Author: Martin North

Martin North is the Principal of Digital Finance Analytics

Chinese Banks’ Earnings Unlikely to Improve in 2015 – Fitch

Fitch Ratings says Chinese banks’ 2014 results indicate their earnings remain under pressure and the agency does not expect meaningful improvement in the current year. The banks’ earnings will be challenged by deteriorating asset quality and net interest margins (NIM) that in 2015 will further feel the effects of stiff competition for deposits and on-going deregulation of deposit rates – the latter being especially true for mid-tier banks.

For Fitch-rated Chinese banks that have reported results for 2014, their revenue grew by 13.1%, but net profit only rose by 7.2% due to higher loan provisioning. State banks reported stable, if not slightly higher, NIMs, reflecting efforts to shift towards loans with higher yield, such as micro and small-business loans, and lower-cost funding sources like core deposits. In contrast, the mid-tier banks’ NIMs were under pressure, which they tried to offset by expanding non-interest income.

Fitch estimates the rated banks’ new NPL formation rate accelerated to 0.85% in 2014 from 0.42% a year earlier, as they continued to expand loans and assets. In 2014, loans increased 11.4% and assets expanded 10.6% on average across Fitch’s rated portfolio, with mid-tier banks speeding ahead with asset growth of 16.6%, compared with the state banks’ 9.0%. Fitch views the system’s pace of credit growth as unsustainable, with the banks already being highly leveraged by emerging market standards.

With slower economic growth, all Chinese banks reported further increases in NPLs, special mention loans and overdue loans in 2014, even as more bad loans were written off and/or disposed. The reported system NPL ratio was 1.25% at end-2014 (up from 1.0% at end-2013) while the provision coverage ratio was 232%. However, most mid-tier banks reported NPL ratios of 1.02%-1.3% and provision coverage ratios around 180%-200%. The Viability Ratings on Chinese banks range between ‘bb’ and ‘b’, reflecting, among other things, Fitch’s expectation that slower economic growth could weaken borrowers’ repayment ability and drive further deterioration in asset quality, the pressure on banks from high leverage, and their potential exposure to liquidity events.

Fitch believes the health of credit quality remains overstated across the banking system. Banks with lower provision coverage will face greater pressure to dispose their NPLs in 2015 in order to meet the requirement to maintain a minimum 150% provision coverage ratio.

Although banks have been shoring up capital, their capital positions are unlikely to improve meaningfully as long as their loans and assets keep expanding at the current pace. Banks that adopted revised capital calculations raised their core tier 1 capital ratios by 92-154bps, except Agricultural Bank of China, whose core tier 1 capital ratio fell by 16bp. The mid-tier banks’ core tier 1 remained largely unchanged. The banks’ tier 1 and total capital ratios were also lifted by the issuance of Basel III-compliant securities during 2014, while the state banks reduced their dividend payout ratios and China CITIC Bank suspended the distribution of final dividends to replenish capital.

For the banks that disclosed information on wealth management products (WMPs), outstanding WMPs at the end-2014 increased by 41% on average, with the amount of WMPs issued during 2014 up 35%. The majority of the WMPs have tenors shorter than one year. While most WMPs are non-principal guaranteed by the banks, Fitch believes banks may assume some losses in the event a WMP defaults or provide funding to the entities that bail out the WMPs that are in danger of default.

 

Overseas Money Powering New Residential Development – ANZ

In a report released by ANZ today they say that while the Australian economy looks to the non-mining sector to drive economic growth in the shadows of rapidly slowing mining construction, strong residential building has provided a flicker of hope. Lower interest rates have eased housing affordability constraints and provided some stimulus to the cyclical upturn in housing construction. However, the boom in residential development especially high-rise apartments in the major centres can be traced to funding from overseas, rather than it being related to low interest rates in Australia.

Latest Edition Of The Property Imperative Released Today

The Property Imperative, Fourth Edition, published April 2015 is available free on request. This report which summarises the key findings for our research into one easy to read publication. We continue to explore some of the factors in play in the Australian residential property market by looking at the activities of different household groups using our recent primary research, customer segmentation and other available data. Specifically we look at the property investment juggernaut and how we are becoming a nation of  property speculators. It contains:

  • results from the DFA Household Survey to end March 2015
  • a focus on first time buyer behaviour and overseas property investors
  • an update of the DFA Household Finance Confidence Index

PropertyImperativeLargeGo here to request a copy.

From the introduction:

This report is published twice each year, drawing data from our ongoing consumer surveys and blog. This edition dates from April 2015.

The Australian Residential Property market is valued at over $5.4 trillion and includes houses, semi-detached dwellings, townhouses, terrace houses, flats, units and apartments. In the past 10 years the total value has more than doubled. It is one of the most significant elements driving the economy, and as a result it is influenced by state and federal policy makers, the Reserve Bank, Banking Competition and Regulation and other factors. Residential Property is therefore in the cross-hairs of many players who wish to influence the economic fiscal and social outcomes of Australia. The Reserve Bank (RBA) has recently highlighted their concerns about potential excesses in the housing market is on their mind, when considering future interest rate cuts.

According to the Reserve Bank (RBA), as at February 2015, total housing loans were a record $1.43 trillion , with investment lending now at a record 34.4%, and representing more than half of all loans made last month. There were more than 5.2 million housing loans outstanding with an average balance of about $241,000. Approximately two-thirds of total loans were for owner-occupied housing, while one-third was for investment purposes. 36.9% of new loans issued were interest-only loans. This report will explore some of the factors in play in the Australian Residential Property market. We will begin by describing the current state of the market by looking at the activities of different household groups leveraging recent primary research and other available data. We also, in this edition, feature recent research into first time buyers and foreign investors; and look at household finance confidence.

ANZ Will Pay $30m To Prime Access Clients

ANZ today confirmed it will be reimbursing some Prime Access clients after it identified the documented annual review, part of a package of services, had not been provided. Prime Access is a fee-for-service package introduced in 2003 and includes priority access to financial planners, investment monitoring alerts and a documented annual review.

In accordance with its obligations under the Corporations Act, ANZ reported the issue to the Australian Securities and Investments Commission (ASIC) and commenced a remediation program supported by external consultants PwC and law firm Clayton Utz.

ANZ estimates the cost of reimbursing around 8,500 clients who did not receive a documented annual review to be approximately $30 million.

ANZ is working with ASIC to finalise the refund methodology and payments will commence as soon as the methodology is agreed. ANZ CEO Global Wealth Joyce Phillips said: “We sincerely apologise to our clients for not delivering all of the Prime Access services we promised and we will reimburse affected clients as soon as possible”.

Another example of issues in the troubled financial planning and advice sector in Australia, and demonstrating the need for more reform to rebuild trust.  Today ASIC announced that it was investigating new instances of licensees charging clients for financial advice, including annual advice reviews, where the advice was not provided. Most of the fees have been charged as part of a client’s service agreement with their financial adviser.

 

 

Unemployment Trend Unchanged At 6.2%

The ABS data shows that Australia’s estimated seasonally adjusted unemployment rate for March 2015 was 6.1 per cent, compared with a revised 6.2 per cent for February 2015. This represented a decrease of less than 0.1 percentage points. In trend terms, the unemployment rate was unchanged at 6.2 per cent.

The seasonally adjusted labour force participation rate increased to 64.8 per cent in March 2015 from 64.7 per cent in February 2015. The ABS reported the number of people employed increased by 37,700 to 11,720,300 in March 2015 (seasonally adjusted). The increase in employment was driven by increases in full-time employment for both males (up 24,800) and females (up 6,700).  The ABS seasonally adjusted aggregate monthly hours worked series increased in March 2015, up 4.8 million hours (0.3 per cent) to 1,630.4 million hours. The seasonally adjusted number of people unemployed decreased by 1,500 to 764,500 in March 2015.

Expectations were of a rise to 6.3 or 6.4 percent, and some analysts were expecting the rise to make a case for the RBA to cut the cash rate again in May. The data may suggest otherwise.

DFA Household Finance Confidence Index Falls In March

We have released the latest edition of the DFA Household Finance Confidence Index, the results of 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.

The overall index fell from 92.1 to 91.97 in March, which continues the overall declining trend since February 2014.

FCIMar2015

Looking at the elements within the index, nearly 60 percent of households are enjoying a growth in their net worth, mainly thanks to further rises in house prices and positive stock market movements. On the other hand, there was a rise of 1.5 percent in those who have seen their net worth fall, these are households who predominately do not own property.

FCINetWorthMar2015

There were small movements in the costs of living data, with school fees and child care being two elements which have hit some households hard, though offset by falls in the costs of fuel. We also see the impact of falling exchange rates on overseas purchases, especially from the US. Finally, rentals are increasing faster than incomes for some households, especially in cities on the east coast.

FCICostsMar2015

Household real incomes are relatively static, though there is little evidence of rising income. Less than 4 percent of households recorded a rise in real terms.

FCIncomeMar2015

Some households are a little more comfortable with their level of debt, this is directly linked to the fall in RBA rates in February. However, there was also a rise in those households who were concerned about the debts they owed, with a rise of 0.57 percent. On average females were more concerned than males, and older households more worried than younger ones.

FCIDebtMar2015

There was a small rise in households who were more comfortable with their savings position, but more are less comfortable, and this is directly linked to the current low interest rates offered for deposits, and the prospect of even lower rates, and the quest for higher yield elsewhere looking ahead. Females were significantly more concerned than males.

FCISavingsMar2015

Finally, looking at job security, there was a significant rise in those households who are concerned, with a drop in those who felt more secure than last year by 1.7 percent and a rise in those who fell less secure. That said, more than 60 percent registered as about the same. We noted some state variations, with those in WA significantly more concerned than those in NSW.

FCIJobsMar2015 Note that the detailed state by state and segmented data is not publicly released. We will update the index again in a months time.

 

Building Activity Slows

The ABS released the Building Activity data to December 2014. Overall, the trend estimate of the value of total building work done fell 0.2% in the December 2014 quarter.  This is despite the estimate of the value of new residential building work done rising 1.0% in the December quarter and the value of work done on new houses rose 0.3% while new other residential building rose 1.9%. Construction for units therefore helped prop up the numbers. This is because the trend estimate of the value of non-residential building work done fell 1.4% in the December quarter.

Looking at the quarter on quarter trend estimate changes, we see a drift downward since mid last year. Momentum in NSW based on value of work done fell furthest. Residential construction cannot replace the decline in other sectors.

BuildingWorkDoneDec2014

RBNZ Says Action Needed To Reduce Housing Imbalances

The Reserve Bank of New Zealand today urged greater attention be given to reducing housing market imbalances that are presenting an increasing risk to financial and economic stability.

OECD-Comps-NZIn a speech to the Rotorua Chamber of Commerce, Reserve Bank Deputy Governor Grant Spencer said that: “Irrespective of the mix of demand and supply-based factors, the longer the excess demand persists, the further prices will depart from their underlying fundamental determinants, and the greater the potential for a disruptive correction.

“Since late 2014, housing market imbalances have become more accentuated, particularly in Auckland where the supply shortage is greatest, and house prices are particularly stretched, having increased by three times since the start of 2002.

“New Zealand is one of the few advanced economies that has not had a major house price correction in the past 45 years.”

Mr Spencer said that a downward correction in house prices in New Zealand could be prompted by a range of potential shocks, such as rising global interest rates, or a downturn in the global economy and financial markets.

With 60 percent of its lending in residential mortgages, the New Zealand banking system could be put under severe pressure in such a downturn. The resulting contraction in credit would amplify the impact to the domestic economy and financial system, making it more difficult to avoid a severe downturn.

Mr Spencer said that policies to ease the supply constraints must be the main priority, but are unlikely to yield quick results.

Considerable scope exists to streamline the multiple approval processes required to complete a residential development. There is also a need to adopt a more integrated approach to the planning and funding of new infrastructure.

“The proposed RMA reforms have the potential to significantly improve the planning and resource consenting processes.

“The best prospect for substantially increasing the supply of dwellings over the next one to two years appears to be in apartment development. The Government and the Auckland Council might consider focussing their efforts on simplifying the approvals process and increasing the designated areas for high-density residential development.”

On the demand side, Mr Spencer said that there are practical difficulties in using migration policies to manage the housing cycle.

“Nor can monetary policy be used currently to dampen housing demand, as CPI inflation is below the Reserve Bank’s target range.”

However, measures should be considered to counter the growth in investor and credit based demand for housing.

The Reserve Bank would like to see fresh consideration of possible policy measures to address the tax-preferred status of housing, especially housing investment.

“Investors are often setting the marginal market prices that are then applied to the full housing stock within a regional market. Indicators point to an increasing presence of investors in the Auckland market and this trend is no doubt being reinforced by the expectation of high rates of return based on untaxed capital gains.”

Mr Spencer said that macro-prudential policy is a potential instrument to help restrain credit-based demand pressures and improve the resilience of bank balance sheets to a potential housing downturn.

“The introduction of loan-to-value ratio restrictions (LVRs) in October 2013 helped to moderate housing market pressures despite strong net inward migration and the ongoing shortage of housing. The LVR restrictions have also improved the resilience of bank balance sheets. They will be removed or modified as market conditions allow.

“Other macro-prudential options are being assessed, including in relation to investor lending. However, such tools are not a panacea – their impact is inevitably smaller than the main drivers of the current housing market imbalance.”

Australian Growth Down And Unemployment Up – IMF

The latest edition of the IMF’s World Economic Outlook, just released, portrays a complex global picture. There are several points relevant to Australia, in the pre-budget run-up.

  • Legacies of both the financial and the euro area crises are still visible in many countries. To varying degrees, weak banks and high levels of debt—public, corporate, or household—still weigh on spending and growth. Low growth, in turn, makes deleveraging a slow process. Potential output growth has declined. Potential growth in advanced economies was already declining before the crisis. Aging, together with a slowdown in total productivity, has been at work. The crisis made it worse, with the large decrease in investment leading to even lower capital growth. As we exit from the crisis, capital growth will recover, but aging and weak productivity growth will continue to weigh. The effects are even more pronounced in emerging markets, where aging, lower capital accumulation, and lower productivity growth are combining to significantly lower potential growth in the future. More subdued prospects lead, in turn, to lower spending and lower growth today.
  • On top of these two underlying forces, the current scene is dominated by two factors that both have major distributional implications, namely, the decline in the price of oil and large exchange rate movements.
  • Australia’s projected growth of 2.8 percent in 2015 is broadly unchanged from the October prediction of 2.7 percent, as lower commodity prices and resource-related investment are offset by supportive monetary policy and a somewhat weaker exchange rate. 3.2 percent growth is forecast for 2016, supported by low interest rates and inflation.
  • The downturn in the global commodity cycle is continuing to hit Australia’s economy, exacerbating the long-anticipated decline in resource-related investment. However, supportive monetary policy and a somewhat weaker exchange rate will underpin nonresource activity, with growth gradually rising in 2015–16 to about 3 percent.
  • Average annual metal prices are expected to decline 17 percent in 2015, largely on account of the decreases in the second half of 2014, and then fall slightly in 2016. Subsequently, prices are expected to broadly stabilize as markets rebalance, mainly from the supply side. The largest price decline in 2015 is expected for iron ore, which has seen the greatest increase in production capacity from Australia and Brazil.
  • Exporters of commodities (Australia, Indonesia, Malaysia, New Zealand) will see a drop in foreign earnings and a drag on growth, although currency depreciation will offer some cushion.
  • Australian unemployment, net is forecast at 6.4 percent in 2015.
  • In addition to strong regulation and supervision, protecting financial stability may also require proactive use of macroprudential policies to tame the effects of the financial cycle on asset prices, credit, and aggregate demand.