Author: Martin North

Martin North is the Principal of Digital Finance Analytics

Backdoor Listing Up, Says ASIC

ASIC has today published the second report in its series on the regulation of corporate finance issues in Australia.

The report, which covers the period July to December 2014, provides companies and their advisers with insights into ASIC’s regulatory approach in the corporate finance sector and aims to assist them with their associated legal and compliance obligations.

ASIC is responsible for the regulation and oversight of corporate finance activity in Australia, with a particular focus on corporate transactions such as fundraising, takeovers, schemes of arrangement, share buy-backs, compulsory acquisitions, employee incentive schemes and financial reporting. The Corporations and Emerging Mining and Resources (EMR) teams are responsible for regulating disclosure and conduct by corporations in Australia in these areas.

In this period there was a 39% increase in the number of disclosure documents lodged with ASIC (compared to the period 1 January to 30 June 2014, and a slight increase in applications for relief from Ch 6D. The table below depicts the top 10 public fundraising transactions by value of the offer based on disclosure documents lodged with ASIC in this period. Hybrid securities make up a notable portion of these fundraisings.

ASIC-Top-TenWhen reviewing prospectuses in this period, among other things, ASIC responded to the following trends:

  1. financial information (including pro-forma financial information) that is not sufficiently complete or adequately reviewed by a third party such as an auditor;
  2. an increase in backdoor listing prospectuses;
  3. poor quality information about companies operating in an emerging market; and
  4. an increase in the number of listed investment companies seeking quotation.

Financial disclosures

Financial disclosures are of significant concern to ASIC, as they paint a picture of the history of the performance of the company and effectiveness of management. Financial information, both statutory and pro forma, is essential to informing investors about the past performance and future prospects of the company. Some of the concerns with the disclosure of financial information we identified include:

  1. pro-forma adjustments described as one-off events;
  2. a lack of prominent disclosure of material differences between statutory and pro-forma financial results; and
  3. multiples not being included for all forecast

Backdoor listings

In this period ASIC reviewed disclosure by 30 companies seeking admission to ASX by way of a backdoor listing—that is, a company seeking to access capital by selling their business into a company that is already listed on an Australian exchange.

Businesses offering web-based products and services or start-up technologies are the most common type of business currently seeking admission by way of backdoor listing. These often have unique businesses requiring technical explanation of a high proportion of intangible assets in their financial statements. With these characteristics it is difficult for investors to make an informed decision unless:

  1. considerable care is taken in explaining the business without the use of jargon; and
  2. a justification for the valuation of intangible assets is provided.

ASIC raised concerns with 22 (73%) of these offer documents, with concerns being addressed by way of supplementary disclosure. In six instances ASIC made interim stop orders in relation to backdoor listing prospectuses; two stop orders were revoked, one had a final stop order made and three prospectuses are still subject to those interim stop orders.

Other concerns identified in a number of backdoor listing prospectuses include:

  1. insufficient financial disclosure, including a lack of operating history, lack of audited financial information, and disclosure of information presented other than in accordance with accounting standards (non-IFRS financial information);
  2. insufficient disclosure of a company’s business model and use of proceeds;
  3. disclosure of directors’ history not consistent with our policy in disclosure of directors’ history not consistent with our policy in RG 228; and
  4. risk disclosure not adequate or appropriately tailored to a company’s circumstances.

Half of the businesses seeking a backdoor listing come from a foreign jurisdiction, with the majority of these from an emerging market. ASIC continues to consider the challenges facing these entities when reviewing a prospectus, and will raise concerns where we consider disclosure is inadequate or misleading.

With the slowdown in the mining sector ASIC expects backdoor listing activity to remain strong.

Listed investment company disclosure

In the last year ASIC  saw an increase in the number of initial public offerings of listed investment companies. These are entities that seek to make a return for investors through their investment activities rather than through operating a business. This raises a few disclosure concerns unique to listed investment company prospectuses.

Firstly, listed investment companies often have similar characteristics to a hedge fund, and may use complex strategies like leverage, short selling and derivatives. These can be quite challenging to explain, and ASIC is concerned that retail investors may struggle to understand how a company intends to make money—particularly when jargon is used excessively. If a listed investment company has similarities to a hedge fund, then it should make disclosure that is similar to that provided by a hedge fund.

Another feature of listed investment companies is that they can have an external manager that may be a related party. The fees charged by the external manager can have a material impact on investors’ returns and, where this is the case, the prospectus should give meaningful disclosure. For example, in some circumstances it may be more appropriate to include a worked example or explain the practical effect of a fee, rather than just cite a complex formula. Where a performance fee formula means that investors’ returns are capped at 10%, it is not sufficient to disclose the formula. The prospectus must clearly and prominently disclose that investors’ returns will not exceed 10%.

Finally, listed investment company prospectuses often seek to include disclosure setting out the past performance of other entities managed by their manager. Concerns about these disclosures are commonly raised by ASIC.

UK PRA Sets Out How It Will Hold Senior Managers Accountable

The Prudential Regulation Authority (PRA) has today set out how it will hold senior managers in banks, building societies and designated investment firms to account if they do not take reasonable steps to prevent or stop breaches of regulatory requirements in their areas of responsibility.

In June 2013, the Parliamentary Commission for Banking Standards (PCBS) published its report “Changing Banking for Good” setting out recommendations for legislative and other action to improve professional standards and culture in the UK banking industry. This was followed by legislation in the Banking Reform Act 2013.

The Banking Reform Act introduced new powers which allow the PRA and Financial Conduct Authority (FCA) to impose regulatory sanctions on individual senior managers when a bank breaches a regulatory requirement if the senior manager responsible for the area where the breach occurred cannot demonstrate that they took reasonable steps to avoid or stop it.

The PRA has today published guidance for banks clarifying how it will exercise this new power; including examples of the kind of actions which may constitute reasonable preventive steps and how firms and individuals may evidence them.

The Banking Reform Act also creates a separate offence which could result in individual senior managers being held criminally liable for reckless decisions leading to the failure of a bank. This new criminal offence will, however, be subject to the usual standard of proof in criminal cases (‘beyond reasonable doubt’).

Andrew Bailey, Deputy Governor, Prudential Regulation, Bank of England and CEO of the PRA said

“Senior managers will be held individually accountable if the areas they are responsible for fail to meet our requirements. Our new accountability regime will hold all senior managers, including non-executive directors, to a clear standard of behaviour and we will take action where they fail to meet this.”

Insurers

In November 2014, the PRA consulted on a parallel accountability regime for the insurance sector. The Senior Insurance Managers’ Regime is aligned with the banking regime but it is not identical. The business model of insurers, the risks they pose to the PRA’s objectives and the legislative framework they operate under are different from banks.  Specifically, none of the potential criminal sanctions, nor the ‘presumption of responsibility’ in the banking regime, will apply to senior insurance managers.

The new regime also takes account of the need to introduce measures relating to governance and the fitness and propriety of individuals as part of Solvency II.

Non-executive directors (NEDs)

In November, the PRA indicated that it would issue a further consultation confirming how the PRA will apply the new Senior Managers’ Regime and Senior Insurance Managers’ Regime to NEDs in banks and insurers respectively.

The PRA has now confirmed that it will apply the Senior Managers’ Regime and Senior Insurance Managers’ Regime to the following NEDs:

  • Chairman;
  • Senior Independent Director;
  • Chair of the Risk Committee;
  • Chair of the Audit Committee; and
  • Chair of the Remuneration Committee.

The PRA’s Senior Managers’ Regime and Senior Insurance Managers’ Regime will therefore focus on those NEDs with specific responsibilities for areas or committees directly relevant to a firm’s safety and soundness. In addition to any collective responsibility they may have as members of the board, non-executives in scope of the Senior Managers’ Regime and Senior Insurance Managers’ Regime will be held individually accountable for their areas of responsibility. The PRA is also proposing to require firms to ensure that all board members are held to high standards of conduct.

The paper also includes details of the FCA’s approach to non-executive directors. Following the FCA’s decision to narrow the scope of its Senior Managers’ Regime to include a smaller group of NEDs, the PRA is also consulting on notification and assessment requirements for those NEDs who are not included in the regime. This will allow the UK to comply with its EU requirements to ensure the suitability of all members of a bank’s board.

Whistleblowing

The PCBS also recommended that banks put in place mechanisms to enable their employees to raise concerns internally, and that the PRA and FCA ensure these mechanisms are effective. The PRA and FCA have today set out a package of measures to formalise firms’ whistleblowing procedures. These proposals aim to ensure that all employees are encouraged to blow the whistle where they suspect misconduct, confident that their concerns will be considered and that there will be no personal repercussions.

Time To Fix Financial Planning Properly

There will, no doubt, be more calls for a Royal Commission into the impact of poor advice provided by financial planners, following the reports of mis-advice at the NAB, which follows on from CBA, and a long list of other firms.

It is clear that there has been significant poor advice provided by some, perhaps influenced by target chasing, commissions, personal gain or errors. Many who received such poor advice will probably be unaware, and simply observe their portfolios are not performing as they expected. On the other hand, poor performance does not necessarily mean poor advice, it could be simply market dynamics, because most investments are inherently risky. That said, it is therefore hard to get a good read on how many people are impacted, but my guess it is into the many thousands, many of these victims do not have deep pockets so cannot fight back.

The superannuation balances of Australians now stand at more than $1.93 trillion so more households will need advice going forward. Much of that could still be conflicted in the current industry structures. Conflicted advice is right in the middle of the current industry problems, and whilst there are many excellent advisors doing the right think by their clients, the reputation of the entire industry is being trashed.

Despite the FOFA reforms (which has been subject to various government attempted revisions) we think that there is still room for significant improvement in the regulatory framework, practice and culture relating to providing good financial advice in Australia, with a focus on doing the right thing for clients. The claim that “its just a few bad apples” becomes less credible as more organisations are implicated. Both ASIC and the recent FSI report highlighted significant structural problems.

We think that the concept of general advice should be removed, and advisors should not be able to receive any indirect financial benefit from the advice they provide.

Separately, financial products can be sold, provided all relevant facts, and costs are disclosed. The two – advice and product sales, should be separated completely. You can read my earlier discussions here. Any link between the two creates conflict and the risk of poor advice.

So, first we need to fix up the industry going forwards. Personally, I think the architecture of a solution is pretty clear, if unpopular from a market participants perspective. Next we need a mechanism to identify people who have received wrong advice, so it can be rectified. That of course is a complex process, and again will be resisted by the industry.

We do not need another couple of years of inactivity whilst yet more inquiries rake over the coals some more. Rather it is time for action.

How Does High-Frequency Trading Impact Market Efficiency?

The Bank of England just published a research paper examining how High-Frequency Trading impacts Market Efficiency. High-frequency trading (HFT), where automated computer traders interact at lightning-fast speed with electronic trading platforms, has become an important feature of many modern financial markets. The rapid growth, and increased prominence, of these ultrafast traders have given rise to concerns regarding their impact on market quality and market stability. These concerns have been fuelled by instances of severe and short-lived market crashes such as the 6 May 2010 ‘Flash Crash’ in the US markets. One concern about HFT is that owing to the high rate at which HFT firms submit orders and execute trades, the algorithms they use could interact with each other in unpredictable ways and, in particular, in ways that could momentarily cause price pressure and price dislocations in financial markets.

Interactions among high-frequency traders Evangelos Benos, James Brugler, Erik Hjalmarsson and Filip Zikes

Using a unique data set on the transactions of individual high-frequency traders (HFTs), we examine the interactions between different HFTs and the impact of such interactions on price discovery. Our main results show that for trading in a given stock, HFT firm order flows are positively correlated at high-frequencies. In contrast, when performing the same analysis on our control sample of investment banks, we find that their order flows are negatively correlated. Put differently, aggressive (market-“taking”) volume by an HFT will tend to lead to more aggressive volume, in the same direction of trade, by other HFTs over the next few minutes. For banks the opposite holds, and a bank’s aggressive volume will tend to lead to aggressive volume in the opposite direction by other banks. As far as activity across different stocks is concerned, HFTs also tend to trade in the same direction across different stocks to a significantly larger extent than banks.

We find that HFT order flow is more correlated over time than that of the investment banks, both within and across stocks. This means that HFT firms tend more than their peer investment banks to buy or sell aggressively the same stock at the same time. Also, a typical HFT firm tends to simultaneously aggressively buy and sell multiple stocks at the same time to a larger extent than a typical investment bank. What does that mean for market quality? A key element of a well-functioning market is price efficiency; this characterises the extent to which asset prices reflect fundamental values. Dislocations of market prices are clear violations of price efficiency as they happen in the absence of any news about fundamental values.

Given the apparent tendency to commonality in trading activity and trading direction among HFTs, we further examine whether periods of high HFT correlation are associated with price impacts that are subsequently reversed. Such reversals might be interpreted as evidence of high trade correlations leading to short-term price dislocations and excess volatility. However, we find that instances of correlated trading among HFTs are associated with a permanent price impact, whereas instances of correlated bank trad- ing are, in fact, associated with future price reversals. We view this as evidence that the commonality of order flows in the cross-section of HFTs is the result of HFTs’ trades being informed, and as such have the same sign at approximately the same time. In other words, HFTs appear to be collectively buying and selling at the “right” time. The results are also in agreement with the conclusions of Chaboud, Chiquoine, Hjalmarsson, and Vega (2014), who find evidence of commonality among the trading strategies of algorithmic trades in the foreign exchange market, but who also find no evidence that such commonality appears to be creating price pressures and excess volatility that would be detrimental to market quality.

A final caveat is in order. The time period we examine is one of relative calm in the UK equity market. This means that additional research on the behaviour of HFTs, particularly during times of severe stress in equity and other markets, would be necessary in order to fully understand their role and impact on price efficiency.

DFA’s perspective is a little different. The underlying assumption in the paper is that more transactions gives greater market efficiency, and therefore HFT is fine. We are not so sure, as first the market efficiency assumption should be questioned, second it appears those without HFT loose out, so are second class market participants – those with more money to invest in market systems can make differentially more profit. This actually undermines the concept of a fair and open market. We think HFC needs to be better controlled to avoid an HFC arms race in search of ever swifter transaction times. To an extent therefore, the paper missed the point.

 

How Does Macroprudential Impact Foreign Banks?

The Bank of England just released a paper which examines whether cross-border spillovers of macroprudential regulation depend on the organisational structure of banks’ foreign affiliates. On a tight leash: does bank organisational structure matter for macroprudential spillovers?  Piotr Danisewicz, Dennis Reinhardt and Rhiannon Sowerbutts.

Do multinational banks’ branches reduce their lending in foreign markets more than subsidiaries in response to changes in the regulatory environment in their domestic markets? And if so, how strong is this effect and how long does it last?

Studies show that multinational banks transmit negative shocks to their parent banks’ balance sheets – including changes in regulation – across national borders. In this paper we examine if the magnitude of the spillover effects depends on the organisation structure of banks’ foreign affiliates. We exploit cross-country cross-time variation in the implementation of macroprudential regulation to test if lending in the UK of foreign banks’ branches and subsidiaries respond differently to a tightening of capital requirements, lending standards or reserve requirements in foreign banks’ home countries.

Focusing on differences in lending responses of branches and subsidiaries which belong to the banking group allows us to control for all factors which might affect parent banks’ decisions regarding their foreign affiliates’ lending. Our results show that whether foreign branches or subsidiaries react differently to changes in regulation in their home countries depends on the type of regulation and the type of lending.

Multinational banks’ branches respond to tighter capital requirements in their home countries by contracting their lending more than subsidiaries. On average, branch interbank lending growth in the UK grows by 6.3 percentage point slower relative to subsidiaries following a tightening of capital requirements in the bank’s home country. This is in line with our hypothesis which predicts that branch lending will be affected due to higher degree of control which parent banks have over its foreign branches. But this heterogeneity in response to capital requirements is only observed in case of lending to other banks. We find that the response of lending to non-bank borrowers to a tightening in capital requirements does not depend on the organisational forms of foreign banks’ UK affiliates. Turning to the impact of a tightening in lending standards or reserve requirements, we find that there are no differential effects on interbank and non-bank lending.

Additional analysis suggests that the stronger contraction in the provision of interbank loans exhibited by branches is only contemporaneous – ie the differential effect fades out after one quarter. Our research provides some evidence that a branch structure is more likely than a subsidiary structure to transmit a tightening in capital requirements affecting the parent institution in the home country. However, the effects we find are short-lived which means that the potential negative effects associated with a higher number of foreign branches we find in this study may not necessarily outweigh any benefits.

NAB Financial Advisors Under The Microscope

According to the Sydney Morning Herald,

“The National Australia Bank has quietly paid millions of dollars in compensation to hundreds of clients given what it considers inappropriate financial planning advice since 2009.

The bank is the latest institution to face disturbing revelations of misconduct in its financial planning division, with a Fairfax Media investigation uncovering instances of forgery, “rogue advisers” and multiple sackings inside its financial advice arm.

A cache of confidential internal documents obtained by Fairfax Media reveals that, according to NAB, 31 of its financial planners were terminated, suspended or had their resignations “ensured” due to conflicts of interest, inappropriate advice, inappropriate practices or repeated compliance breaches

Disturbingly, the document states that these instances were not detected by the bank’s internal controls, but through client complaints or queries by authorities”.

This is further evidence that the financial advice sector is not up to scratch, and that despite the FOFA reforms (which has been subject to various government attempted revisions) we think that there is still room for significant improvement in the regulatory framework, practice and culture relating to providing good financial advice in Australia, with a focus on doing the right thing for clients. The claim that “its just a few bad apples” becomes less credible as more organisations are implicated. Both ASIC and the recent FSI report highlighted significant structural problems.  Remember the superannuation balances of Australians now stand at more than $1.93 trillion.

We think that the concept of general advice should be removed, and advisors should not be able to receive any indirect financial benefit from the advice they provide. Separately, financial products can be sold, provided all relevant facts, and costs are disclosed. The two – advice and product sales, should be separated completely. You can read my earlier discussions here.

Australians Trading Fixed For Mobile Broadband

According to the latest OECD data, published today, whilst we are lagging behind other developed OECD countries in fixed broadband, we rank third in the world for wireless broadband behind Finland and Japan. Some Australians have more than one wireless service and mobile growth is significantly higher than fibre.

Using June 2014 data, Australia ranked 20 out of 34 OECD countries based on the number of fixed broadband connections for 100 inhabitants, behind nations including Switzerland, UK Korea, New Zealand and Japan. Total penetration was around 27 per cent. About 81 per cent of connections were via DSL, 15 per cent and 3 per cent fibre. Our fibre rates are lower than the 17% OECD average.  OECDFixedBroadbandFeb2015Mobile broadband penetration has risen to 78.2% in the OECD area, making more than three wireless subscriptions for every four inhabitants, according to data for June 2014 released today.

OECDMobileBroadbandFeb2015

Mobile broadband subscriptions in the 34-country area were up 11.9% from a year earlier to a total of 983 million, driven by growing use of smartphones and tablets.

Seven countries (Finland, Japan, Australia, Sweden, Denmark, Korea and the United States as ranked in descending order of mobile broadband subscriptions) lie above the 100% penetration threshold.

Fixed broadband subscriptions in the OECD area reached 344.6 million as of June 2014, up from 332 million in June 2013 and making an average penetration of 27.4%. Switzerland, the Netherlands and Denmark remained at the top of the table with 47.3%, 40.8% and 40.6% respectively.

DSL remains the prevalent technology, making up 51.5% of fixed broadband subscriptions, but it continues to be gradually replaced by fibre, now at 17% of subscriptions. Cable (31.4%) accounted for most of the remaining subscriptions.

Annual growth of above 100% in fibre take-up was achieved in OECD economies with low to average ratio of fibre to total fixed broadband levels such as New Zealand, Luxembourg, Chile and Spain. Japan and Korea remain the OECD leaders, with fibre making up 71.5% and 66.3% of fixed broadband connections.

Full details are available from the OECD Broadband portal.

Treasury Consultation on Resolution Regime for Financial Market Infrastructure (FMI’s)

The Treasure today announced further consultation on a proposed resolution regime for financial markets infrastructure (FMI’s).   Australia was one of sixteen jurisdictions which has no administrative authority responsible for resolution of FMIs. FMIs are defined as multilateral systems used to clear, settle and record financial transactions. They are an essential element enabling financial markets to work smoothly.

  • Clearing is a post-trade and pre-settlement function performed by financial market participants to manage trades and associated exposures. Through the legal process of novation, a central counterparty (CCP) interposes itself between counterparties to transactions executed in the markets it serves, becoming principal to each transaction so as to ensure performance of obligations.
  • Settlement is the point at which the counterparty exposures associated with a transaction are eliminated. In securities markets, settlement is facilitated by securities settlement facilities (SSFs).
  • TRs are facilities that centrally collect and maintain records on over-the-counter (OTC) derivatives transactions and positions for the purpose of making those records available to regulators and, to an appropriate extent, the public.

Internationally, the Financial Stability Board (FSB), the Committee on Payments and Market Infrastructures (CPMI, formerly the Committee on Payment and Settlement Systems (CPSS)) and the International Organization of Securities Commissions (IOSCO) have progressed work on international guidance for FMI recovery and resolution. The FSB adopted the Key Attributes of Effective Resolution Regimes for Financial Institutions (the KAs) in October 2011, and the G20 Leaders endorsed these KAs in November 2011. The FSB subsequently added guidance for applying the KAs to FMIs (the FMI Annex to the KAs) in October 2014. Together, the KAs and the FMI Annex to the KAs identify the powers and limits of a resolution framework for financial institutions, including FMIs. CPMI and IOSCO also published guidance on the development of recovery plans for FMIs in October 2014. The guidance provided in these documents extends to CS facilities and TRs, but not financial markets. The FSB is monitoring jurisdictions’ progress in implementing the KAs, including in respect of FMIs, through a series of peer reviews. The first such review was published in April 2013 and noted that resolution regimes for FMIs were generally less developed than corresponding regimes for banks. Australia was one of sixteen jurisdictions identified in the report as having no administrative authority responsible for resolution of FMIs.

The Australian Government, acting on the advice of the Reserve Bank of Australia (RBA), the Australian Securities and Investments Commission (ASIC), the Australian Prudential Regulation Authority (APRA) (jointly, the Regulators) and the Australian Treasury — seeks stakeholder views on legislative proposals to establish a special resolution regime for clearing and settlement (CS) facilities and trade repositories (TRs), together referred to as financial market infrastructures (FMIs), consistent with international standards. Some of the legislative proposals in this paper relating to directions powers and international regulatory cooperation also extend to operators of domestically incorporated and licensed financial markets. Closing date for submissions is Friday, 27 March 2015.

Although robust risk management significantly reduces the likelihood of an FMI failure, the possibility of such failure is not entirely eliminated. With increasing dependence on centralised infrastructure, motivated in part by regulatory reforms, it is vital that the official sector clarifies how it would address a situation of FMI distress. The particular focus of this consultation paper is on resolution: actions taken by public authorities to either return an FMI to viability or facilitate its orderly wind-down. The associated concept of recovery refers to actions taken by a distressed FMI itself to return to viability. The powers proposed for the resolution authority in relation to FMIs are:

  • Statutory management. The power to appoint an individual, company or the resolution authority itself to temporarily administer a distressed FMI in a manner consistent with the objectives of the resolution regime. The statutory manager would assume the powers of the FMI’s board, including carrying out recovery measures and other actions in accordance with the FMI’s rulebook. The exercise of powers by the statutory manager would be overseen by the resolution authority.
  • Moratorium on payments to general creditors. The power to suspend an FMI’s payment obligations to general creditors. This would exclude payments made in relation to core FMI activities (such as margin payments and settlement of securities transactions).
  • Transfer of operations to a third-party or bridge institution. The power to compulsorily transfer all or part of an FMI’s operations to a willing third-party purchaser, or a temporary bridge institution established by public authorities. A transfer to the latter would be intended as an interim step towards a return to private sector ownership under new governance arrangements.
  • Temporary stay on early termination rights. The power to impose a temporary stay of up to 48 hours on termination rights (with respect to future obligations) that may be triggered solely by an FMI’s entry into resolution. It is also expected that FMIs would ensure that such termination rights were not included in their rules or contracts with critical third-party suppliers.

The powers available to the resolution authority have the potential to significantly impact participants and other stakeholders that have dealings with FMIs. The legislative proposals provide a right to compensation from the Commonwealth should participants or other stakeholders be left worse off in resolution than they would have been had the FMI entered general insolvency. The proposals also include an immunity from liability for the resolution authority, statutory manager and others acting in compliance with the directions of the resolution authority. It is envisaged that in some resolution scenarios, there could be a need to draw on public funds to provide temporary liquidity, to ensure the timely disbursement of operating expenses, or in some extreme cases to meet a small shortfall required to complete an FMI’s closeout processes. In each of these cases the Government would seek to recover any expenditure from participants and shareholders of the FMI.

Mortgage Securitisation On The Rise

The ABS today released the data for Australian Securitisers to December 2014. We see two interesting points, first the value of mortgages being securitised has risen (up 4.8%), and second, a greater share are being purchased by Australian investors (all but 7.2%). We discussed recently the rise on securitisation, and the implications. We know the securitised mortgage pools have been securitised by both the banking sector, and non-banking sector. Investors who buy mortgage back securitised paper are of course leveraged into housing at a second order level.

At 31 December 2014, total assets of Australian securitisers were $136.5b, up $4.8b (3.6%) on 30 September 2014.

SecuritisersAssetsDec2014During the December quarter 2014, the rise in total assets was due to an increase in residential mortgage assets (up $5.2b, 4.9%) and cash and deposits (up $0.3b, 7.1%). This was partially offset by decreases in other loans (down $0.6b, 3.9%).

Residential and non-residential mortgage assets, which accounted for 83.0% of total assets, were $113.3b at 31 December 2014, an increase of $5.2b (4.8%) during the quarter.

At 31 December 2014, total liabilities of Australian securitisers were $136.5b, up $4.8b (3.6%) on 30 September 2014. The rise in total liabilities was due to the increase in long term asset backed securities issued in Australia (up $4.3b, 4.3%) and loans and placements (up $3.0b, 18.4%). This was partially offset by a decrease in short term asset backed securities issued in Australia (down $1.5b, 33.0%) and asset backed securities issued overseas (down $1.1b, 10.4%).

SecuritiserLiabilitiesDec2014At 31 December 2014, asset backed securities issued overseas as a proportion of total liabilities decreased to 7.2%, down 1.1% on the September quarter 2014 percentage of 8.3%. Asset backed securities issued in Australia as a proportion of total liabilities decreased to 77.5%, down 0.7% on the September quarter 2014 percentage of 78.2%.

Note the ABS says revisions have been made to the original series as a result of improved reporting of survey data. These revisions have impacted the assets and liabilities reported as at 30 September 2014 and 30 June 2014.

AMP Lifts Profit 32%

AMP Limited has reported a net profit of A$884 million for the full year to 31 December 2014,, up 32 per cent on A$672 million reported for FY 13. In response AMP’s share price rose to a five year high. Their banking division has grown on the back of a 9% rise in mortgage lending.

Underlying profit was A$1,045 million compared with A$849 million for FY 13, up 23 per cent year on year, driven by double digit growth in operating earnings across all contemporary businesses.

AMP-ProfitThe Board has declared a 17 per cent increase to the final dividend to 13.5 cents per share compared with 11.5 cents per share for the 2013 final dividend. This represents a FY 14 payout ratio of 74 per cent of underlying profit and is within AMP’s target range of paying 70 to 80 per cent of underlying profit.

The group cost to income ratio was managed tightly to 44.8 per cent for FY 14, down from 49.4 per cent in FY 13. Controllable costs increased 1.1 per cent and are tracking in line with guidance having been impacted positively by the business efficiency program.

Australian wealth management net cashflows were A$2.3 billion in FY 14, up A$115 million on net cashflows of A$2.2 billion in FY 13. AUM rose 9 per cent over the year to $109.5 billion, against a relatively flat Australian market. Total net cashflows on AMP platforms continue to perform strongly, growing 35 per cent to A$3.6 billion in FY 14.  AMP Capital external net cashflows were A$3.7 billion, a A$4.8 billion improvement from net cash outflows of A$1,039 million in FY 13.

Underlying return on equity: Increased to 12.7 per cent in FY 14 from 10.7 per cent in FY 13, reflecting the 23 per cent increase in underlying profit.

In Australian wealth management, operating earnings for FY 14 were up 13 per cent compared with FY 13, reflecting higher net cashflows supporting good growth in AUM and disciplined cost control in a growing business.

Australian wealth protection has recovered well with operating earnings of A$188 million compared with A$64 million in 2013.

AMP Capital’s improved performance: Operating earnings increased 16 per cent reflecting strong fee growth and investment returns. The internationalisation of the business drove this with global investors attracted by leading infrastructure and property capabilities alongside new inflows generated by the China Life AMP Asset Management joint venture and improved flows from the MUTB alliance. The cost to income ratio of 63 per cent was within AMP Capital’s target range of 60 to 65 per cent.

Seventh quarter of more than A$1 billion net cashflows on North platform: Net cashflows improved 34 per cent to A$5.5 billion for FY 14 and North AUM grew 66 per cent to A$16 billion since December 2013. North also had 50 per cent growth in customers with a total of over 76,000 customers on the platform in 2014.

AMP Bank: The bank delivered A$91 million in operating earnings, up 10 per cent compared with FY 13, reflecting an increase in residential mortgages with AMP growing above system in an intensely competitive environment and AMP aligned advisers contributing a quarter of new business. Total revenue increased 12% in FY 14 on FY 13, driven mainly by growth in the loan portfolio and improved net interest margin.

AMP Bank maintained a competitive lending position, with the total loan book growing by A$1,169m to A$14.5b in FY 14, an increase of 8.8% on FY 13. Residential mortgage competition remained intense in the period, with continued market-wide discounting. AMP Bank’s focus on pricing enhancements and productivity from key channels, contributed to deliver above system residential mortgage book growth of A$1,117m (9%) in FY 14 to A$14.0b. Strong growth was delivered through both the broker and AMP aligned adviser channels. The AMP aligned adviser channel now contributes 25% of AMP Bank’s mortgage new business, up from 19% in FY 13.Owner occupied loans made up 62% of the mortgage portfolio at 31 December 2014, while investment property loans were 38%

Customer deposits increased over FY 14 by A$0.5b (6%) to A$9.2b. The deposit growth was primarily driven by AMP Bank’s Notice Saver Account and the North Platform, offset by a reduction in both term deposits and deposits sourced from financial institutions. Customer deposit to loan ratio was 64% for FY 14, compared with 66% for FY 13

Net interest margin was 1.41% for FY 14, up 2 bps from FY 13 and up 6 bps from 1H 14, aided by improved cost of wholesale funding during the period, targeted use of discounting and enhanced liquidity managemen. AMP Bank’s credit policy remains conservative and has not been relaxed to achieve growth. Asset quality remains strong, with mortgages in arrears (90+ days) at 0.42% as at December 2014 (0.37% as at December 2013). Loan impairment expense to gross loans and advances was 0.01% in FY 14.

AMP Bank’s variable costs increased by A$9m (18%) in FY 14, largely attributable to higher commission payments, mortgage acquisition and securitisation financing costs. AMP Bank’s controllable costs increased A$6m (12%) to A$56m in FY 14, from A$50m in FY 13, due to investments in technology, product development and operating capability to support the growth in lending and improvements to customer service levels. AMP Bank’s cost base will continue to rise as it invests to support growth. The cost to income ratio increased by 0.7 percentage points to 30.3% in FY 14 from 29.6% in FY 13.

The Capital Adequacy Ratio (CAR) was 12.2% at FY 14, (11.8% at FY 13). The Common Equity Tier 1 Capital Ratio at FY 14 was 9.3% (8.7% at FY 13). Both ratios remain well above APRA and internal thresholds. AMP Bank is building its capital holdings to ensure compliance with Basel III capital requirements upon implementation in 2016

New Zealand achieved improved cashflows: Operating earnings of A$110 million, up 13 per cent compared with FY 13, reflecting growth in profit margins, experience profits and favourable currency movements.

Future of advice strategy: A package of measures to lift the quality of advice is being introduced along with a new approach to advice being piloted in five locations. AMP is also investing in services, platforms and digital capabilities to improve adviser quality and productivity. Australian adviser numbers are up slightly at 3,844 in a period of regulatory uncertainty.

AMP continues to hold an appropriate capital surplus, with A$2.0 billion capital above minimum regulatory requirements at 31 December 2014, down from A$2.1 billion at 31 December 2013. The decrease was driven by the redemption of AMP Notes and the impact of falling bond yields, partially offset by retained profits and other capital impacts.