Category: Banking Culture

Industry responds to ACCC inquiry into home lending

Yesterday, the government announced the ACCC will be conducting an inquiry into home loan pricing, investigating how lenders set their rates, why they often fail to pass through RBA rate cuts to borrowers in full, and the barriers that may be preventing consumers from switching to cheaper options on the market. Via AustralianBroker.

Over the course of the day, key industry players publicly responded to the news, some welcoming the development, while the major banks seemed to imply the key concerns listed were a matter of miscommunication rather than misbehaviour. 

FBAA

The Finance Brokers Association of Australia (FBAA) welcomed the announcement of an inquiry, with managing director Peter White dubbing the examination of the banking sector “appropriate.”

“I’ve been calling on the banks for a long time to pass on interest rate cuts in full,” White said.

“The banks have been playing some sort of seesaw game where they will pass on a little bit this time and then a bit more – or a bit less – the next time.

“There’s a pattern of behaviour here that Australians are clearly not happy with.”

White rejected the banks’ claims the partial rate pass throughs have been due to increasing costs.

“The banks are being hit with penalties for breaches uncovered through the royal commission, and through investigations by the Banking Executive Accountability Regime (BEAR).

“Trying to balance the books by passing on these penalties is not something that should be borne by borrowers.

 “This inquiry provides an opportunity for banks to be transparent around their decision making and how they balance the needs of the community.”

COBA

The Customer Owned Banking Association (COBA) also welcomed news of the inquiry, particularly singling out the investigation into what prevents more consumers from switching banks when they may find a better deal elsewhere.

Further, the association expressed optimism the inquiry with generate “creative new ways to unleash consumer power.”

“Empowering consumers to switch their banking and to shop around is an unambiguously good thing,” said COBA director of strategy Sally Mackenzie.

“A more competitive market will make all players care more about their customers, and the market will function more effectively if there is more intense competition for borrowers.

According to Mackenzie, it’s up to the policymakers to enable consumers to drive this market-wide competition.

ANZ

In its response, ANZ asserted the issues raised in the ACCC inquiry launch stem from a shared misperception held among consumers. 

“Despite intense competition, there is cynicism in the broader community about interest rates for home loans,” said ANZ CEO Shayne Elliott.

“We know we have not done a good job in explaining our position and we will be working hard to ensure this process delivers results. 

“The inquiry is a good opportunity to provide facts in what is a complex space and we hope it will provide the public with renewed confidence in the way their home loans are priced.”

Westpac

Westpac took a similar stance to ANZ, but went yet further, directly defending its prioritisation of protecting its margins and making a reasonable profit. 

“The inquiry is an important opportunity to put the facts on the table around mortgage pricing,” said Westpac Group CEO Brian Hartzer. 

“Pricing decisions require banks to take into account a number of factors, particularly as the cash rate heads towards zero. In particular we have to manage the net interest margin – that is the difference between deposit and lending rates. As part of this process we take into account the interest of borrowers, depositors and shareholders who provide the equity that enables us to operate.

“Banks also need to make a reasonable level of return. This not only supports shareholder investment it also underpins prudential stability, and our debt rating. The level of profit also needs to be considered in relation to the size of our balance sheet which is $850bn. In fact our profitability in terms of ROE has more than halved over the last 15 years.

“Westpac must also retain its double AA rating. This rating allows the bank to import funding at more reasonable cost from international investors. To lose it would increase the cost of our wholesale funding which would inevitably lead to higher interest rates for our borrowers.”

 NAB

NAB acknowledged the launch, but did so in a noncommittal manner.

Chief customer officer for consumer banking, Mike Baird said, “This is an important opportunity to discuss the challenges of an increasingly low interest rate environment and engage in a broader discussion about how we support all our customers – both depositors and borrowers.”

The commentary did not extend further, aside from a list of “fast facts” tagged onto the end, including that NAB currently has the lowest Standard Variable Rate of the majors, has gotten rid of over 100 fees from its products and services, and offers a special fixed rate of 2.88% for two years for first home owners – seeming to imply the bank has already done a great deal in making itself more hospitable for customers.

RBA On ‘Emergency Liquidity Injections’

The RBA released “Research Discussion Paper – RDP 2019-10 Emergency Liquidity Injections” by Nicholas Garvin.

Here is the non-technical summary.

Understanding liquidity crises has long been, and will probably long be, an important objective for economic policymakers. Liquidity risk is inherent to banking systems because banks fund long-term assets (like mortgages) with short-term and at-call debt (like deposits). This process benefits the economy by making more credit available for households and businesses. However, it also generates the risk that if short-term debtholders withdraw their funds en masse, banks are unlikely to be able to pay them. This paper contributes to the research literature that studies how a policymaker can handle such a situation, which broad monetary stimulus is not designed for, by modelling the scenario faced by the United States and other global financial centres in late 2008. This type of situation appears highly unlikely in Australia in the foreseeable future.

The model depicts a banking system that is solvent, but a system-wide withdrawal by debtholders leaves banks with short-term payment obligations that exceed their available funds (i.e. their liquidity). It is then in the policymaker’s interests to inject liquidity into the banking system, which can prevent bank failures and the harm to the economy that would likely follow. However, injecting liquidity incentivises banks to take more liquidity risk the next time around, which makes future liquidity crises more likely. This paper compares different types of liquidity injection policies by where they sit in the trade-off between the perverse incentives generated, and the ability to support the banking system during a crisis.

To address the subject, I develop a game-theoretic model in which banks decide how many liquid assets to hold as protection against funding withdrawals. Banks consider the losses they would suffer if a crisis eventuated, which depend on the type of liquidity injection policy implemented by the policymaker. If a crisis eventuates, the type of policy also influences how the crisis unfolds. By placing a particular type of policy into the model, we can therefore analyse that policy’s influence on banks’ risk-taking decisions and on crisis outcomes. The model replicates some features of liquidity injection policies highlighted previously in the research literature. It also generates two new insights, which are the paper’s main contributions.

The first insight is that, if the policymaker injects liquidity by lending to banks, there is an indirect benefit of requiring them to provide collateral. The benefit arises through the (secondary) markets for the securities that the policymaker accepts as collateral. In the model, the crisis is characterised by falling prices in these markets, driven by selling pressure from the banks that need more cash. However, banks cannot sell securities that they are providing as collateral. Collateral requirements can therefore alleviate ‘fire sales’ in these markets, which benefits other banks through the higher market prices. In aggregate, the banking system ends up better off after the crisis, but, for each individual bank, there is no increase in the return to taking more liquidity risk.

The second insight is about whether a policymaker can disincentivise risk-taking by charging high ‘penalty’ interest rates on its emergency lending. Farhi and Tirole (2012) argue that, regardless of the effects on banks’ incentives, once a crisis occurs, the policymaker will then offer low rates. This is because the risk-taking that caused the crisis has already taken place, and charging banks penalty rates could now put them in further distress. Therefore, banks view any claims by the policymaker that it would charge penalty rates in a crisis as not credible, so such claims are powerless to influence risk-taking. I present a counterargument: penalty rates can be credible if the emergency loans are long term. In the crisis I model, banks are in liquidity distress but they are still solvent (i.e. they have not run out of capital). This means they will have no trouble making the repayments once liquidity conditions in the banking system improve. Charging banks penalty rates on long-term loans during a crisis will therefore not put them in further distress, which gives penalty rates more credibility.

ANZ Takes Another $559 million Remediation Bill Hit

ANZ has announced that its second half 2019 (2H19) cash profit will be impaired by a charge of $559 million (after-tax) as a result of increased provisions for customer related remediation.

The costs include a $405 million after-tax ($485 million before tax) charge within continuing operations, which the bank said largely related to product reviews in Australia retail & commercial for fee and interest calculation and related matters.

ANZ added that such costs also include historical matters recently identified during the period, as well as refinements to estimates of existing customer compensation programs and associated costs.

Further, within discontinued operations, remediation charges recognised in ANZ’s 2H19 results will be $154 million after-tax ($166 million before tax), which ANZ claimed are primarily associated with the advice remediation program and customer compensation charges for other wealth products.

This might not be the end of the matter, as the charges relate to issues that have been identified from previous reviews and from reviews which remain ongoing.  

Following the announcement, ANZ chief financial officer Michelle Jablko said: “We recognise the impact this has on both customers and shareholders.

“We are well progressed in fixing issues and have a dedicated team of more than 500 specialists working hard to get any money owed back to customers as quickly as possible.”

ANZ will release its full-year 2019 financial results on 31 October.

NAB To Drop 2H19 Cash Earnings By ~$1,123 Million

National Australia Bank Ltd (NAB) announced additional charges of $1,180 million after tax ($1,683 million before tax) relating to increased provisions for customer-related remediation and a change to the application of the software capitalisation policy. This is expected to reduce 2H19 cash earnings by an estimated $1,123 million after tax and earnings from discontinued operations by an estimated $57 million after tax.

Customer-Related Remediation
The 2H19 result will include charges of $832 million after tax ($1,189 million before tax) for additional customer-related remediation. The key driver of these additional charges is inclusion of a provision for potential customer refunds of adviser service fees paid to self-employed advisers. NAB now has in place provisions for the estimated costs and customer payments relating to all known material customer-related remediation matters based on information currently available. However, until all customer payments have been completed, the final cost of such remediation matters remains uncertain.

NAB Chief Executive Officer, Philip Chronican, said: “NAB is moving forward with rigour and discipline to make things right for customers. While we previously noted additional customerrelated remediation provisions were expected in 2H19, the size of these provisions is significant. We understand that shareholders will be rightly disappointed. However, we also recognise the need to prioritise dealing with these past issues and fixing them for customers.

“We have undertaken to significantly uplift customer remediation practices, as part of a broad program of reform to change the way we operate and ensure NAB meets customer and community expectations. We have made approximately 450,000 payments to customers with a total value of $202 million between June 2018 and August 2019, and have a dedicated remediation team of about 400 people helping to bring greater discipline and focus to remediating customers.”

Of the 2H19 charges, approximately 92% are for Wealth and Insurance-related matters, with the remainder for Banking-related matters. In combination with provisions raised in 2H18 and 1H19 which have not yet been utilised, this brings total provisions for customer-related remediation at 30 September 2019 to $2,092 million.

The key items giving rise to increased provisions for customer-related remediation include:

  • Adviser service fees charged by NAB Advice Partnerships (self-employed advisers). Provisions have been increased to include allowance for customer refunds based on total ongoing advice fees received between 2009-2018 of approximately $1.3 billion, with an assumed refund rate of 36% (or approximately 55% including interest costs). Key considerations in estimating a refund rate include assumptions about  circumstances where documents are not available or readily accessible, including where advisers are no longer working in the industry;
  • Consumer Credit Insurance sales through certain NAB channels. This relates to a previously disclosed remediation program which arose from an ASIC industry-wide review. Provisions have been increased mainly to reflect higher refund rates based on experience to date;
  • Non-compliant advice provided to Wealth customers which is being addressed as part of NAB’s ongoing wealth advice review. Provisions have been increased mainly to cover higher expected costs to undertake the program; and
  • Adviser service fees charged by NAB Financial Planning (salaried advisers). Provisions have been increased to reflect higher expected costs and a higher assumed refund rate of 28% (or approximately 39% including interest costs).

Capitalised Software Policy Change
Following a review of NAB’s software capitalisation policies, the minimum threshold at which software is to be capitalised has increased from $0.5 million to $2 million, reflecting NAB’s focus on simplification and the increasingly shorter useful life of smaller software items. The change will be applied to both current and future software balances and is expected to reduce NAB’s capitalised software balance at 30 September 2019 by $494 million and NAB’s 2H19 cash earnings by $348 million (post tax). There is no impact on Group capital given capitalised software balances are already deducted from Common Equity Tier 1 capital. This change in approach will significantly
reduce the number of individual capitalised assets on the balance sheet from approximately 1,390 to 340.

Earnings Impact
Details of the expected 2H19 cash earnings impact are provided in the table below. As has been the case in prior periods, 2H19 customer-related remediation costs and capitalised software change will be excluded from FY19 and FY20 expense growth guidance of ‘broadly flat’. Further detail will be provided when NAB releases its 2019 Full Year results on 7 November 2019, including an update on progress towards achieving unquestionably strong capital requirements. The matters in this announcement remain subject to finalisation of NAB’s 2019 Full Year results, including review by the auditors.

NZ Reserve Bank Seeks Views on Expanded Stewardship Role For Cash

Cash system participants and the wider public are being asked for their views about the Reserve Bank of New Zealand taking a more active role in the cash system.

A consultation paper has been released today as part of the Bank’s ongoing Future of Cash – Te Moni Anamata programme which is considering the implications for New Zealanders of falling cash use for every-day transactions, including the impacts on the system that supplies, moves and stores it.

Assistant Governor Christian Hawkesby says the Reserve Bank is just one cog in a cash system machine which includes the banking system, armoured truck companies, retailers, and independent ATM providers. “We see roles for all parts of the system – along with interest groups, whānau and individuals – in ensuring people who want or need to access or use cash can do so.”

The consultation paper proposes that the Reserve Bank take on a stewardship role in the cash system, providing system-wide oversight and coordination. It also proposes two tools which, though not currently required, may be needed in the future to respond flexibly to changes in the cash industry and the evolving needs of the public:

  • The Reserve Bank be given the power to set standards for machines that process and dispense cash.
  • The Reserve Bank Act set out regulation-making powers that enable the government and the Reserve Bank to require banks to provide access to cash deposits and withdrawals.

“These proposals are not the complete answer, but they would help create a foundation for the Reserve Bank to be more than the issuer of notes and coins when it comes to how we use cash which is an important component of our social and economic activity,” Mr Hawkesby says.

Mr Hawkesby says the Reserve Bank is grateful to the large numbers of individuals, groups, banks and other cash system providers, business and community organisations, and public sector agencies who are participating in the Future of Cash programme and sharing their views.

“Nearly 2400 individuals and groups gave feedback on our earlier issues paper discussing the potential impacts from a fall in cash use, particularly for people who are already financially or digitally excluded for whatever reasons. Meanwhile 3100 people randomly selected from the electoral roll have responded to a scientific survey updating our understanding of how New Zealanders are using cash and how this use is changing. We expect to publish results from both these efforts in November, and these will also feed into final recommendations in respect of the proposals released today.

”The changes in our latest consultation document would have significant consequences for all participants in the cash system. Banks, cash-in-transit providers, independent ATM operators, and the broader retail sector would likely be particularly affected. We want to continue to hear views and feedback from everyone about the purpose and desired attributes for the mechanics of the cash system, and how we could collectively improve it,” says Mr Hawkesby.

The paper is published on the The Future of the Cash System – Te Pūnaha Moni Anamata page, and feedback closes on 6 November 2019.

CBA Withholds Some Of The Rate Cut Margin

Commonwealth Bank has responded to the Reserve Bank of Australia’s cash rate decision by reducing home loan interest rates.

New Standard Variable Rates  

  • Owner Occupied Principal and Interest Standard Variable Rate home loans reduced by 0.13% per annum (p.a) to 4.80% p.a.
  • Investor Principal and Interest Standard Variable Rate home loans reduced by 0.13% p.a. to 5.38% p.a.
  • Owner Occupied Interest Only Standard Variable Rate home loans reduced by 0.13% p.a. to 5.29% p.a.
  • Investor Interest Only Standard Variable Rate home loans reduced by 0.25% p.a. to 5.64% p.a.

New Fixed Rates

  • 2 and 3 Year Owner Occupied Principal and Interest Fixed Rates in the Wealth Package reduced to 2.99% p.a. available from Thursday.

Commonwealth Bank has responded to the Reserve Bank of Australia’s (RBA) cash rate decision by reducing the Standard Variable Rate (SVR) for home loan customers by between 0.13% p.a. and 0.25% p.a.

“Today’s announcement means our SVR for Owner Occupied customers, with Principal and Interest repayments, will be at record low levels,” Angus Sullivan, Group Executive Retail Banking Services said.

“As the Reserve Bank cash rate has reached record lows, we face a difficult balancing act between the multiple, valid interests of our stakeholders. Particularly given it is currently not feasible to pass on the full rate reduction to more than $160 billion of our deposits which are at, or near, zero rates.

“In balancing these interests, we have carefully considered how to best meet the needs of over 6 million savings customers – who may find it challenging to make ends meet with record low savings interest rates – with the needs of our 1.6 million home loan customers, who want to pay less on their mortgages; and the needs of our shareholders, many of whom are retirees who rely on our dividend.

“In this environment, while reducing the SVR for home loan customers by between 0.13% p.a. and 0.25% p.a., we have also decided to limit the base rate reduction for savings customers in our popular NetBank Saver product to 0.05%.  These changes are in addition to the fee removals, fee reductions and pre-emptive fee alerts we have already introduced, which have helped save our customers over $415 million.

“We are also announcing a new 2.99% p.a. 2 and 3 year Owner Occupied Principal and Interest Fixed Rate, available to new and existing Wealth Package customers taking out a Fixed Rate loan. This allows customers who prefer certainty to lock-in this historically low rate. This means we have reduced our 2 and 3 year Fixed Rates by 0.80% p.a. since July for Owner Occupied Principal and Interest customers,” Mr Sullivan said.

For Owner Occupied customers paying Principal and Interest, the SVR has reduced by 0.57% p.a. since June, which on a $400,000 home loan equates to a reduction in the minimum monthly repayment of $140 or an annual saving of $1680.

For Investor customers paying Interest Only, the SVR has reduced by 0.75% p.a. since June, which on a $400,000 home loan, equates to a monthly saving of $250 or an annual saving of $3000.

Customers who have questions regarding today’s rate change are encouraged to speak to one of our home lending specialists in branch or over the phone.

  • The new SVR will take effect on 22 October 2019
  • The new Fixed Rates will be available to new and existing customers switching to a Fixed Rate on 3 October 2019
  • The NetBank Saver base rate reduction will take effect on 4 October 2019

Westpac tipped to cut dividend by 12%

Analysts believe the major banks will be forced to reduce dividend payments amid slower growth, margin squeeze and significant remediation costs, via InvestorDaily.

In a research note published on Wednesday (25 September), Morningstar analyst Nathan Zaia forecast Westpac’s 2020 dividend will be reduced by 12 per cent to $1.66 from $1.88. 

The analyst believes that the bank may struggle to meet its January 2020 capital deadline. 

“When Westpac reported first-half earnings in May, the bank appeared in good shape to meet APRA’s 10.5 per cent unquestionably strong target by January 2020,” Mr Zaia said. 

“However, we estimate capital headwinds, new and previously known, will detract around 44 basis points from Westpac’s common equity Tier 1 ratio by December 2019.”

Morningstar believes that if Westpac maintains its final dividend of $0.94 a share, which is paid in December, its CET1 capital level will fall below 10.5 per cent. To offset this, the research house assumes that the major bank will partially underwrite the dividend reinvestment plan (DRP). 

NAB used the same strategy in May when it partially underwrote $1 billion on top of the $800 million received through ordinary DRP participation by shareholders. 

The capital headwinds are largely being driven by remediation programs among the big four banks. In July, APRA announced a $500 million operational risk overlay for the banks. This applied to all majors except CBA, which was asked to hold an additional $1 billion in capital. These capital burdens will remain in place until the banks have completed their remediation programs and strengthened risk management. 

Last month UBS analyst Jonathan Mott warned that the majors will be forced to cut dividends as net interests margins become unsustainable. 

Mr Mott explained that with interest rates entering ultra-low territory, the ability of the banks to generate a lending spread and return on equity (ROE) has become significantly challenged. 

“If the housing market does not bounce back quickly this could put material pressure on the banks’ earning prospects over the medium term, implying that the dividend yields investors are relying upon come into question once again,” he said. 

UBS now believes the majors will be forced to cut dividends in the next two years. 

“We believe the significant revenue pressure the banks are facing as interest rates fall and NIMs decline will force the banks to review their dividend policies,” Mr Mott said. 

UBS expects CBA, Westpac and Bendigo and Adelaide Bank to cut their dividends over the next two years if the RBA cuts the cash rate to 0.5 per cent or undertakes any alternative monetary policies like QE.

Changes to Banking Code should be strengthened: ACCC

The ACCC proposes to impose conditions on the Australian Banking Association’s (ABA) Banking Code of Practice to ensure the revised Code will benefit low-income consumers and drought-affected farmers.

The ABA, on behalf of its 23 members including the major banks, has sought authorisation to amend its Banking Code in line with recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Hayne Royal Commission).

The proposed amendments aim to improve basic bank accounts and low or no-fee accounts by prohibiting informal overdrafts unless requested by the customer, and dishonour fees. The ABA is also proposing that certain types of basic bank accounts have no minimum deposits, free direct debit facilities, access to a debit card at no extra cost and free unlimited domestic transactions.

In addition, the ABA’s changes would prevent default interest being charged on agricultural loans in drought-affected areas.

After considering the ABA’s proposal, the ACCC believes that additional conditions are required to strengthen these changes.

“The proposed changes to the Code should result in public benefits, by giving customers on low incomes better access to affordable banking, and to address a source of significant harm to farmers experiencing drought,” ACCC Deputy Chair Delia Rickard said.

“While the ACCC strongly supports these objectives, we are proposing to place extra conditions on ABA members to ensure the changes effectively address the Royal Commission’s recommendations, and in turn actually deliver these public benefits.”

For example, under the ABA’s proposal, basic bank accounts could still be overdrawn without the customer’s agreement in some circumstances, and banks could continue to charge interest, in some cases at rates approaching 20 per cent, on overdrawn amounts.

“This could lead to low income customers getting into debt from overdrafts they did not agree to, which is exactly the kind of problem the Hayne Royal Commission sought to address,” Ms Rickard said.

The proposed conditions of authorisation would not allow interest to be charged in these cases, or would require any such interest charges to be repaid to the customer.

The ACCC also shares consumer groups’ concerns that the ABA’s proposed changes would not require banks to proactively identify existing customers who would be eligible for the accounts, or even to continue to offer a basic bank account at all.

To address this, the ACCC’s proposed conditions would require banks to proactively identify eligible customers, including through data analysis; inform these customers of their eligibility, and for the ABA to report to the ACCC on measures taken to offer them fee-free bank accounts, and report how many customers have taken them up.

The ACCC will also require members of the ABA who currently offer a basic banking product to continue to do so for the period of authorisation.

Feedback is invited on these issues and the proposed conditions by 14 October 2019. The ACCC’s final determination is due in November 2019.

The draft determination and more information about the application for authorisation is available at The Australian Banking Association.