Martin North – Page 1042 – Digital Finance Analytics (DFA) Blog

Financial Adviser Directory Will Be Active End March 2015 – ASIC

ASIC, is well advanced with work on an industry-wide public register of financial advisers to be up and running at the end of March according to an update released today.

The register will contain details of all persons employed or authorised – directly or indirectly – by Australian financial services (AFS) licensees who are authorised to provide personal financial advice to retail clients on Tier 1 (investment) products. Tier 1 products are financial products other than basic banking products, general insurance products or consumer credit insurance products or a combination of any of those products.

It is intended the register will be accessible online from ASIC’s MoneySmart website from 31 March 2015.

The Government had announced plans to establish the register in October 2014, and intends to make regulations relating to the register in coming days. ASIC is working with licensees and authorised representatives to assist them to provide the required information in accordance with the timetable in the planned regulations.

ASIC has a dedicated webpage www.asic.gov.au/far and encourages all licensees to subscribe via this webpage to receive email correspondence about the register.

Housing Finance Leaps Higher

Data from the ABS today shows a further lift in home lending in December, driven hardest by the investment sector, but with owner occupation lending also in play. The trend estimate for the total value of dwelling finance commitments excluding alterations and additions rose 1.0%. Investment housing commitments rose 1.2% and owner occupied housing commitments rose 0.9%. Investment lending comprised more than 50.6% of new loans, excluding refinance, another record. Refinancing remains strong in the current low rate environment. In seasonally adjusted terms, the total value of dwelling finance commitments excluding alterations and additions rose 4.7%. However, DFA is now using the trend series in our modelling, as we think the SA series are suspect (according to the ABS, trend series reduces the impact of the irregular component of the seasonally adjusted series and is derived by applying a 13-term Henderson-weighted moving average to all but the last six months of the respective seasonally adjusted series, whilst the last six months are estimated by applying surrogates of the Henderson moving average to the seasonally adjusted series.)

In trend terms, the number of commitments for owner occupied housing finance rose 0.5% in December 2014. In trend terms, the number of commitments for the purchase of established dwellings rose 0.6%, while the number of commitments for the purchase of new dwellings fell 1.1% and the number of commitments for the construction of dwellings was flat.

Turning to First Time Buyers, on the revised new method of calculation and in original terms, the number of first home buyer commitments as a percentage of total owner occupied housing finance commitments fell to 14.5% in December 2014 from 14.6% in November 2014. The fall in First Time Buyer activity remains a feature in the current climate.

The state by state data reflects the revised First Time Buyer data, with NSW up by one third from 8% to 11% following the ABS revisions, compared with a national uplift of one quarter. We still see WA leading the way, though falling from the June 2014 peak. The other states are now more closely aligned. Given the size of the adjustment, we hypothise that at least one of the majors was not correctly recording first time buyer data.

CBA Results Suggests Momentum Slowing?

The Commonwealth Bank of Australia announced its results for the half year ended 31 December 2014 today. The Group’s statutory net profit after tax (NPAT) for the half year ended 31 December 2014 was $4,535 million, which represents an 8 per cent increase on the prior comparative period. Cash (NPAT) was $4,623 million, an increase of 8 per cent on the prior comparative period. Cash Return on Equity was 18.6 per cent. The Board declared an interim dividend of $1.98 per share – an increase of 8 per cent on 2014 interim dividend.

Revenue was up 5 per cent in subdued market conditions. The cost to income ratio improved 70 basis points to 42.2 per cent as productivity initiatives continue. Return on Equity on a cash basis was 18.6 per cent. They maintain a strong capital position – Basel III Common Equity Tier 1 (CET1) (Internationally Comparable) of 13.3 per cent.

The banks said that while some of the Group’s customers are facing challenges, this is not translating into a deterioration of credit quality. The Group is maintaining a strong balance sheet with high levels of capital and provisioning. Liquidity was $151 billion as at 31 December 2014.

Customer deposits were up $32 billion to $458 billion and represents 63 per cent of funding. During the period the Group took advantage of improving conditions in wholesale markets, issuing $18 billion of long term debt in multiple currencies.

Looking at the segmentals, the bank reported that:

Net interest income and other banking income both grew 6 per cent, with average interest earning assets up $49 billion to $739 billion and retail and business average interest bearing deposits up $27 billion to $432 billion;
Net interest margin (NIM) declined 2 basis points (to 2.12 per cent) on the prior half, reflecting competitive asset pricing, partially offset by lower wholesale funding costs;
Strong growth in net interest income and other banking income and a disciplined approach to expenses contributed to Retail Banking Services cash earnings growth of 12 per cent;
Wealth Management’s average Funds Under Administration grew by 11 per cent with 85 per cent of funds outperforming their respective three year benchmarks;
Cash earnings in New Zealand (excluding the impact of lower losses associated with the New Zealand earnings hedge) grew 15 per cent and in Bankwest grew 8 per cent respectively;
The Group’s cost to income ratio improved by 70 basis points, in large part due to the on-going productivity focus, which delivered savings of $312 million over the past twelve months;
The annualised ratio of loan impairment expense (LIE) to average gross loans and acceptances improved 2 basis points and 3 basis points (to 14 basis points) compared with the prior comparative period and the prior half respectively;
Investment in long term growth continued, with $595 million invested in a set of initiatives, including $167 million for risk and compliance related projects, with the balance invested against on-going strategic priorities;
Provisioning remained conservative, with total provisions of $3.9 billion, and the ratio of provisions to credit risk weighted assets at 1.25 per cent. Collective provisions included a management overlay of almost $800 million and an unchanged economic overlay;
CET1 (Internationally Comparable basis) was 13.3 per cent. CET 1 (APRA basis) increased 70 basis points (on the prior twelve months) to 9.2 per cent;

The Group remained one of a limited number of global banks in the ‘AA’ ratings category.

Looking at home loans, average balances increased by $24 billion or 6% on the prior comparative period to $404 billion. The growth in home loan balances was largely driven by growth in Retail Banking Services and Bankwest. There was a drop of margin of seven basis points related to home lending, reflecting intense competition and discounting in the market.

In their outlook, they highlight the importance of job creation.

The Australian economy has many of the foundations necessary to make a successful transition from its dependence on resource investment. Population growth, a vibrant construction sector, some signs of increased business investment, greater trade access supported by a lower Australian dollar and a strong banking sector are all contributing to an economy that remains the envy of most developed markets. However, the volatility of the global economy continues to undermine confidence, particularly the impact of lower commodity prices on national revenue. Weak confidence is a significant economic threat. Businesses need the certainty to invest to create jobs, and households need a greater feeling of security. That requires implementation of a coherent long term plan that clearly addresses target government debt levels and timeframes, infrastructure priorities, foreign investment, business competitiveness policies and, above all, job creation.

Overall then, whilst profit was in line with expectations, revenue growth may be slowing, and margins are under some pressure thanks to what the bank called “competitive asset pricing” aka the battle for home loan market share.

Launch of the Official Australian Renminbi Clearing Bank

Glenn Stevens spoke at the launch yesterday. The launch of a local RMB clearing bank in Australia is an important event. It should make it easier to make RMB for payments, especially for larger transactions. It should establish a more direct connection with the liquidity in RMB which is provided by China’s central bank, the People’s Bank of China (PBC). Next, it will facilitate access to China’s Real-time Gross Settlement System (CNAPS), making it will be easier to track and confirm when payments to China reach their recipients. Finally, as it develops, it has the potential to reduce risks via access to fiduciary accounts structures maintained by the PBC on behalf of its clients. In addition, more broadly, the establishment of an RMB clearing bank underscores the international importance of Sydney as an Asian financial centre and strengthens the bilateral relationships. Now, it is up to local businesses to grasp the opportunity to transact in RMB in Australia.

Today’s events mark an important step in the further development of a local renminbi – or RMB – market. But more than that, they mark one more step in a lengthy and very important journey that has seen the flowering of trade relations between China and Australia, and which promises benefits from the maturing of financial ties.

On its own, the key direct benefit of the official Australian RMB clearing bank is that it can more efficiently facilitate transactions between Australian firms and their mainland Chinese counterparts using the Chinese currency. Bank of China (Sydney)’s ‘official’ status – which was granted by the People’s Bank of China (PBC) – affords it more direct access to the Chinese financial system, with flow-on effects for local financial institutions and their customers.

But an official Australian RMB clearing bank also confers some indirect benefits on the Australian financial sector and its customers, particularly when viewed as one element of a broader range of initiatives.

In particular, the establishment of the clearing bank helps to raise awareness among Australian firms that the local financial system has the capacity to effect cross-border RMB transactions on their behalf. This is important, because over the long run, Chinese firms may increasingly wish their trade with Australian firms to be settled in RMB. To be sure, today the bulk of global trade is settled in US dollars. But with China now a very large trading nation, and continuing to grow into a ‘continental sized’ economy, it would be surprising if at some point we do not see much more use of China’s currency for trade purposes. Already its usage is growing quickly, if only from a small base. So Australian firms and the Australian financial system need to be well prepared.

To that end, the RBA has been directly involved in several initiatives, with the aim in each instance being to ensure that there are mechanisms in place that allow the private sector to increase its use of the Chinese currency as and when it chooses to do so. This of course included the signing of a Memorandum of Understanding with the PBC to enable the establishment of an official RMB clearing bank in Australia, in November last year following the G20 Leaders’ Summit in Brisbane.

In addition, there was the establishment of a bilateral local currency swap line with the PBC in 2012, which is designed to provide confidence to both Chinese and Australian financial institutions that appropriate RMB and AUD liquidity arrangements are in place in the event of dislocation in the market.

More recently, there was the negotiation of a quota to allow financial institutions based in Australia to invest in approved mainland Chinese securities under the Renminbi Qualified Foreign Institutional Investor Scheme – better known as RQFII.

Finally, I note the RBA has invested a small proportion of Australia’s foreign currency reserves in RMB.

Official initiatives like these help to lay the groundwork. But ultimately, the development of an RMB market in Australia will depend on the extent of benefit the private sector sees in using RMB for trade settlement and investment purposes. It is worth noting that private sector-led initiatives are now becoming increasingly important drivers of the RMB market’s development. For example, forums such as the Australia-Hong Kong RMB Trade and Investment Dialogue and the ‘Sydney for RMB’ Working Group are beginning to have a more prominent role in raising awareness of the financial sector’s capacity to conduct RMB business and in identifying any further market development issues that may need to be addressed.

Did HSBC Help Wealthy Clients Evade Tax?

Claims that Britain’s biggest bank helped wealthy clients cheat the UK out of millions of pounds in tax via HSBC’s private bank in Switzerland have been made. HSBC may faces criminal investigations. The suggestion, based on leaked documents, is that they allowed clients to withdraw cash, often in foreign currencies of little use in Switzerland, marketed schemes likely to enable wealthy clients to avoid European taxes, colluded with some clients to conceal undeclared “black” accounts from their domestic tax authorities and provided accounts to international criminals, corrupt businessmen and other high-risk individuals.

Whilst a numbered bank account is now illegal in most western countries, it is still part of Switzerland’s banking system. This dates from 1934. Article 47 of the Federal Act on Banks and Savings Banks made it a criminal offence to disclose the identity of clients. A depositor’s true identity will be known to only a select group of employees, and in order to withdraw cash or make a wire transfer, the account holder is asked for a codeword. A breach of professional confidentiality, even for retired bankers or those who have had their licence revoked, is punishable by three years in jail. By 2018, Switzerland has committed to an automatic exchange of information about individual accounts, taxes, assets and income along with 50 other nations under an OECD agreement.

Rate Cut Unlikely To Cut Defaults – Fitch

Fitch Ratings says that the Reserve Bank of Australia’s move on 3 February 2015 to cut its official interest rate to 2.25% down from 2.50%, which led to mortgage rates in Australia falling to their lowest point in 50 years, is unlikely to improve the performance of domestic residential mortgage loans.

Australian variable interest rates have tracked well below historical levels for a long time, and there is little room for further improvement in mortgage performance in terms of loan defaults and delinquencies. Fitch data shows that the current delinquency rate of loans that are more than 30 days past due (a measure of borrowers who have missed one or more payments) on residential mortgages is now just 1.08%, the lowest recorded since December 2007.

Financial distress is one of the key factors that borrowers cite when they default on mortgages. However, interest rates are already at low levels, while household finances have improved following lower petrol prices, both of which mean that now is one of the least likely times for borrowers who remain employed, to be unable to pay. Fitch is of the view that a 25bps cut in rates will have no impact on mortgage performance.

Any defaults in the current environment will be due to other key factors such as sickness, business bankruptcy and divorce, which are unaffected by interest rates. Fitch remains vigilant for over-commitment of borrowers and poor underwriting in the mortgage market, although there is little evidence of such practices now.

Fitch currently rates 139 Australian residential mortgage backed securities (RMBS) transactions and five covered bond programmes which include over 1.4 million individual housing loans as collateral. These loans represent approximately 18% of the Australian housing loan market and so provide a good proxy for the market as a whole.

RBA Lowers Growth Forecast

The RBA published their statement on monetary policy today. They point to a lower than expected growth and inflation forecast, but higher rates of unemployment. GDP is now projected at 2.25 per cent to June, and a quarter percent lower by the end of the year than their last projection. They are expecting unemployment to remain higher for longer, and above 6 per cent during 2017. Inflation is forecast at a headline level of just 1.25 per cent, thanks to lower oil prices, although the bank’s favoured core inflation measure still sits within its 2-3 per cent target.

Looking at the economic drivers, the banks said that the 9 per cent fall in exchange rates had yet to flow through into higher prices, and the fall in oil prices are estimated to have increased real household disposable income by 0.25 per cent over the last half of 2014, and will lift spending power by an additional 0.5 per cent over the first three months of this year.

“While growth in non-mining activity has picked up a little over the past two years, all components except dwelling investment look to have grown at a below average pace over the past year,” the RBA said.

The ABS capital expenditure survey suggests that there will be only very modest growth in non-mining investment in 2015.

The most significant comment for me related to the behaviour of households who have experienced significant lifts in wealth thanks to rising house prices, yet may not be turning this into higher rates of consumption.

“However, another possibility is that ongoing buoyant conditions in housing markets will have less of an effect on consumption than previously. In particular, in recent years fewer households appear to have been utilising the increase in the value of their dwelling to increase their leverage or trade up”.

This cuts to the heart of the problem. Their core strategy was to allow housing to expand, to lift wealth, to encourage spending, to drive growth, until the business sector kicks in. However, there is mounting evidence that households are not convinced, and are unwilling or unable to spend. Retail is still below trend, and as interest rates of savings fall, households become more conservative. It could be that their core thesis is flawed. Indeed, they had previously acknowledged

“we shouldn’t expect consumption to grow consistently and significantly faster than incomes like it did in the 1990s and early 2000s, given that the debt load is already substantial”.

In our recently published household finance confidence index we noted a consistent fall. No surprise then households are not performing as expected.

Bank of England maintains Bank Rate at 0.5%

The Bank of England’s Monetary Policy Committee at its meeting today voted to maintain Bank Rate at 0.5%. The Committee also voted to maintain the stock of purchased assets financed by the issuance of central bank reserves at £375 billion.

The Committee’s latest inflation and output projections will appear in the Inflation Report to be published at 10.30 a.m. on Thursday 12 February.

The previous change in Bank Rate was a reduction of 0.5 percentage points to 0.5% on 5 March 2009. A programme of asset purchases financed by the issuance of central bank reserves was initiated on 5 March 2009. The previous change in the size of that programme was an increase of £50 billion to a total of £375 billion on 5 July 2012.

The Bank will continue to offer to purchase high-quality private sector assets on behalf of the Treasury, financed by the issue of Treasury bills, in line with the arrangements announced on 29 January 2009 and 29 November 2011.