Major banks change third-party strategy

From The Adviser.

Two of Australia’s big four banks have changed their appetite for broker-originated loans in a move that could curb the growth of the third-party channel, according to a market analyst.

Digital Finance Analytics (DFA) principal Martin North believes underperforming branch networks and regulatory pressure to curb investor and interest-only lending has led CBA and Westpac to rethink their broker strategies.

“Two or three months ago, CBA said they were really looking to drive more momentum through their branch channels and offset the volumes through brokers. Westpac also showed in their latest results a little bit of a fall in broker momentum,” Mr North told The Adviser.

“There is a change of strategy from these lenders. They are trying to figure out what to do with their branch networks. If you think about the digital migration that’s happening, the branch is becoming less and less relevant,” he said.

Mr North believes the two Sydney-based banks are looking to drive home lending through their proprietary channels in an effort to avoid closing branches.

Westpac reported a six per cent fall in broker-originated loans over the year to 31 March. CEO Brian Hartzer told The Adviser that while the bank has “no issue” with brokers, who provide the group with “lots of new customers”, the bank is looking to ramp up its own channels.

“We want to do better in our proprietary channels. We know that customers like to come directly to us online. We know that customers like visiting our branches and talking to our people,” he said.

Mr North noted that recent changes to lending criteria are being used as a lever to control third-party flows.

Last week Westpac capped at 90 per cent its LVR for owner-occupiers on interest-only home loans. Meanwhile, CBA told brokers on Friday that it will reduce the maximum LVR from 95 per cent to 80 per cent for new owner-occupied, and from 90 per cent to 80 per cent for new investment home loan applications with IO payments. The changes will take effect from 10 June.

“They are less willing to take business from third-party channels for that particular category because they are trying to control the volume of those particular loans at the moment, thanks to the imposed speed limits and the need to reduce interest-only loans. It is a way of giving priority to their own channels,” Mr North said.

“The strategic positioning of those two majors is significant,” he said. “I was expecting broker penetration to go up to 60 per cent. But based on what we are seeing now from the two majors, I’m not so convinced that we will see more growth. I think it will hover around that 50 per cent mark.”

Mr North’s comments come after the MFAA released last week fresh figures showing mortgage brokers originated 53.6 per cent of new residential home loans over the March quarter.

Mortgage Choice delivers continued record growth throughout Q3

Following record interim financial results, Mortgage Choice has continued its positive momentum throughout Q3.

In the six months to 31 December 2016, Net Profit After Tax, home loan settlements, loan book and financial planning revenue all grew to record levels.

Throughout Q3 the momentum has continued, with strong growth in mortgage broking and very impressive growth in financial planning.

“Over the third quarter we saw an 8% lift in group office home loan enquiries, setting a new record for the company,” Mortgage Choice chief executive officer John Flavell said.

“This lift in home loan enquiries has resulted in a 6% increase in home loan applications and a 4% increase in home loan approvals, compared to Q3 FY16. Mortgage Choice’s home loan approval result in March was a new record.

“Throughout Q3 FY17, the financial planning division has gone from strength to strength, with the value of Funds Under Advice and Premiums Inforce surging 59% and 30% respectively in comparison to Q3 FY16.

“Our network of mortgage brokers understands the value of providing their customers with access to professional financial advice. As a result, a larger proportion of our customers’ wealth needs are now being met.”

Mr Flavell attributed the continued growth in financial planning revenue and the ongoing strength of the underlying core broking business to two main factors.

“As a group we have delivered continuous productivity gains as well as network growth,” he said.

“To the end of Q3, franchise numbers have grown by 5%, while loan writer and adviser numbers have also continued to increase.

“These strong outcomes have come off the back of the effective execution of a very solid strategy.”

A ‘paradigm shift’ is taking place in financial technology

From Business Insider.

A “paradigm shift” is taking place in financial technology.

Venture capital firms, which poured $US117 billion into fintech startups from 2012 to 2016, have been pulling back on their investments. Meanwhile, established financial firms are positioned to step up their spending.

In a big note out to clients on May 18 titled “Fintech: A Gauntlet to Riches,” a group of equity analysts at Morgan Stanley said this shift will lead to an environment where legacy firms, or incumbents, “take the reigns”of financial innovation.

“Financials and payments incumbents are likely to be emboldened to step up R&D and take the investment lead, and this combination of VC/incumbent behaviour represents a paradigm shift that should benefit incumbents’ [return on investment],” Morgan Stanley said.

The role of VCs will continue to diminish

Financial technology companies experienced a surge in funding from 2012 to 2015, during which time venture capital firms poured $US92 billion into the space. Now it looks like those VC firms are experiencing a bit of a hangover.

In 2016, global venture capital investment in fintech companies dipped to $US25 billion, from $US47 billion in 2015.

In a recent interview with Business Insider, Amy Nauiokas, the head of Anthemis Group, a New York-based venture capital firm, described the time leading up to the dip as a “period of exuberance.”

“Big firms just sort of piled on a bunch of, let’s say, happy money,” Firms were thinking, we have money, we have capital, we have to spend it,” she said.

This environment of “happy money” sent valuations for fintechs to levels that some investors view as unreasonably high. For instance, Andy Stewart, a managing partner at Motive Partners, said at the International Fintech conference in London that valuations in fintech were “frothy,” or not connected to performance.

“Pullback in fintech investment over the past year is indicative of a realisation of lower [return on investments] than initially hoped due to some unique challenges to disrupting in the financials industry, and our suspicion is that VC investors will continue to scale back investing,” Morgan Stanley said.

Incumbents may fill the void

According to Morgan Stanley, there are a number of factors that will push legacy financial firms to step up their investments in fintech companies. The most obvious factor is the fear of disruption.

“[T]he threat of disruption from fintechs is forcing incumbents to up their investments in technology to gain operating efficiencies and preserve market share,” the bank said.

Deregulation is another trigger. If the Trump administration follows through on its promises of Wall Street deregulation, then incumbent firms won’t have to spend as much cash on regulatory compliance. That would free up money for fintech investment initiatives. Legacy firms’ focus on lowering cost also provides an incentive to invest in fintech.

“Managing expenses remains a key focus for incumbents as one of the drivers for earnings growth,” the bank said.”It follows that there is an increasing trend towards implementing more technology to drive efficiencies with moderated headcount growth going forward.”

What is the net outcome of this shift? A better business landscape for well-established Wall Street firms.

“As incumbents pick up investment while VCs reduce investment, we tilt towards a world where incumbents are less susceptible to disintermediation and more likely to co-opt new technologies,” the bank said.

Auction activity rises week-on-week

From CoreLogic.

Auction activity across the combined capital cities increased this week, up from 2,409 auctions last week, to 2,794 this week, making it the sixth busiest week this year. This weeks weighted average clearance rate across the combined capitals was 77.2 per cent, increasing from a final clearance rate of 72.8 per cent over the previous week, while at the same time last year, both volumes (1,920) and the clearance rate (68.9 per cent) were lower.

The two largest auction markets, Melbourne and Sydney, saw their preliminary clearance rates rise, with Sydney at 80.7 per cent and Melbourne at 79.2 per cent, although Sydney, and to a lesser extent Melbourne, tend to revise down over the week when the remaining results are captured. Over the previous week, Sydney’s preliminary clearance rate of 79.4 per cent was revised down to 74.5 per cent when finalised.  Across the smaller capital city markets, Brisbane was the only city where preliminary clearance rates fell week-on-week so again it will be interesting to see how the clearance rates hold when the final figures are released on Thursday.

 

BT Panorama inks deal with robo-adviser

From Investor Daily.

BT has made a clear statement of intent on digital advice by signing a platform connectivity deal with Ignition Wealth.

In a deal that will be announced this morning, BT has agreed to connect advisers and accountants using the Ignition Wealth platform to BT Panorama.

A spokesperson for BT confirmed to InvestorDaily that Ignition Wealth is the first digital advice provider to have connectivity with Panorama.

The agreement between the two companies is squarely aimed at accountants who are no longer permitted to provide advice to SMSFs after the expiry of the ‘accountants’ exemption’ on 1 July 2016.

Speaking to InvestorDaily about the deal, Ignition Wealth chief executive Mark Fordree said that while many clients will continue to be offered portfolios of ETFs, others will now be recommended a BT Panorama product if it is in their best interests.

The experience will be “seamless”, he said, with the Ignition Wealth engine granted permission to create BT Panorama accounts for clients.

“Our hybrid solution will allow an individual to have a complete self-service into numerous investment options including BT Panorama but not limited to it,” Mr Fordree said.

“The journey starts with Ignition Wealth, and a proportion of the clients that come through our platform may end up in BT Panorama where it’s appropriate.”

The agreement with BT was a long time in the making and it was a matter of “jumping bank-grade hurdles” at every step of the process, Mr Fordree said.

While the initial agreement with BT is limited to connectivity with Panorama, the goal of Ignition Wealth is to become completely integrated into Panorama and the BT Wealth platform.

“All the major players in the wealth management business may over the next few years have a digital platform,” Mr Fordree said.

“Whether they build it themselves or partner is the key question. We’re offering a solution to those who either don’t have the appetite or capability to build it.

“If they haven’t started already, I suspect that they’re already leaving it too late.”

In a separate statement, Ignition Wealth said the deal with BT was “the largest fintech deal in Australia to date”.

“This marks the first of the ‘big four’ to choose an independent technology provider to power their digital financial advice,” it said.

Vanguard’s UK Online Investment Platform Is Credit Negative for Incumbent Players

From Moody’s

Last Tuesday, low-cost fund provider Vanguard (unrated), announced its intention to enter the UK’s direct-to-consumer online investment market. Vanguard’s entry into the UK retail online investment market is credit negative for incumbent online platforms such as Hargreaves Lansdown (unrated) and FIL Ltd.’s (Baa1 stable) Fidelity FundsNetwork because it will likely trigger a price war that costs incumbents their profitability.

Vanguard’s online service, the Vanguardinvestor, lets UK retail investors directly access a wide range of Vanguard’s exchange-traded funds (ETFs) without using a broker or financial advisor. So far, most of Vanguard’s UK business has been sourced from brokerages and financial advisors, which typically require clients to have minimum account balances of at least £100,000. Using Vanguard’s online platform, retail investors will now be able to open an individual savings account with £500 or a monthly investment of £100. And, Vanguardinvestor will charge a flat administrative fee of 0.15% (capped at £375 per year), which is lower than the 0.45% fee that Hargreaves Lansdown, the UK’s largest online provider, charges (see Exhibit 1).

Vanguard will target investors from both the mass and mass-affluent markets – those with savings of £5,000-£50,000. These investors lost access to advice in 2013 with implementation of the UK’s Retail Distribution Review (RDR) and invest directly. In a November 2012 publication, Deloitte estimated that the RDR had created an advice gap population of as many as 5.5 million people.

Gross inflows into stock and share individual savings accounts in 2015-16 totalled £21.1 billion, and this segment has been growing (see Exhibit 2), driven by the tax-free individual savings account allowance increase to £20,000 from £15,240 in April 2017 and new products. In addition to individual savings accounts and defined-contribution pensions, general investment accounts without any tax wrapper are benefiting from investor inflows as people become increasingly aware of their investment options. Vanguard announced plans to launch a self-invested personal pension in the future.

Vanguard’s online service also targets younger investors such as millennials, who are comfortable with online services and are not yet a target for financial advisors or wealth managers. As they evolve in their careers and garner higher incomes, this demographic will be accustomed to low-cost services and investment funds. Vanguard’s online service in the UK is so far limited, but we can see it evolving toward robo-advice as it has in the US with The Vanguard’s Personal Advisor Services.

Incumbent platform providers will likely lower administrative fees and increase services to maintain market share, but this will compress their margins. Given the high and rising costs of running online services, smaller platforms with less price flexibility such as Interactive Investors (unrated) and Nutmeg (unrated) will be most challenged. Cheap online investment services will also accelerate the adoption of low-costs index trackers and ETFs among UK retail investors. Active managers such as Aberdeen, Henderson, Schroders, and FIL Ltd. Will face fee and margin pressure as a result.

In addition, the UK’s Financial Conduct Authority’s upcoming investment platform market study to improve competition between platforms and improve investor outcomes is likely to challenge most platform providers’ prices and Vanguard would be well positioned for any price war. As the best-selling fund manager in 2016 and second-largest asset manager globally, Vanguard has the scale, resources and brand necessary to disrupt the UK retail market, which was £872 billion as of year-end 2015. In the US, where Vanguard provides a similar online-value proposition, platform costs went down.

Avocados and housing affordability? It’s a green herring

From The New Daily.

Avocados are in the news again, which must mean housing affordability is too. This time it was wunderkind property developer Tim Gurner who told 60 Minutes that millennials “buying smashed avocado for 19 bucks and … coffees at $4 each” shouldn’t be complaining about the difficulty of getting into the property market.

But blaming young people for eating pricey avo brunch doesn’t shed any light on housing affordability. It’s just a green herring.

Mr Gurner is probably right that a lot of young people are happy to live a life of brunch and overseas travel. But these are unlikely to be the same Australians who feel locked out of the housing market. They either can afford to buy a home, or are happy renting or living with their parents while they enjoy their 20s. And good on them.

The real problem is that the real estate market roundly cheered for decades has turned out to be a Ponzi scheme of sorts. Rapidly and consistently rising real estate values enhanced the wealth of many Australians, but the rest have been stranded.

Rising prices have been a staple barbecue and dinner party topic of conversation since the heady 1980s. It was a decade of financial deregulation, easy access to home lending and a bullish sense of prosperity. Economic reform had transformed the ‘Great Australian Dream’ into the ‘Great Australian Wealth Machine’.

A report by property analyst CoreLogic shows that in the five years to 2016 the proportion of household income required for a 20 per cent deposit on a home climbed from 85.9 to 138.9 per cent. This at a time of static wage growth, adding to the difficulty of raising a home deposit. In the five years to 2016, national dwelling prices rose by 19 per cent while household incomes rose by just 9.2 per cent.

Australia remains a nation of homeowners, but the Great Australian Dream is under pressure. Nationally, according to the Melbourne Institute, 68.8 per cent of households were owner-occupied in 2001; by 2014 this had fallen to 64.9 per cent. The impact of investors on the housing market is also clear. According to the Bureau of Statistics, at the close of 2016, investors comprised 47 per cent of national mortgage demand – 55 per cent in NSW.

For those who do feel unable to realise their dream of home ownership, avocados aren’t the problem. They’re locked out because of inflated property values, poor wages growth, the impact on supply of a rapidly rising population, and people like Tim Gurner whose wealth depends on stoking the market.

Sadly, it’s difficult to assume there is a ready solution out there just waiting to be discovered.

Public policy does have a role to play in addressing housing affordability, but how far can policy go in solving a problem which at its root is down to market forces?

Treasurer Scott Morrison was irresponsible when he flagged that housing affordability was going to be the centrepiece of his budget. Once again, the Turnbull government set expectations it was unable to meet.

The Budget’s ‘ta-da’ contribution to easing the burden for first homebuyers was the “first home super saver scheme” which will allow first-home buyers to make voluntary contributions of up to $30,000 to their superannuation which will be made available for a home deposit at concessional tax rates.

University of NSW economics professor Richard Holden says the measure will do “absolutely nothing to help first home owners”, arguing, as many others have, that the subsidy will actually force home prices higher.

“It’s bad economics, somewhat costly and a cruel hoax on prospective home buyers who are struggling with an out-of-control housing market,” he wrote in The Conversation.

The key to addressing housing affordability is not policy sophistry whose only purpose is to give the impression of action. A more nuanced understanding of Australia’s housing market, in the context of a rapidly changing economy, is required before meaningful policy settings can be made. Housing affordability also needs to be understood in the context of a rapidly growing population.

We need fewer policy stunts from the government and a more considered vision for Australia in the 21st century. It may well be time for the Great Australian Dream to be updated. The Great Australian Dream 2.0.

Economists are trying to out why incomes aren’t rising — but workers have a good hunch

From Business Insider.

Economists are often wringing their hands over why, despite a continuous eight-year economic recovery, US workers’ wages remain largely stagnant, extending a trend that began some three decades ago.

Yet anyone who has applied for a job in the last couple of years knows that, while the US unemployment rate is historically low at 4.4%, the labour market isn’t exactly bustling.

Companies have become a lot more reticent about making new investments in the wake of the Great Recession and during the weak economic recovery that has followed it. That includes investing in people, and the hiring process has become slower and more onerous.

It also means wage increases have become even harder to come by.

The recession caused lasting damage to the job market which still resonates to this day. Steven Partridge, vice president for workforce development at Northern Virginia Community College (NOVA), says the crisis created what he calls “degree inflation” in job requirements — a trend correlated with stagnant and sometimes falling incomes as workers lost their jobs and considered themselves lucky to take lower-paying ones.

In other words, because applicants were so desperate and the pool was so wide, the bar for hiring became unrealistically, and often unnecessarily high. The trend has abated, but not fully receded.

“The downturn made everyone push up their education requirements,” Partridge told Business Insider.

Several job market indicators point to underlying weakness — high levels of long-term joblessness, low labour force participation and, yes, a distinct lack of wage growth.

Albert Edwards, market strategist at Societe Generale, deserves credit for doing something that’s rather rare on Wall Street — admitting he was wrong, specifically about the prospect of imminent wage increases.

“Talking about wrong, I have to put my hands up. I have been expecting US wage inflation to roar ahead over the past three months to well above 3%, yet every data release has surprised on the downside,” he wrote in a note to clients.

“Wage inflation, as measured by average hourly earnings, has actually leveled off at close to 2-1⁄2% while wage inflation for ‘the workers’ is actually slowing (see chart below)! Strictly speaking, ‘the workers’ are defined (by the BLS) as “those who are not primarily employed to direct, supervise, or plan the work of others.” Hey, that’s me!”

EdwardsSociete Generale

Fed officials have also struggled to understand the absence of wage increases. In a recent research brief from the San Francisco Fed, staff economist Mary Daly and co-authors reflect on what they see as a surprising trend.

“Standard economic theory tells us that wage growth and unemployment are intimately linked. Wage growth slows when the unemployment rate rises and increases when the unemployment rate falls,” they write. “The experience since the Great Recession has been very different.”

SffedFederal Reserve Bank of San Francisco

“This slow wage growth likely reflects recent cyclical and secular shifts in the composition rather than a weak labour market. In particular, while higher-wage baby boomers have been retiring, lower-wage workers sidelined during the recession have been taking new full-time jobs,” they said. “Together these two changes have held down measures of wage growth.”

Their explanation provides little comfort in the face of the depressed labour market many Americans still face, especially lower-income and minority families.

The Fed authors also suggest a factor in low income growth that might ring true to those families: “As long as employers can keep their wage bills low by replacing or expanding staff with lower-paid workers, labour cost pressures for higher price inflation could remain muted for some time.”

As suggested in that last excerpt, labour’s bargaining power vis-a-vis employers is probably at least as important as unfavorable demographics in explaining slow wage growth. It will take a substantially stronger economy to tilt that balance back in workers’ favour.

The Bank Tax Rumbles On

Interesting segment on ABC Insiders today exploring the bank tax, and highlighting some of the practical realities, and policy implications, as the legislation is developed.

Barrie Cassidy with The Guardian Australia’s political editor Katharine Murphy, Andrew Probyn from ABC’s 730 and The Saturday Paper’s Karen Middleton.

 

 

Auction Results May 20th 2017 Still Hot

The preliminary results from Domain continue to show strong rates of clearance on good volume. No signs of the main Sydney and Melbourne markets faltering yet.

The national clearance rate was 77.6% compared with 73.9% last week, and 69% a year ago. The number sold was 1,314, higher than last week at 1,286 and last year 984.

Sydney cleared 76.9% with 512 sales, compared with 73.8% on 512 last week and 375 last year. Melbourne cleared 79.2% with 688 sales compared with 75.4% and 654 last week and 497 last year.

Brisbane cleared 62% of 110 scheduled auctions, Adelaide 70% of 86 scheduled auctions and Canberra 75% of 66 scheduled.