital cities over the past twelve months has reduced further, with dwelling rents unchanged over the year.

According to Mr Lawless, with a rental series that extends back to 1996, these are the weakest rental markets conditions ever seen. “In fact there hasn’t previously been a twelve month period when rents didn’t rise across our combined capitals index.” he says.

Darwin and Perth are dragging the broader capital cities’ rental indicators down with weekly rents down 13.4% over the past year in Darwin and 8.6% lower in Perth. Dwelling rents were also down in Brisbane (-0.7%) and Adelaide (-0.4%). The largest rental increases were in Sydney and Melbourne where weekly rents rose 1.4% higher, and 2.1% higher respectively over the past twelve months.

Mr Lawless said, “With dwelling values rising substantially more than rents in Sydney and Melbourne, this ongoing effect has created a compression in gross rental yields to the extent that gross yields in these cities are now only marginally higher than record lows.”

According to the most recent Reserve Bank’s private sector housing credit data, the pace of investment-related credit growth has fallen well below the 10% speed limit implemented by APRA in December 2014.

Mr Lawless said, “The slower pace of investment credit is likely to be due to more than just higher mortgage rates for investment loans and stricter lending policies, but also due to investors becoming wary of the low rental yield scenario while also anticipating lower capital gains than what was recorded last year.”

“As housing market activity moves out of its seasonally slow festive period, we are likely to have a much better gauge on how the overall housing market is performing in the New Year.

“January tends to be a relatively quiet month across the housing market, however across the capital cities we estimate that there were approximately 16,500 dwelling sales contracted in January.

“Additionally, while the number of auctions won’t return to normal until early February, the weighted average auction clearance rate across the capital cities over the final weekend of January was 61.6%; higher than what was recorded during December when the weighted average clearance rate was between 57% and 59% from week to week.

“The bounce in dwelling values in January may provide an early sign that housing values across the combined capital cities are not likely to experience material decreases in 2016. We believe that the rate of capital gain across the combined capitals in 2016 is likely to be less than the 7.8% experienced in 2015, driven by a slowdown in Sydney and Melbourne and continued softness in the Perth and Darwin markets,” Mr Lawless said.