September 2016 – Page 7 – Digital Finance Analytics (DFA) Blog

Latest Fintech Disruption Index Higher

The latest edition of the Financial Services Disruption index is released today. It measured 39.26, up 8.51% from last quarter.

The Disruption Index tracks change in the small business lending sector, and more generally, across financial services. The Financial Services Disruption Index, which has been jointly developed by Moula, the lender to the small business sector; and research and consulting firm Digital Finance Analytics (DFA).

Combing data from both organisations, we are able to track the waves of disruption, initially in the small business lending sector, and more widely across financial services later.

Highlights this time include:

Surveyed small businesses are becoming increasingly aware of funding alternatives away from the traditional banks, with a rise of 14% quarter on quarter.
We have now reached the point where SMEs using smart phones, tablets and laptops within their businesses are in the majority for the first time, with nearly 52% of businesses indicating these important tools in a small business. This trend is only likely to accelerate.
Coupled with the increasing adoption of smart devices in SMEs, we are also seeing increasing use of cloud accounting data, not only in running a SME but also to obtain a loan (through data permissioning). In the latest results, over half of all businesses permissioned Moula into cloud accounting data.

In light of the vacuum of information in respect of the size of SME borrowing, DFA have used their survey to provide an estimate of this market segment.

DFA looked at SME’s borrowing less than $500,000. The total stock of debt is in the order of $107 billion of loans (including unsecured overdrafts, structured loans, personal loans for business purposes) and $36 billion of credit cards debt, or $143 billion in total.

Of surveyed respondents, approximately 13% of businesses are just aware of fintech offerings, whilst 2% considered applying for funding but did not follow though. In addition, a further 5% have visited a fintech lender web site and 10% may apply within the next 12 months.

So, the opportunity for fintech lending is significant…

Government Trumpets Foreign Buyer Clampdown

In a statement today, the Treasurer highlighted further forced sales and fines imposed on foreign investors who have purchased a residential property. The body count is 46, with 400 still under investigation, so the number of actions, and amounts involved are very small, when compared to the whole market.

Treasurer the Hon. Scott Morrison has ordered the divestment of a further 16 Australian residential properties that have been held by foreign nationals in breach of the foreign investment framework, taking the total purchase price of Australian residential real estate divested to over $92 million.

“The divestments of these 16 properties, which have a combined purchase price of over $14 million, are further evidence of the Turnbull Government’s commitment to enforcing our rules so that foreign nationals illegally holding Australian property are identified and their illegal holdings relinquished,” Mr Morrison said.

“Foreign investment provides significant benefits for Australia but we must also ensure that such investment benefits all Australians, is in-line with our rules and is not contrary to our national interest.

“The 16 properties were purchased in Victoria, New South Wales, Queensland and Western Australia with prices ranging from approximately $200,000 to $2 million. The individuals involved come from a range of countries including the United Kingdom, Malaysia, China and Canada.

“The foreign investors either purchased established residential property without Foreign Investment Review Board approval, or had approval but their circumstances changed meaning they were breaking the rules.

“Since taking office in 2013, the Coalition Government has forced foreign nationals to divest a total of 46 properties. Under the previous Labor government, no foreign nationals were forced to divest illegally held Australian property.

“These divestments are a reminder that the Coalition Government’s increased compliance measures, which include transferring responsibility for residential real estate enforcement to the Australian Taxation Office (ATO), are working to ensure our foreign investment rules are being enforced.

“Since the Government’s transfer of responsibility to the ATO for compliance in May 2015, over 2,200 matters have been referred for investigation. Through information provided by the public, together with the ATO’s own enquiries, approximately 400 cases remain under active investigation.

“Since a new penalty regime was introduced from 1 December last year, 179 penalty notices have been issued, totaling over $900,000. Penalty notices have been issued to people who have failed to obtain FIRB approval before buying property as well as for breaching a condition of previously approved applications.

“Illegal real estate purchases by foreign citizens attract criminal penalties of up to $135,000 or three years’ imprisonment, or both for individuals; and up to $675,000 for companies. The new rules also allow capital gains made on illegal investments to be forfeited.

“In addition to divestments, a number of people came forward during the reduced penalty period who were not in breach and some who voluntarily sold their properties while the ATO was examining their case. There are at least 25 examples of foreign investors self-divesting in this way showing a change in behaviour towards more compliance with the rules and a strengthening of the program overall.

“While Australia welcomes foreign investment, foreign investors must comply with our laws,” Mr Morrison said.

The Future Of Fintech – Episode 3

In the last episode of the three-part series on the future of fintech, Baker & McKenzie looks ahead and examines both where some of the opportunities lay and where some of the challenges will be.

Household Financial Security Confidence Improves Again

The latest edition of the Digital Finance Household Finance Confidence Index, to end August is released today. Overall the index rose again, from 95.1 to 95.8.

Household costs were relatively contained, whilst many received a boost from the RBA cash rate cut. Some savers were able to take advantage of higher term deposit rates, although others saw their returns on cash deposits falling further. Income growth remained static, but net worth improved thanks to rises in the value of property and shares. Overall the index remains below a neutral setting, but some households in some states are now well into positive territory.

The cash rate cut helped to propel the confidence of those with owner occupied and investment property, while those who are property inactive did not show the same rise. In addition, the more recent positive home price rises bolstered property investors.

The state variations continue to widen, with households in NSW and VIC well into positive territory, whilst those in WA languish.

By way of background, these results are derived from our household surveys, averaged across Australia. We have 26,000 households in our sample at any one time. We include detailed questions covering various aspects of a household’s financial footprint. The index measures how households are feeling about their financial health. To calculate the index we ask questions which cover a number of different dimensions. We start by asking households how confident they are feeling about their job security, whether their real income has risen or fallen in the past year, their view on their costs of living over the same period, whether they have increased their loans and other outstanding debts including credit cards and whether they are saving more than last year. Finally we ask about their overall change in net worth over the past 12 months – by net worth we mean net assets less outstanding debts.

ASIC reports on review of marketing practices in IPOs

ASIC has warned firms and issuers involved in initial public offerings (IPOs) in Australia to ensure their marketing campaigns comply with the letter and spirit of the law, particularly when using emerging social-media strategies.

An ASIC review of marketing practices in IPOs has found that so-called ‘traditional’ means of communication – telephone calls, emails and websites – remain more important for the marketing of an offer to retail investors. The review found that the use of social media is not yet pervasive; it is only used occasionally by small to medium-sized firms to market IPOs.

REP 494 Marketing practices in initial public offerings of securities details the review’s findings, highlights areas of concern and provides for consideration ASIC’s recommendations to improve marketing practices for IPOs in the future.

Between October 2015 and March 2016 ASIC reviewed the online and social media marketing of 23 IPOs where a prospectus was lodged. ASIC then conducted a more extensive review of the marketing practices and materials of 17 firms that were involved in 7 of the original IPOs. ASIC also monitored the marketing of other IPOs as part of its usual prospectus review work.

Key findings of the report included:

There were some oversight weaknesses in relation to marketing done via telephone calls and social media, and in ensuring that marketing material is kept up to date.

The use of forecasts in communications or the targeting of investors from a particular background means special care may need to be taken to avoid misleading investors.

Firms and issuers did not always properly control access to information about the offer to ensure retail investors base their decision on the prospectus; and

Some good practices were adopted by firms to ensure that communication was consistent with the prospectus information.

ASIC Commissioner John Price said the purpose of the review was to understand current market practices and identify areas of particular concern.

‘The way that an IPO is marketed may unduly influence the decision to invest in an IPO,’ he said.

‘We are living in more innovative times where we are seeing new interactive methods of communication and marketing used in many corporate and commercial arenas, including taking a company public. While we embrace such innovation, we also want to remind firms and issuers to ensure that their marketing practices comply with the advertising and publicity restrictions in the Corporations Act,’ he said.

Statement on the Conduct of Monetary Policy

The Treasurer and Governor of the Reserve Bank have reaffirmed the statement on the Conduct of Monetary Policy. Both the Reserve Bank and the Government agree that a flexible medium-term inflation target is the appropriate framework for achieving medium-term price stability. They agree that an appropriate goal is to keep consumer price inflation between 2 and 3 per cent, on average, over time.

The Statement on the Conduct of Monetary Policy (the Statement) has recorded the common understanding of the Governor, as Chair of the Reserve Bank Board, and the Government on key aspects of Australia’s monetary and central banking policy framework since 1996.

The Statement seeks to foster a sound understanding of the nature of the relationship between the Reserve Bank and the Government, the objectives of monetary policy, the mechanisms for ensuring transparency and accountability in the way policy is conducted, and the independence of the Reserve Bank.

The centrepiece of the Statement is the inflation targeting framework, which has formed the basis of Australia’s monetary policy framework since the early 1990s.

The Statement has also been updated over time to reflect enhanced transparency of the Reserve Bank’s policy decisions and to record the Bank’s longstanding responsibility for financial system stability.

Building on this foundation, the current Statement reiterates the core understandings that allow the Bank to best discharge its duty to direct monetary policy and protect financial system stability for the betterment of the people of Australia.

Relationship between the Reserve Bank and the Government

The Reserve Bank Governor, its Board and its employees have a duty to serve the people of Australia to the best of their ability. In the carrying out of their statutory obligations, through public discourse and in domestic and international forums, representatives of the Bank will continue to serve the best interests of the people of Australia with honesty and integrity.

The Governor and the members of the Reserve Bank Board are appointed by the Government of the day, but are afforded substantial independence under the Reserve Bank Act 1959 (the Act) to conduct the monetary and banking policies of the Bank, so as to best achieve the objectives of the Bank as set out in the Act.

The Government recognises and will continue to respect the Reserve Bank’s independence, as provided by the Act.

The Government also recognises the importance of the Reserve Bank having a strong balance sheet and the Treasurer will pay due regard to that when deciding each year on the distribution of the Reserve Bank’s earnings under the Act.

New appointments to the Reserve Bank Board will be made by the Treasurer from a register of eminent candidates of the highest integrity maintained by the Secretary to the Treasury and the Governor. This procedure ensures only the best qualified candidates are appointed to the Reserve Bank Board.

Objectives of Monetary Policy

The goals of monetary policy are set out in the Act, which requires the Reserve Bank Board to conduct monetary policy in a way that, in the Reserve Bank Board’s opinion, will best contribute to:

the stability of the currency of Australia;

the maintenance of full employment in Australia; and

the economic prosperity and welfare of the people of Australia.

These objectives allow the Reserve Bank Board to focus on price (currency) stability, which is a crucial precondition for long-term economic growth and employment, while taking account of the implications of monetary policy for activity and levels of employment in the short term.

Both the Reserve Bank and the Government agree on the importance of low and stable inflation.

Effective management of inflation to provide greater certainty and to guide expectations assists businesses and households in making sound investment decisions. Low and stable inflation underpins the creation of jobs, protects the savings of Australians and preserves the value of the currency.

Both the Reserve Bank and the Government agree that a flexible medium-term inflation target is the appropriate framework for achieving medium-term price stability. They agree that an appropriate goal is to keep consumer price inflation between 2 and 3 per cent, on average, over time. This formulation allows for the natural short-run variation in inflation over the economic cycle and the medium-term focus provides the flexibility for the Reserve Bank to set its policy so as best to achieve its broad objectives, including financial stability. The 2-3 per cent medium-term goal provides a clearly identifiable performance benchmark over time.

The Governor expresses his continuing commitment to the inflation objective, consistent with his duties under the Act. For its part the Government endorses the inflation objective and emphasises the role that disciplined fiscal policy must play in achieving medium-term price stability.

Consistent with its responsibilities for economic policy as a whole, the Government reserves the right to comment on monetary policy from time to time.

Transparency and Accountability

Transparency in the Reserve Bank’s views on economic developments and their implications for policy are crucial to shaping inflation expectations.

The Reserve Bank takes a number of steps to ensure the conduct of monetary policy is transparent. These steps include statements announcing and explaining each monetary policy decision, the release of minutes providing background to the Board’s policy deliberations, and commentary and analysis on the economic outlook provided through public addresses and regular publications such as its quarterly Statement on Monetary Policy and Bulletin. The Reserve Bank will continue to promote public understanding in this way.

In addition, the Governor will continue to be available to report twice a year to the House of Representatives Standing Committee on Economics, and to other Parliamentary committees as appropriate.

The Treasurer expresses support for the continuation of these arrangements, which reflect international best practice and enhance the public’s confidence in the independence and integrity of the monetary policy process.

Financial Stability

Financial stability, which is critical to a stable macroeconomic environment, is a longstanding responsibility of the Reserve Bank and its Board.

The Reserve Bank promotes the stability of the Australian financial system through managing and providing liquidity to the system, and chairing the Council of Financial Regulators (comprising the Reserve Bank, Australian Prudential Regulation Authority, the Australian Securities and Investments Commission and the Treasury).

The Payments System Board has explicit regulatory authority for payments system stability. In fulfilling these obligations, the Reserve Bank will continue to publish its analysis of financial stability matters through its half-yearly Financial Stability Review.

In addition, the Governor and the Reserve Bank will continue to participate, where appropriate, in the development of financial system policy, including any substantial Government reviews, or international reviews, of the financial system itself.

The Reserve Bank’s mandate to uphold financial stability does not equate to a guarantee of solvency for financial institutions, and the Bank does not see its balance sheet as being available to support insolvent institutions. However, the Reserve Bank’s central position in the financial system, and its position as the ultimate provider of liquidity to the system, gives it a key role in financial crisis management. In fulfilling this role, the Reserve Bank will continue to coordinate closely with the Government and with the other Council agencies.

The Treasurer and the Governor express their support for these longstanding arrangements continuing.

Higher Auction Clearances Confirmed

According to CoreLogic, based on preliminary results, the combined capital city clearance rate rose this week, from 75.4 per cent last week to 77.9 per cent.

This week, the clearance rate across the capitals is higher than one year ago, when 69.9 per cent of reported capital city auctions cleared. There were 2,093 capital city auctions held over the week, similar to the 2,062 last week, but lower than one year ago, when, despite lower clearance rates, the spring market was in full force, with over 2,500 auctions held across the combined capitals. This week last year represented the 7th consecutive week of capital city auction volumes being over the 2,000 mark, while over the past seven weeks, only three weeks have seen more than 2,000 auctions across the capitals.

This aligns with the APM data already posted, though there are some variations.

Probability of Mortgage Default – Latest Estimates in 3D

As we finish our series on deep analysis of mortgages by LVR, DSR and LTI, we have incorporated the latest household survey data into our probability of mortgage default modelling by post code. The national average is 1.3%, but it rises to more than 3% in some places.

We take the DSR, LTI and LVR data, and overlay the mortgage stress and state-level economic indicators to estimate the likely relative probability of mortgage default. We also overlay assumptions on the RBA’s cash rate, expected mortgage rates, income growth and employment. This all gets mashed to derive a percentage estimate of default by post code.

We have mapped this into a 3D view, which clearly shows that the higher levels of default in coming months will emanate from QLD and WA, as the mining sector rotation continues. On the other hand, NSW and VIC are relatively benign as ultra-low interest rates continue to protect many households with large mortgages. The greater the height of the post code, the higher the risk of default.

One striking final conclusion. If you compare this picture with the DSR 3D view from yesterday, you will see that DSR and probability of default are only somewhat linked. There are a bunch of other factors which shape the likely loss outcomes.

Deutsche Bank Looks to Settle US Mortgage Legal Exposure at a Reasonable Cost – Moody’s

According to Moody’s on 15 September, Deutsche Bank AG announced in a filing that it has commenced negotiations with the US Department of Justice (DoJ) aiming to settle civil claims in connection with the bank’s underwriting and issuance of residential mortgage-backed securities (RMBS) and related securitization activities between 2005 and 2007. Eliminating the claims’ litigation tail risk at a manageable cost would be credit positive for Deutsche Bank, but negotiations have just begun and the final cost of settlements of complex capital markets litigation remains very difficult to predict.

At the end of the second quarter of 2016, Deutsche Bank had €5.5 billion of litigation reserves, for a variety of legal matters, but the bank has not disclosed the size of reserves for any specific action. For the analysis below, we have assumed that at least half of the litigation reserve could be made available for a possible DOJ settlement. If Deutsche Bank can eliminate this tail risk and settle within or near the assumed reserve of €2.75 billion (or $3.1 billion), it would be positive for bondholders.

Deutsche Bank has indicated its willingness to consider settlements at a cost broadly in line with peers’ prior settlements. However, as Exhibit 1 indicates, peers’ settlements have varied widely, ranging from $1.7 million to $8.9 million per basis point of RMBS league table share. Based on Deutsche Bank’s 6.4% market share, a settlement in the low end ($1.7 million per basis point) or even at the mid-point ($3.6 million per basis point) of the settlement range would be well covered by our assumed DOJ settlement reserve. However, a DB settlement at the high end of announced peer settlements ($8.9 million per basis point) would total $5.7 billion. A settlement of $5.7 billion would require an addition to our assumed DOJ settlement reserve of €2.4 billion, which would dent 2016 profitability (pretax earnings for first-half 2016 totaled €1 billion), a credit negative. Basing litigation exposure solely on market share is a crude approximation, but it helps dimension the adequacy of reserves and potential income statement effect.

The commencement of these negotiations is not surprising since Deutsche Bank management set a strategic objective to resolve crisis-related litigation and remove uncertainty hanging over the bank. As the complex negotiations proceed, we also expect that management have strong incentives to resist a quick settlement with the DOJ that is more expensive than the prior settlements of peers. These incentives include preserving flexibility with respect to paying coupons on its additional Tier 1 (AT1) securities. Even a settlement requiring an additional $2.4 billion of reserve should still leave Deutsche Bank with sufficient flexibility to pay its 2017 AT1 coupons. We expect this flexibility to increase given the EBA’s announced intention to bifurcate Pillar 2 capital requirements into required and guidance components, with only the required component factoring into the calculation of the Maximum Distributable Amount for AT1 coupon payments.

Finally, Deutsche bank’s current Baa2 rating and stable outlook already incorporates the possibility of a modest loss (and substantial litigation costs) in 2016 and the potential for limited profitability in 2017.

How Airbnb is reshaping our cities

From The Conversation.

Infrastructure in our cities – let’s call it the hardware – remains much the same as ever, but the software – the way we use it – is transforming rapidly. One piece of that software, Airbnb, is dramatically reshaping the world’s cities.

The digital platform allows citizens to find and rent short-term accommodation from other citizens. Airbnb has the potential to rupture the traditional spatial relationship between tourist and local, making our cities more vibrant and diverse places to live in and to visit.

The question is: what opportunities and dangers does the platform present? What are the implications of repurposing existing residential infrastructure for short-term accommodation? What happens when the global “sharing economy” meets a city’s suburbs?

Lessons from an early adopter

Melbourne was an early adopter of Airbnb. It is also one of the top 10 cities for global travellers on Airbnb. What insights can be gathered from its experience?

According to Airbnb, three-quarters of listings worldwide are outside major hotel districts. Airbnb has three types of property listings: entire homes, private rooms and shared rooms.
Concentration of Airbnb entire-house rentals in Melbourne. Jacqui Alexander & Tom Morgan, Author provided
Entire homes make up over half the total number of Melbourne’s metropolitan listings. Data collected in January 2016 reveals that their distribution is relatively consistent with that of hotels and licensed accommodation, which exist in large concentrations in the CBD and inner city. Many hosts who list entire homes lease or sublet when they go away.

In Australia, tenants require permission from their landlord to sublet, so there is little risk for the landlord if they follow due process. But analysis by website Inside Airbnb indicates that about 75% of entire-house listings in Melbourne are available for over 90 days per year. Hosts with multiple properties manage about a third of all the entire-house listings in Melbourne. These operators hold an average of three properties, but some have dozens. Through Airbnb, these brokers are turning existing housing infrastructure into informal, distributed hotels while saving on capital costs, overheads and wages.

Globally, the Airbnb phenomenon has been blamed for driving up rents, accelerating gentrification and displacing local residents by reducing available housing stock. In Melbourne, the boom in high-density development in the CBD has resulted in an excess of homogeneous apartment dwellings. Bedrooms without natural light, as well as insufficient floor area, outdoor space and storage space, characterise many of these developments, rendering them effectively unlivable for long-term residents. But these properties are attractive to itinerant tenants seeking affordable inner city accommodation.
Concentration of Airbnb shared-room rentals in Melbourne. Jacqui Alexander & Tom Morgan, Author provided
Shared rooms in Melbourne constitute only about 2% of all listings, but they are almost exclusively confined to the CBD. Box Hill (14 kilometres east of Melbourne), and Maidstone/ Braybrook (eight kilometres west of Melbourne) are secondary outlying hotspots. The majority of CBD listings are around new apartment towers near Southern Cross Station (at the western end of the CBD) and RMIT University.A number of already small two-bedroom apartments in the Neo200, Upper West Side and QV1 towers are operating as gendered dormitories. These often sleep eight, with four to a room. Overloading these apartments creates potential fire-safety and hygiene-compliance issues.

Short-term letting via sites like Airbnb allows investors to earn up to three times the amount they’d receive in rent (the average cost to rent an entire home is AU$189 per night). Travellers benefit from competitive accommodation rates, cooking facilities, convenient locations and access to private pools and gymnasiums intended for residents.

Airbnb acknowledges that professional hosts with multiple listings are exploiting the so-called sharing economy, but has not yet taken steps to regulate this. Governments would do well to implement the long-awaited and much-needed minimum design standards for apartments to curb the construction of developments in the city that fail to cater for residents or which are purpose-built for the Airbnb market (a few local examples are already emerging).

Beyond the obvious need to protect the amenity of citizens, protection of the liveliness and heterogeneity of the city is essential to maintain the kind of “authentic” experience that appeals to Airbnb users in the first place. Melbourne is beginning to follow the trajectory of international cities like London where the investor market, fuelled by capital gains tax exemptions, has pushed residents further and further out. Dispersing the concentration of entire-house and private-room rental is vital.
Concentration of Airbnb private room rentals in Melbourne. Jacqui Alexander & Tom Morgan, Author provided
More promising is the dispersed pattern of private rooms in Melbourne. These represent around 45% of listings across the city. While private rooms are still concentrated in and around the CBD, diffuse listings across Melbourne’s middle-ring suburbs realise Airbnb’s ambition to enable access to the everyday spaces of cities. This pattern makes sense given the mismatch between Australian house sizes, which remain the largest in the world, and changing household structures – most significantly, the decline of the nuclear family. An increase in housing diversity in the middle-ring suburbs is likely to facilitate more entire-house listings in these areas in the future.

We are also seeing evidence of Airbnb driving housing diversity. Annexed and granny-flat configurations are commonly listed in suburbs close to the Melbourne CBD like Brunswick and Caulfield. Loose-fit arrangements like these provide more flexibility to cater to both residents and visitors, and the by-product is slow but genuine “bottom-up” densification.

Government incentives for this kind of small-scale development would help to make this a viable (and, for many, welcome) alternative to densification through high-rise apartment development.

In 2015, Tourism Victoria entered into an agreement with Airbnb Melbourne to promote buzzing inner-city suburbs Fitzroy and St Kilda as “sharing economy” hotspots. But the cost of renting in these suburbs is already exorbitant. Fitzroy was named the second-most-expensive suburb in Melbourne for apartment rental in 2015.

Instead, policymakers could encourage disruption in the suburbs that would benefit both sides.

What can be done to capture local benefits?

Airbnb claims that tourists who use the platform “stay longer and spend more”. Through taxation and additional revenue from the sharing economy, governments could fund more extensive and efficient transport networks to service both locals and visitors. Extending transport infrastructure would support the intensification of distributed neighbourhoods and maximise intermingling between tourists and locals.
Airbnb rentals in Perth. Jacqui Alexander, Author provided
Bottom-up densification could also be a way forward for Perth. The distribution of Airbnb accommodation towards Perth’s coastal suburbs highlights potential in this space: here, tourism-specific and local infrastructure can converge. This is an exciting prospect for a state that positions itself as a unique travel destination.

Airbnb emerges from the same cultural tendency as the pop-up shop and interim-use place activation. Built environment professionals must recognise it as an urban issue and lead with a framework for targeted, productive disruption.

Airbnb can increase the density of people within existing building stock, while dispersing the positive effects of the tourist economy. This requires more imagination from planners and designers, who first and foremost must consider the interests of individual citizens, whether they are renters or home owners.

Can Airbnb be a part of the solution of increasing urban infill without compromising a minimum standard of living?

The Conversation is co-publishing articles with Future West (Australian Urbanism), produced by the University of Western Australia’s Faculty of Architecture, Landscape and Visual Arts. These articles look towards the future of urbanism, taking Perth and Western Australia as its reference point. You can read other articles here.