May 2017 – Page 11 – Digital Finance Analytics (DFA) Blog

Credit Suisse says the RBA will need to cut multiple times

The Reserve Bank of Australia will need to cut interest rates multiple times as the labour data understates the slack in the economy, according to Credit Suisse.

While jobs growth in April surpassed expectations and the unemployment rate fell to a four month low, full-time jobs fell and the weakness in the detail would have been bigger if not for another month of bias from the sample rotation, Credit Suisse analysts, led by Damien Boey, said in a note to investors.

The Credit Suisse call for cuts is in contrast to the collective market wisdom, which expects the RBA to stay pat at a record low cash rate of 1.5% for the rest of the year.

“The output gap is at levels historically consistent with another cash rate cut,” Credit Suisse said. “We believe there is a case for multiple cuts, because our measure of the output gap is based on upwardly-biased labour market data, and probably understates the degree of slack in the economy.”

That said, Credit Suisse felt the positive headline data means the RBA is yet to get a trigger to change its policy stance.

This chart from Credit Suisse shows the sample bias

Data on Thursday shows Australia added 37,400 jobs, smashing expectations for an increase of 5,000.

However, full-time employment fell by 11,600 over the month, while part-time employment surged by 49,000.

Credit Suisse explains the quality of the data thus:

Employment quality was even more questionable considering statistical distortions. For yet another month, the ABS rotated its sample in favour of cohorts with higher full-time employment to population ratios. There is a notable net upward bias to the full-time employment data since late 2016. In our view, this means that if we were to remove upward statistical biases, the decline in full-time employment in April would have been even greater than officially reported.

Employment leading indicators, based on business and consumer confidence, as well as trend growth in loan approvals point to a near-term bottoming out in the labour market, Credit Suisse said.

However, the official data, thanks to the statistical problem, has stolen the march and shows the jobs market has already bottomed out and when the sample bias reverses, it could start throwing out some ugly numbers.

Credit Suisse is not alone in blaming the data. Commonwealth Bank of Australia economists said the jobs report left them scratching their heads: “Once again the ABS has published an employment report that has left us scratching our heads. Employment is reported to have lifted by a very strong 37,400 in April after increasing by a massive 60,000 in March. To put these numbers in perspective, it’s the equivalent of a 1.2 million increase in US non farm payrolls over two months! To further add to our concerns over the data, total hours worked is reported to have fallen by 0.3% in April and is down by 0.1% over the past two months despite employment having risen by 97,400”.

This chart shows Credit Suisse’s cash rate model

“our cash rate model currently points to one further cut,” Credit Suisse analysts said.

“However, because of our belief that full-time employment gains have been significantly overstated, we think that our output gap proxy understates the amount of slack in the economy. We remain of the view that the RBA needs to cut rates multiple times this year.”

Industry denounces ‘ridiculous’ UBS report

From The Adviser.

Broker associations and several members of the industry have slammed a recent UBS report that claimed mortgage brokers are “overpaid”, saying that the data is “wrong” and the findings are “ridiculous”.

In an analyst note entitled, Are mortgage brokers overpaid?, analysts Jonathan Mott and Rachel Bentvelzen argued that the new bank levy could be offset by the banks if they cut broker commissions.

The analysts suggested that broker commissions exceeded $2.4 billion in 2015, and added 16 basis points, or $4,600 to the cost of a mortgage.

The damning note went on to argue that the cost of broker commissions are factored into how a bank costs its home loans, which the UBS analysts said were then borne by mortgage customers.

“Although mortgage broker commissions are paid by the bank, not the customer, commissions are factored into the bank’s cost of funding and have been a driving factor in mortgage repricing in recent years,” they said.

Touching on the ASIC and ABA reports on mortgage broker remuneration, the UBS analysts claimed that the bodies had “called for sweeping changes to the way brokers are remunerated”.

It also referred to an 18 per cent “blow out” in commissions paid to brokers since the financial year 2012 and said there was an “unrealistic economic rent being extracted by the mortgage broking industry”.

The analysts concluded that “while a mortgage is a large financial commitment, it is a simple, commoditised product” and could therefore “be easily provided by robo-advice”.

Report is ‘garbage’

Several members of the industry have lambasted the note, stating that the analysis is using incorrect data and thus drawing unfair and damaging conclusions.

Peter White, the executive director of the Finance Brokers Association of Australia, called the report “garbage” and said that the average broker commission was between $2,500 and $3,000 a deal (not the $4,500 quoted by UBS).

Speaking to The Adviser, Mr White said: “This report is way off the mark. To me, it just doesn’t make sense. The data is flawed and before they start making comments, they need to ensure that they have information that is actually backed by fact.”

He continued: “To suggest that there are 16 basis points added to every mortgage because of a broker’s involvement is the most ridiculous comment to make. It’s the most ridiculous comment I’ve seen in the last 12 months. The reality is you pay the same rate in the bank as you do through a broker, so where did that come from? It’s the same interest rate.”

Mr White concluded: “The report is garbage and I’m really disappointed that UBS has gone out and released something that is so fundamentally flawed. UBS is a global bank, it shouldn’t be making these sorts of mistakes. It makes them lose all credibility in the marketplace.

“UBS need to restructure their research department. They are certainly not doing their job and they are an embarrassment to UBS.”

MFAA ‘extremely frustrated’ by report

The Mortgage & Finance Association of Australia (MFAA) also said that it was disappointed by the tone of the note, and argued that several points were either “incorrect” or “misleading”.

Backing the value of brokers, the MFAA said that working with a customer to secure a mortgage can be extremely complex and often requires months of work from a broker (not to mention the subsequent years as the broker supports the customer for the life of the loan), and goes far beyond what robo-advice can offer.

MFAA CEO Mike Felton commented: “Complexity gravitates towards the broker channel (as does the need for service) and brokers go to great lengths to help these clients find a suitable mortgage product.”

Mr Felton also said he thought UBS’ commissions calculation was wrong, stating that they had divided the total amount of broker commissions in 2015 (which included upfront and trail commission) by the number of loans written by brokers in 2015.

He said: “This has given them a commission per mortgage that is about double what it actually is in the year of acquisition.”

The MFAA CEO added that an “interrogation of the data demonstrates that the increases to total remuneration to the broking channel are not due to changes to commission structures”, but due to “the simple fact that every year, more Australians are turning to brokers,” Mr Felton said.

“We are extremely frustrated by this report,” he added, concluding that the MFAA was “extremely disappointed that a reputable organisation would issue a report like this without ensuring that the data they’re working with is correct”.

‘A bank extolling the virtues of banks’

Both associations emphasised that the ASIC report had also not recommended “sweeping changes”, but instead “improve” the standard commission model, and highlighted that the ASIC report actually recognised the value in mortgage brokers – with chairman Greg Medcraft telling the media after the release of the report that brokers deliver “great consumer outcomes”.

The interim CEO of aggregation group AFG, David Bailey, said that it was important to note that the UBS report was issued by a company that owns an investment bank.

“This is a bank extolling the virtues of banks”, he said.

Mr Bailey added that UBS’ “elevation of the ABA’s Sedgwick Review to being a significant analysis of the broking industry is quite frankly outrageous”.

“We have said all along that the ABA Review is nothing more than the opinions of a single interest group, the banking lobby group. How can a review of the broking industry not have any serious involvement from the very sector it is purporting to review? And furthermore, why conduct the review when the regulator is already doing so with significantly more scope and analysis?,” he said.

“Secondly, UBS extol the virtues of robo-advice. With over 3,400 loan products sitting within our mortgage broking technology, we believe that a mortgage is anything but a commoditised product…

“We find it simply ridiculous that these conclusions can be drawn and reported as fact,” Mr Bailey concluded.

FactCheck: do Australian banks have double the return on equity of banks in other developed economies?

From The Conversation.

The banks in Australia have a return on equity which is about twice, if not more than that, what you see particularly in other parts of the advanced developed economies of the world. Treasurer Scott Morrison, ABC Insiders, May 14, 2017.

In its 2017 federal budget, the Australian government included a 0.06% levy on Australia’s biggest five banks: ANZ, the Commonwealth, NAB, Westpac and Macquarie Bank. The levy will collectively cost the banks A$1.6 billion a year, and by some estimates will raise the overall cost of funding for the affected banks by around 0.03%. Many commentators have suggested this cost will be passed directly onto customers.

In an interview on the ABC’s Insiders program, Treasurer Scott Morrison said the banks could absorb the cost of the levy, given the size of their profits.

He said Australia’s large banks have between a 0.2% to 0.4% advantage because of the way Australia’s regulatory regime works and that Australian banks have a return on equity about twice that of banks in other advanced developed economies.

Is that right?

Checking the source

When asked for sources to support his statement, a spokesperson for Scott Morrison referred The Conversation to evidence presented by the Reserve Bank of Australia to the House of Representatives Standing Committee on Economics at its hearing on September 28, 2016.

In the report, the Reserve Bank included a chart provided below.

The spokesperson added that:

Importantly, the chart doesn’t adjust for M&A [mergers and acquisitions] activity, given NAB’s 2016 sale of Clydesdale brings down average (unadjusted) ROE [return on equity] for Australian banks quite substantially.

Let’s check the facts.

What is the return on equity for Australian banks?

Return on equity, or ROE, is a measure of profit, expressed as a percentage of shareholder equity. It shows how much profit a company generates with the funds invested by its shareholders.

The figure below (from the Reserve Bank’s Financial Stability Review) shows the return on equity of the large banks in Australia was around 15% in 2015.

Including the smaller Australian banks, which have about 20% of the market, the average return on equity is somewhat lower and more variable than for the big four only, but it is above 12%.

Financial Stability Review April 2016, Reserve Bank of Australia, page 12. RBA

A decade ago, Australian bank returns on equity were a few points higher, and not much different from those earned by banks in other developed markets.

However, during the global financial crisis, banks in the US and Europe sustained large losses, leading to negative returns for couple of years. US banks have since recovered somewhat. European and UK banks, however, continue to perform weakly: the returns on equity of large banks in Europe are about 5%, compared to about 3% in the UK. The ROEs of large Canadian banks have, like those of large Australian banks, remained higher and more stable.

Looking ahead, the Reserve Bank notes that:

analysts’ expectations are for Australian banks’ [return on equity] to remain on average around 12.5% over the next couple of years. While this is high by international standards and appears to be above banks’ cost of equity, it is lower than the returns to which Australian banks and their investors have become accustomed.

Do Australia’s biggest banks have an added advantage over smaller rivals?

The treasurer also claimed that “our major banks have about a 20 to 40 basis point [funding cost] advantage because of the nature of the regulation and structure of our financial system”.

Big banks do indeed appear to be able to borrow more cheaply because their lenders expect them to receive government support during crises.

In 2010, the International Monetary Fund (IMF) used a range of approaches to estimate the value of “implicit government support” – such as the bailouts provided to some US banks during the global financial crisis – for banks and other financial institutions in the Group of 20 nations, including Australia.

While the answers from the different approaches varied, the IMF concluded that implicit government support “provides too big to fail financial institutions with a funding benefit between 10 and 50 basis points, with an average of about 20 basis points”.

Here in Australia, the Reserve Bank has concluded that “the major banks have received an unexplained funding advantage over smaller Australian banks of around 20 to 40 basis points on average since 2000”.

Macquarie University researchers James Cummings and Yilian Guo found that the funding cost advantage was about 30 basis points from 2004 to 2013, but has declined to about 16 to 17 basis points since then, in part due to prudential reforms that obliged banks to increase the share of lending contributed by shareholders.

Verdict

Scott Morrison was correct: Australian banks do “have a return on equity which is about twice, if not more than that, what you see particularly in other parts of the advanced developed economies of the world”.

Australian banks currently have higher returns on equity than banks in many other major developed markets. Those returns are about twice as high or more than the returns of the troubled European and UK banks. But returns in Canada are close to the Australian level, and the returns earned by large US banks are only a few points below the Australian level.

The treasurer is also correct to point out that the major banks enjoy a funding cost advantage on the basis of expected government support in financial crises. However, the size of the support is less clear. While IMF and RBA studies are in line with the treasurer’s range, there is some evidence that the funding cost advantage may now be somewhat lower. – Jim Minifie

Review

This FactCheck is clear and accurate. Two other points need to be made.

The first is that the recent data on bank return on equity is a lot weaker than the graph presented. This one comes from the Reserve Bank’s March 2017 Bulletin, authored by David Norman.

Reserve Bank of Australia Bulletin March Qtr 2017.

The second point that needs to be made is that the Macquarie University study referred to in the FactCheck, which examined the possible funding advantages that large banks have over small banks, is calculated as a residual. That means that the studies try all the possible explanations they can think of, and then say the bit they cannot explain must be the result of some implied government subsidy. It may be, but the methodology is very indirect. – Rodney Maddock

Author: Jim Minifie, Productivity Growth Program Director, Grattan Institute
Reviewer: Rodney Maddock, Vice Chancellor’s Fellow at Victoria University and Adjunct Professor of Economics, Monash University

Businesses lost an average of $10,000 to scams in 2016 – ACCC

Nearly 6000 businesses reported being targeted by scams in 2016 according to the Australian Competition and Consumer Commission’s Targeting Scams report, with losses totalling around $3.8 million, an increase of almost 31 per cent.

The highest losses were to computer hacking, fake investment schemes and buying and selling scams, according to reports made to Scamwatch over the past year.

“As recent events with the WannaCry ransomware scam demonstrates, businesses can be just as vulnerable to scams as anyone else in the community,” ACCC Deputy Chair Dr Michael Schaper said.

“Unfortunately ransomware scams like WannaCry targeting businesses are not uncommon – we’re seeing steep increases in scammers contacting businesses to swindle them out of their money with varying types of scams. Small businesses with fewer than 20 staff are in particular the most vulnerable to scammers and accounted for nearly 60 per cent of reported losses.”

“The vast majority (85 per cent) of scammers make contact with businesses via email or phone, so it’s important for any business to be aware that these scams are out there in the community and to scrutinise any requests they receive for payment or sensitive information,” Dr Schaper said.

Scamwatch reports the top three scams business should be aware of are:

Ransomware – these scams trick a victim into downloading a virus that infects computer systems and prevents user access until payment is made to unlock it. In 2016, reports indicate that there was an increase in ransomware emails to businesses, purportedly from legitimate companies such as Australia Post or a utility provider.

Business email compromise scams – these are a form of hacking scam that operate by the scammer obtaining access to a business’ email address. The scammer will then send an email (purportedly from senior management) to the business’ suppliers advising of new payment arrangements and requesting a wire transfer to the new account.

Investment scams – these scams are promoted as business opportunities (for example sports investment or stock broker scams, superannuation schemes or managed funds) and promise inflated returns but are, in reality, nothing more than a method used to drain a business of its funds.

“Attacks on businesses where scammers try to trick, deceive or manipulate businesses into sending money or divulging confidential information continue to increase in both frequency and sophistication,” Dr Schaper said.

“These scams often result in one-off losses that a business can recover from. However, hacking, malware and targeted phishing now present significant financial and reputational risks to business.”

Protect your business

There are practical steps all businesses can take to protect themselves from scams:

always scrutinise new requests for any payment and have a clearly defined process for verifying and paying accounts and invoices.
regularly back-up your computer’s data on a separate hard drive so this can be easily re-installed if your computer is infected by malware or ransomware.
ensure your computer has a firewall and up-to-date anti-virus and anti-spyware software

Dismal wages growth makes a joke of budget forecasts

From The Conversation.

Now that Australia’s two major political parties (and the Greens) have decided that robbing banks is legitimate public policy, we return our focus to how the Australian economy is actually functioning.

ABS data released Monday showed that investor housing loans rose slightly, up 0.8% on the previous month. The really interesting figures on this front are still to come, since the Australian Prudential Regulation Authority announced tighter macro-prudential measures – especially on interest-only loans – at the end of March. There are already some anecdotal suggestions that these have started to dampen investor demand, but there is no proper evidence yet. The next round of ABS housing finance data will certainly provide some clues.

The ABS also reported this week that first quarter wage growth was distressingly low, with pay packets rising just 0.5%. That puts private-sector annual wages growth at 1.8%. The main concerns here are, of course, for workers struggling to get by and the fact that rising levels of income inequality are not being dented by robust wage growth.

Added to this, however, is the impact of low wage growth on the budget, and the economy more generally. The RBA has pointed out in recent months that around one-third of mortgage holders have less that one month’s repayment buffer. As the cost of living keeps rising, but wages don’t, people with close to no wiggle room get squeezed more and more.

Last week’s budget, and the forecast return to surplus in 2020-21, was predicated in no small part on very robust wage growth.

On budget night I wrote that these wage growth assumptions were bullish and unlikely to eventuate. 3% going to 3.75% annual wage growth looks really aggressive against a stagnating 1.8 – 1.9% (counting the public sector’s slightly stronger growth). When wage growth is lower than it has been since the mid 1990s, how can one forecast with a straight face that the growth rate will double?

Ratings agency Standard & Poor’s certainly understands this. It almost grudgingly reaffirmed Australia’s AAA credit rating this week, but cast doubt on the projected return to surplus, saying “budget deficits could persist for several years, with little improvement, unless the Parliament implements more forceful fiscal policy decisions”.

Figures released Thursday showed the unemployment rate fell from 5.9% to 5.7%. This is seemingly good news, although this ABS series has been notoriously unreliable in recent times.

The workforce participation rate was steady at 64.8% – and this may be a better and more relevant measure of short-term fluctuations in employment.

There was also a continued shift to part-time employment. Total jobs were up 37,400, but people in full-time work fell by 11,600 and the number of part-time jobs was up 49,000.

Consumer confidence weakened a little in May according to the Westpac-Melbourne Institute Index. It was down a point to 98.0 in May (recall that for indices like these 100 is the level at which optimists and pessimists are in equal supply).

Westpac chief economist Bill Evans said:

Respondents’ confidence in housing and the outlook for house prices deteriorated sharply, while the assessment of the budget around the outlook for family finances was decidedly weaker.

And why wouldn’t it be? The budget contained essentially nothing to address the housing affordability crisis, further fuelling concerns that there will be a messy correction to prices.

Meanwhile, the government’s best ideas for how to grow wages and incomes were to waive a white flag about spending restraint, whine about how the Senate won’t pass their legislation (“this is a Senate tax”, said the treasurer on budget day), and launch a populist attack on our five largest banks.

And that attack – the bank tax – will be passed on to consumers, just like the last increase in regulatory capital required by APRA.

So the government raised the taxes of most Australians and blamed the cross-bench. That doesn’t fill me with confidence. And it seems I am not alone.

Author: Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW

Super to become ‘hyper-personalised’: Bravura

From Investor Daily.

Superannuation funds are in the process of collecting “unprecedented” amounts of member data that will be used to create hyper-personalised services, says Bravura.

In a new report titled Super Megatrends, Bravura superannuation product manager Scott Kendall said big data and predictive analytics are becoming essential tools for super funds that are looking to retain members.

A better understanding of member data can also improve the risk management and compliance processes of the big superannuation funds, Mr Kendall said.

“Modern technology platforms are facilitating the collection of unprecedented amounts of member data, enabling detailed member profiling in an eﬀort to deliver hyper-personalised service oﬀerings,” he said.

Super funds are employing techniques such as behaviour modelling to identify members who are at risk of leaving the fund, Mr Kendall said – and scenario stress testing can help funds better manager investment risk.

“As their use of big data becomes more sophisticated, all kinds of businesses are drawing upon information from other external data sources, such as social media and data aggregators, to gain an even more intimate knowledge of their customers,” he said.

Mr Kendall pointed to Mercer’s Harmonise platform in the UK, which provides an aggregated view of members’ finances through their employer.

“Participating funds have access to far greater amounts of member information than ever before and the additional data captured via this loop can be applied to deliver more meaningful, hyper-personalised services to their members,” he said.

Super funds will also start investigating artificial intelligence services such as ‘cognitive computing’, Mr Kendall predicted.

“Various insurers are already employing the services of IBM Watson to process large amounts of data to achieve better underwriting, fraud detection and credit control,” he said.

“It’s only a matter of time before super funds follow suit.”

The Growing Skill Divide in the U.S. Labor Market

The St. Louis Fed On The Economy Blog has highlighted a polarization in the labor market, between skilled employees capable of performing the challenging tasks in the cognitive nonroutine occupations and entry-level employees that are physically strong enough to perform the manual nonroutine tasks.

Over the past several decades, the skill composition of the U.S. labor market has shifted. Employers are hiring more workers to perform nonroutine types of tasks (such as managerial work, professional services and personal care) and fewer workers for routine operations (such as construction and manufacturing). This shift in the type of skills in demand is referred to as job polarization.

One way to see evidence of job polarization is to look at employment growth in certain occupational classifications. The figure below divides occupational employment growth into four groups:

Cognitive Nonroutine: managers, computer scientists, architects, artists, etc.
Manual Nonroutine: food preparation, personal care, retail, etc.
Cognitive Routine: office and administrative, sales, etc.
Manual Routine: construction, manufacturing, production, etc.

The black lines represent the average growth rate across all occupations within a group, while the bars represent the growth rate in that particular occupation.

The fastest growing occupational groups are cognitive nonroutine and manual nonroutine, both growing about 2 percent every year on average since the 1980s. Cognitive routine and manual routine occupations are growing significantly slower, less than 1 percent on average (or shrinking, in the case of production occupations).

Physical Demands of Work

One of the implications of job polarization is a shift in the type of work required to be performed by the average employee. A new survey from the Bureau of Labor Statistics—the Occupational Requirements Survey—gathers data on the type of work performed in each occupation.

The figure below looks at two physical task requirements:

The percentage of hours in an eight-hour day spent standing or walking
The percentage of workers required to perform pushing or pulling tasks with one or both hands

The most physically demanding occupational groups are manual nonroutine and manual routine. In both of these groups, on average more than half of the employees are required to push or pull with their hands, and over half of their day is spend standing or walking.

In contrast, less than 35 percent of workers in the cognitive nonroutine and cognitive routine groups push or pull with their hands. These groups also spend much less time standing/walking.

Decision-Making at Work

The last figure looks at two cognitive task requirements:

The percentage of workers where decision-making in uncertain situations or conflict is required
The percentage of workers whose supervision is based on broad objectives and review of results

These requirements are easier to think about in terms of a spectrum. For example, occupations that require less cognitive activity either lack decision-making entirely or involve straightforward decisions from a predetermined set of choices.

Similarly, occupations with a greater cognitive requirement usually involve broad objectives with end-result review only, while more manual occupations require detailed instructions and frequent interactions with supervision (for example, a consultant’s quarterly performance review versus daily quality control checks in a factory).

By a large margin, the cognitive nonroutine occupations involve more challenging decision-making and less frequent interactions with supervision. The other occupational groups all have fewer than 10 percent of employees engaging in these types of cognitive tasks.

Job Growth According to Skill Requirements

The figures above show a stark contrast between the skill requirements in the two occupational groups growing the fastest. The cognitive nonroutine group requires complex decision-making, independent working conditions and less physical effort, while the manual nonroutine group still requires quite a bit of physical effort and does not involve a high level of cognitive tasks.

Is The ABA Split?

Not according to the ABA’s press release.

Deputy Australian Bankers’ Association Chairman and Bendigo and Adelaide Bank Chief Executive Mike Hirst has today described rumours of a split in the ABA as “complete rubbish”.

“From time to time there are occasions where banks have different views and different commercial interests. However, 99 per cent of the time we agree,” Mr Hirst said.

“As individual members we each have the strength and respect for each other that allows us to have robust discussions on a variety of issues.

“Together we are a strong industry with a strong industry association working to provide better banking for Australia’s customers,” he said.

ABA Chief Executive Anna Bligh has been in regular contact with non-major bank CEOs, including a teleconference with all regional bank CEOs as recently as yesterday afternoon, and has several scheduled meetings with non-major bank executives in the coming days.

Meantime Aggregator AFG has also released a strongly worded statement about the weakness of the recent ABA Remuneration review.

AFG has today asked the regulator to keep a watchful eye on the big banks to ensure they do not use the Government’s recently announced major bank levy and their own Australian Bankers’ Association (ABA) Retail Banking Remuneration Review as a justification to implement changes designed to reduce the financial viability of providing broking services and marginalise large portions of the lending sector, leaving them without a distribution network.

“The ‘big bank levy’ announced by the Treasurer on budget night recognises the artificial taxpayer subsidy the four major banks and Macquarie have received through their lower borrowing costs since the GFC,” said AFG CEO (Interim) David Bailey. “The government is finally seeking to level the playing field.

“History suggests the big banks will undoubtedly pass this new cost on. The extent to which they are able to pass this levy on will depend on how strong our regulators are with the new supervisory powers also announced on budget night.

“Supervision of mortgage pricing has been tasked to the ACCC and the Productivity Commission will be conducting an Inquiry into competition in the sector. AFG welcomes this news.

“We will be telling the Productivity Commission that the four major banks dominate the Australian lending market and a viable mortgage broking market is crucial for retaining competitive pressure,” he said.

The Australian Securities and Investments Commission (ASIC) has recently completed an exhaustive review of the remuneration of mortgage brokers and the overriding conclusion was that brokers are good for competition and as such have delivered good consumer outcomes.

“ASIC identified some areas where the industry could be strengthened but it did not recommend wholesale changes to the current remuneration structure as incorrectly reported in some quarters,” said Mr Bailey.

“It is incumbent upon the industry as a whole to respond to the regulatory process and our industry is doing so. AFG will continue to play a leading role in this response representing our 2,800 mortgage brokers.

“One very vocal industry participant, the Australian Bankers’ Association (ABA), conducted their own review into remuneration structures, principally about their own sales channel, which is entirely appropriate. However, at the time the scoping document was released AFG questioned why, given the width and breadth of the ASIC review the ABA would choose to incorporate the broker channel in their scope.

“For the ABA Review to be regarded as a significant analysis of the broking industry is quite frankly outrageous. We continue to assert that it is nothing more than the opinion of a single interest group, the banking lobby group.

“All major lenders came out within hours of the ABA review being released and committed to implementing all of the changes recommend.

“For anyone to suggest that the ABA should be the one driving remuneration change when there is already a consultative process underway with ASIC and Treasury is ridiculous.

“Tweaks are needed, not wholesale change; we would urge the regulators and government to ensure the ASIC Review is not used as a lever to drive an even better outcome for the big banks.”

“We all need to come back to the central conclusions of the ASIC Review – brokers are good for competition and for consumers. If consumers were not satisfied with the broker channel they would have abandoned it. In fact, recent statistics show that that broker market share is growing.

“A significant change to the broker remuneration model impacts the ability of the broking industry to survive which mean the non major lenders, who rely on the broker channel to distribute their products across the Australian market becomes compromised,” said Mr Bailey.

“This means less choice for consumers and higher home loan rates. This is not a good consumer outcome but does provide more strength to the Big Four banks.

“AFG has worked hard at providing choice for our brokers’ customers and with 45 lenders on our panel more than 30% of our flow now goes to non-major lenders. This is a great consumer outcome. We would like to think the non-majors are supportive of the current remuneration structure,” he concluded.

Unemployment Rate at 5.8 per cent for the Fourth Consecutive Month

The latest employment data from the ABS does not look too bad on first blush, it beat expectations, especially if you go for the wobbly seasonally adjusted series. However the continued rise in part-time employment (up 3.6%) compared with full-time (up 0.1%) highlights the problem with low take home pay, and when added to the falling wage growth in real terms, it explains why household finances are taking a battering, and why mortgage stress is up again. Also significant differences if you compare WA with NSW.

Trend employment increased by 19,900 persons to 12,071,300 persons in April 2017, according to figures released by the Australian Bureau of Statistics (ABS) today. Total employment growth over the year was 1.3 per cent, which remains below the average growth rate over the past 20 years of 1.8 per cent.

Over the past year there was a larger increase in trend part-time employment (102,800) than full-time employment (49,300) – around two-thirds of the total increase in employment. This was considerably more pronounced in the trend hours worked, which grew by 3.6 per cent for the part-time employed, and 0.1 per cent for those employed full-time.

Australia’s trend unemployment rate remained at 5.8 per cent for the fourth consecutive month.

“For almost 18 months, the trend unemployment rate has been relatively stable, at around 5.7 to 5.8 per cent” said Bruce Hockman, General Manager of the ABS Macroeconomic Statistics Division. “We haven’t seen this stability since the May 2007 to October 2008 period, when it remained around 4.2 to 4.3 per cent.”

The trend participation rate increased by less than 0.1 percentage points to 64.8 per cent.

Trend series smooth the more volatile seasonally adjusted estimates and provide the best measure of the underlying behaviour of the labour market.

The seasonally adjusted number of persons employed increased by 37,400 in April 2017. The seasonally adjusted unemployment rate decreased 0.2 percentage points to 5.7 per cent, and the seasonally adjusted labour force participation rate remained steady at 64.8 per cent.

The comparison between the numbers in WA and NSW (the last and first placed states from an economic perspective) tells an interesting story.

Unemployment has been falling in NSW, and has turned the corner in WA, after a steady climb. However the participation rate in WA is significantly higher and is rising, whilst it is lower and falling in NSW. This reflects a range of factors, including demographic distribution, industry mix and part time work options. The falling rate in NSW should be regarded as a warning of trouble ahead when it comes to looking at household finances.

ANZ tightens interest only lending portfolio

From Australian Broker.

ANZ has announced changes to its interest only loans in compliance with government efforts to reduce banks’ exposure to this type of asset.

The bank announced that effective May 29, the maximum interest only period will be reduced from 10 years to five years to allow “investment lending to align to the maximum for owner occupier lending.”

According to an announcement on the company website, this new provision will apply to all ANZ home loan and residential investment loan products.

It will also waive the renegotiation fee for customers who want to shift their interest only to principal and interest repayments, applicable to the same above mentioned products.

Meanwhile, the bank will apply a minimum rental or board expense of $375 per month to residential investment loans to borrowers who are not currently occupying their own homes. The fee will be charged to residential investment loan products and equity manager accounts, the bank said in its announcement.

Changes to ANZ’s loan provisions is in keeping with the regulatory initiatives geared towards bringing down banks’ exposure to interest only loans to 30%, according to a report on news.com.au.

The report also said that the bank will “crack down on customers failing to chip into their principal and also hit those with loan to value ratios higher than 80%”