Westpac released their Pillar 3 report for December 2018, plus data on asset quality funding and capital. Of most interest to me was their mortgage data, which shows loan volume growth slowing, and rising delinquencies. The number of properties in possession rose from 396 to 444 in a quarter!
They said their audited statutory net profit for 1Q19 was $1.95 billion, comparable to 2H18.
They reported net interest margins excluding treasury was higher following repricing last year. There was a weaker contribution from treasury.
Provisions were $4,066 million compared with Sep 18’s $3,053.
On 1 October 2018 Westpac adopted AASB 9 and AASB 15. The models for implementation of these standards are still to be finalised and so current changes associated with implementation are preliminary and may change. These will be finalised with Westpac’s First Half 2019 results.
Some transitional impacts from the adoption of AASB 9 have included: i) an increase in collectively assessed provisions of $974 million; ii) a reduction in retained earnings and an increase in deferred tax assets; iii) a $3.9 billion reduction in risk weighted assets; iv) a rise in reported stressed assets; and• v) a 2 basis point increase in the CET1 capital ratio.
Impairment charge was $204 million. $30m pre-tax in insurance claims for Sydney hailstorms are expected.
Westpac showed the slowing in mortgage lending we are seeing across the majors.
Mortgage Interest only lending was 32% of portfolio at 31 Dec 2018 (down from 35% at 30 Sep 2018). Investor lending growth, using APRA extended definition, 0.8% pa
They have a portfolio of IO loans, some at 10 years plus. 16% expire this year.
Australian mortgage delinquencies were 4 basis points higher over the quarter while Australian unsecured delinquencies were also higher, up 10 basis points. The number of properties in possession rose from 396 to 444 in a quarter!
Australian unsecured 90+ day delinquencies increased to 1.83% (up 10bps over the quarter)
The Group’s common equity Tier 1 (CET1) capital ratio was 10.4% at 31 December 2018. The ratio was lower than the 10.6% reported for September 2018 after payment of Westpac’s final dividend (net of DRP), which reduced the CET1 capital ratio by 69 bps. Excluding the dividend payment, the CET1 capital ratio increased 49 basis points.
Liquidity coverage ratio (LCR) 128%, net stable funding ratio (NSFR) 112%
$16bn of term funding was raised during 4 months to 31 January 2019
Finally, a warning about capital.
Australia’s big banks may struggle to raise the amount of extra capital they require under new rules proposed by the country’s banking regulator, a senior executive at Westpac Banking Corporation said in an interview published on Monday.
The
mooted requirements, which the country’s four largest lenders said
would mean they need to raise between A$67 billion and A$83 billion over
four years ($48 billion to $60 billion) are sound in principle but
tough to achieve, Westpac treasurer Curt Zuber told the Australian
Financial Review newspaper.
“As we go through cycles, it is
potentially problematic for the banks to get the volumes they need in an
economic way for the system which allows for the balance we want to
achieve,” he said.
ASIC is appealing last year’s landmark Federal Court decision, determinedto prove two Westpac subsidiaries provided personal financial advice despite not being licensed to do so, via Financial Standard.
In
December 2018, Justice Jacqueline Gleeson determined Westpac Securities
Administration Limited (WSAL) and BT Funds Management (BTFM) had
breached the Corporations Act in 2014, during two telephone campaigns in
which staff recommended the rollover of superannuation accounts to
Westpac/BT super products.
However,
the judge said ASIC failed to prove the phone calls constituted
personal financial advice. Under their respective AFSLs, WSAL and BTFM
are only licensed to provide general advice.
ASIC has now filed an
appeal of the decision, seeking greater clarity and certainty as to the
difference between general and personal advice for consumers and
financial services providers.
“The
dividing line between personal and general advice is one of the most
important provisions within the financial services laws. It directly
impacts the standard of advice received by consumers,” ASIC deputy chair
Daniel Crennan said.
“This is why ASIC brought this test case and
ASIC believes further consideration by the full court of the Federal
Court is necessary to better inform consumers and industry.”
The
case concerned 15 phone calls which the judge determined to be general
advice “because the callers did not consider one or more of the
objectives, financial situation and needs of the customers to whom the
advice was given.”
However, in 14 of the 15 calls, the law was
breached by the implication that the rollover of super funds into a BT
account was recommended. While not dishonest, the product advice was not
provided efficiently, honestly and fairly, the judge deemed.
The Bank of Queensland released a trading and earnings update today, ahead of the half year results on 11 April 2019. Their shares dropped significantly and are ~18% lower than a year back.
They said the cash earnings will be in the range of $165-170m, compared with 1H18 cash earnings after tax of $182m.
This is driven by a fall in non-interest income, down $8-10m that $75m in 1H18, thanks to lower fee, trading, insurance and other income lines.
Plus net interest margin will be in the range 1.93% to 1.95% compared with 1.97% in 1H18, and will be around $475m.
There will be more non-recurring expenses, so expenses will be higher.
Loan impairments are expected to be int eh range of 11-13 basis points of gross loans. They say underlying quality remains good.
CET1 capital will be above 9.1% reported last time.
The say conditions will remain challenging with an increasing regulatory burden, including the outfall from the Royal Commission.
Welcome to the Property Imperative weekly to the sixteenth of February 2019 – our digest of the latest finance and property news with a distinctively Australian flavour.
Watch the video, listen to the podcast, or read the transcript.
The data fest continued this week, with more evidence of weaknesses
appearing in the global economy, as Italy formally went into recession, Trump
declared an emergency to pay for his wall, trade talks progressed but Brexit
continues to wind into chaos. US retail figures were shockingly weak, a further
indicator that the current stock market rally is going to run out of steam.
Locally, more banks revealed margin compression, home prices continued to fall,
and the property spruikers fixated on the slightly higher auction clearance
results this past week, despite their continued weakness. Just another week in
paradise.
First to home prices. The latest index from CoreLogic shows more falls,
with Melbourne and Perth dropping 0.32% and 0.46% respectively. Sydney dropped
0.26%. As always, these averages only tell some of the story, but the falls
from peak are continuing to grow. Perth is now at 17.1% and Sydney 12.8%.
The impact of this is a reduction in the number of suburbs with a
million dollar plus price tag. CoreLogic data to the end of January 2019 showed
there were 649 suburbs across Australia that had a median house or unit value
at or in excess of $1 million. They said “Although this figure had increased
substantially from 123 suburbs a decade earlier, it has fallen from 741 suburbs
in January 2018. In fact, more suburb had a median of at least $1 million in
2017 (651) than do currently.” As at January 2019, there were 366 suburbs in
NSW that had a median house value of at least $1 million and 46 suburbs with a
median unit value of at least $1 million. In Vic, there were 129 suburbs that
had a median value of at least $1 million as at January 2019.
The negative wealth effect bites harder.
Australian auction clearance rates jumped noticeably last week, with the
final rate in Sydney at 54% and Melbourne 52.4%, whereas before Christmas we
were in the forties.
CoreLogic said that the combined capital city final auction clearance
rate remained above 50 per however volumes are still quite low across the
capitals with only 928 auctions held. The last time we saw the final weighted
average clearance above 50 per cent was back in late September 2018 when
volumes were significantly higher. One year ago, a higher 1,470 capital city
homes went to auction returning a final auction clearance rate of 63.7 per cent.
This weekend, CoreLogic is currently tracking 1,359 auctions across the
capital’s so volumes up by 46.4 per cent on last week. But the lower year on
year trend continues with volumes down 31.8 per cent when compared to the same
week last year (1,992).
In fact, we often get a small lift after the summer break, so this is in
my view not material. But the industry
is making the most of the higher results and not mentioning the painfully low
volumes.
This takes us to the question of whether there will be looser lending
ahead. Well ASIC came out this week with their thoughts for review on
responsible lending standards. Specifically, they refer to using the Household
Expenditure Measure as a guide, and the lenders need to make specific inquiry
to confirm affordability, not rely on a HEM without appropriate buffers. My view is that HEM 2.0 will used to
keep bank costs down but will keep credit standards much tighter than they
were. All this reinforces the focus on tighter lending standards
And remember that APRA recently confirmed the 7% hurdle affordability
rate and warned of risks in the system. And ASIC also benefited from the
passage of a bill this week to give the regulator powers to impose more fines.
ASIC is bearing its teeth. Corporate executives could face maximum jail terms
of 15 years for criminal offences and companies could cop fines of up to $525
million per civil violation. We are in a new lending environment, and as you
know by now, tighter credit means lower home prices.
HSBC made the point this week that
“The deceleration in the flow of
housing credit has been evident since at least early 2018 but has only recently
come into focus due to a flurry of weakness in indicators of domestic demand. This
includes a weaker-than-expected Q3 GDP print, the biggest monthly drop in
surveyed business conditions since the Global Financial Crisis, a 22.5%
year-ended fall in building approvals and monthly retail sales that turned
negative in December, confirming two soft quarters of consumer spending. In the ‘ugly contest’ of G10 Foreign Exchange,
we still think the AUD looks unattractive versus the higher carry and reserve
currency status of the USD. Our forecast remains for AUD/USD to trade down to
post-crisis lows of 66c by year-end.”
And another dampening factor to consider is that according to the AFR, China
has introduced jail terms for operators of “underground banks”
illegally helping tens of thousands of its citizens transfer money out of the
country to buy property overseas. This will reinforce the cooling demand we
have already seem from international buyers and will put more pressure on the
high-rise developers and , our real estate market more broadly. They took this
step to try and prop up the weakening Chinese economy, where home sales are
falling. Estimates by Gan Li, a
professor at Southwestern University of Finance and Economics in Chengdu
suggests that sales volumes in 24 cities tracked by China Real Estate
Index System fell by 44% in the first week of 2019 compared with a year
earlier, though the four largest cities including Shanghai and Beijing —
still saw a 12% increase.
Roughly 25% of China’s gross domestic product has been
created from property-related industries, according to CLSA. And housing is a crucial
means of asset formation in China, where ordinary citizens face restrictions to
overseas investment and have few domestic options besides local stock markets,
which lost 25% of their value last year. Prof. Gan’s striking estimate that 65
million urban residences — or 21.4% of housing — stand unoccupied was published
in a report in December. The proportion is up from 18.4% in 2011, driven by a
rise of vacancies in second- and third-tier cities, where demand is relatively
weaker and speculative activities are more prevalent. In other words, almost
half the bank loans are tied to housing assets that are neither being lived in
nor churning out rental income. According to the stress test conducted by the
professor, a 5% fall in housing prices would take away 7.8% of the actual asset
value of occupied houses, but 12.2% for unoccupied houses.
Back in Australia, the broker wars continue, with the industry mounting
a rear-guard action to try and reverse the Hayne recommendation to remove
conflicted remuneration by abolishing commission in favour of a buyers fee, as
well as bringing in a best interests obligation. They are however batting uphill, with
consumer groups claiming the mortgage broker industry is pretending to care
about reform, while vigorously lobbying politicians to protect their
commissions. The consumer groups said “Mortgage
broking lobbyists continue to swarm on Parliament House in an attempt to derail
crucial recommendations from the Royal Commission Final Report, showing the
sector cannot be trusted to stand up for everyday home owners when it comes to
reform”. As reported by SBS, They
are urging the government to implement the recommendations of the royal
commission into the financial services industry, including ending trail
commission payments to brokers for the life of a home loan and phasing out
commissions paid by lenders to brokers who push their loans.
And UBS added heat to the debate by reporting that 32 per
cent of customers who secured their mortgage via brokers stated they misrepresented
parts of their mortgage documentation compared to 22 per cent of customers who
used bank proprietary distribution. “In each category of factual accuracy (with
the exception of ‘would rather not say’) there was a statistically
significantly higher level of misrepresentation for customers who secured their
mortgage via a broker,” the report said.
Data from New Zealand also shows a weakening housing
market. According to the REINZ, outside of Auckland, seasonally adjusted house
prices rose by 2.3% in December, with prices up 9.7% year-on-year. But Auckland’s
seasonally adjusted median house price fell by 2.4% and was down 2.4%
year-on-year. The second year of falls. Christchurch’s (Canterbury) fell by
1.7% in January and was down 1.4% year-on-year. Whereas Wellington’s median
house price rose 0.9% in January but was up 11.6% year-on-year.
And in other New Zealand News, the Reserve Bank there has
gone coy on the next cash rate movement, it might be up, it might be down, as
some weaker economic indicators come through. I will be releasing a report from
Joe Wilkes on this tomorrow. And of course, RBNZ has also tabled a proposal to
lift bank capital much higher than APRA is proposing, Under the proposal, over
five years or so, banks’ Tier 1 capital ratios would rise from the current
industry average of around 12 percent of risk-weighted assets, to somewhere
above 16 percent for banks deemed systemically important.
RBNZ governor, Adrian Orr, defended the reforms, contending
that the proposed capital requirements are not excessive and would lead to a
more level playing field in the banking sector. He also attacked the excessive
returns of Australia’s Big Four banks as reported in the AFR saying “We have to
remember that the return on equity should be related to the risks they are
taking… At the moment, the return on equity for banking is incredibly strong
and we would even hazard to say over and above the risks they are holding
themselves as private banks, because there is an aspect in most OECD countries
of the ability to free ride — where returns can be privatised, and losses can
be socialised”. “More capital means sounder financial institutions… The capital
levels we are talking about are still well within the range of norms. We have
spent a lot of time trying to compare apples with apples”. A back of an
envelope calculation suggests Australian Banks would need an extra $100 billion
or so capital to get to the same level – so I guess you could call this the
price of Australia’s “too big to fail” policy. Tax payers may yet have to pick
up the bill. New Zealand is once again, way ahead on policy here.
The RBA had a couple of outings this week, but there was
little new. Still clinging to the wages growth will come mantra, and also
making again the point that the Aussie Dollar can go lower, to support the
economy. Despite the evidence. Expect a rate cut later, the question now is
whether it will be before or after the election, or both.
And just when you thought it was case to come out after the
Banking Royal Commission, The Treasurer noted that there will be a further
review in three years’ time to ensure they have improved their behaviour and
are treating customers better. And Josh Frydenberg wrote this week to the heads
of the Australian Banking Association, Australian Securities and Investments
Commission and Australian Prudential Regulation Authority directing them to
swiftly implement dozens of Commissioner Kenneth Hayne’s recommendations that
pertain to their bodies. This reform is not going away. For a Banker’s view see
our post “Beyond The Royal Commission” where I discuss what the banks should be
doing with Ex. ANZ Director John Dalhsen.
And talking of reform, post the Royal Commission, there was
progress on the Glass Steagall bill in Parliament this week. The question of
structural separation of the banks has been passed to a Senate Committee for a
review. Here is an extract from
Hansard:
The Hayne Royal Commission into Misconduct in the Banking,
Superannuation and Financial Services Industry has highlighted the necessity
for banks to be limited to their core industry.
The vertical integration of the banks providing additional
services including financial advice, insurance and superannuation have been
shown to be the root cause of rorts, over charging and profit gouging.
Australia’s best-known finance commentator Alan Kohler
wrote in The Australian on 3 December 2018 and I quote:
I have been opening a random sample of the 10,140
submissions — just short ones from individuals. Without exception they called
for the banks to be broken up and most of them, surprisingly, used the term
‘Glass-Steagall’ – suggesting that the now-repealed American law that used to
forcibly separate banking from insurance and investment banking be introduced
into Australia.
Alan Kohler stated further:
That would certainly be a fertile field for the Royal
Commissioner to plough, although most of the banks have already announced plans
to break themselves up along those lines so perhaps such a recommendation would
lack drama.
Unlike most commentators and politicians, however, Kohler
is not totally fooled by these moves from the banks that appear as if they are
separating voluntarily.
Continuing, he made the following very important point:
But Westpac says it will keep its insurance and wealth
management division and AMP and Macquarie have not announced any plans to get
rid of their banks, so an Australian version of Glass-Steagall would make it uniform
and would make sure they didn’t slide back into their bad old ‘one stop shop’
ways in future.
Kohler now joins the ranks of other notable Australian
experts who have endorsed the Glass-Steagall option.
In the aftermath of the global financial crisis, Don Argus,
former CEO of National Australia Bank and former Chairman of BHP, said in The
Australian on 17 September 2011 and I quote:
People are lashing out and creating all sorts of
regulation, but the issue is whether they’re creating the right regulation …
What has to be done is to separate commercial banking from investment banking.
Former ANZ director John Dahlsen wrote in the Australian
Financial Review on 21 August 2018 and I quote:-
Problems in banking will not be solved until the structure
is changed … With barriers removed it is possible that banks and the
investment market will move to unlock shareholder value in structural
separation, following the principle of the US Glass-Steagall Act, which kept
commercial and retail banking separate. Voluntary demergers would threaten the
gravy train of ‘coupon clipping’ for fee extraction, but enforced separation in
Australia seems inevitable…
Former ACCC chairman Professor Alan Fels was quoted in The
Australian on 9 August 2018 and again I quote:
There are a number of serious structural issues that need
to be considered, the first and most obvious is the separation of the activity
of creating financial products and then offering so-called independent advisory
services to customers on what are the best products. A second very important
one is whether there should be a structural separation between traditional
banking activities and the more risky investment activities … Banks benefit
from the implicit guarantee on their deposit liabilities which flows into their
trading activities.
Banking expert Martin North of Digital Finance Analytics
stated in his submission to the Interim Report of the Royal Commission:
The large players are too big to fail and too complex to
manage, and need to be broken apart. A modern Glass-Steagall separation would
achieve this, and is proven to reduce risk, and drive better customer outcomes
and right-size our finance sector.
Former APRA Principal Researcher Dr Wilson Sy recommended
in his submission to the Royal Commission:
The financial system should be structurally separated to
simplify regulation, increase competition and innovation, and better serve the
community.
The Banking System Reform (Separation of Banks) Bill 2018,
previously introduced by the Honourable Bob Katter MP in the House of
Representatives but since lapsed, is being introduced by Pauline Hanson’s One
Nation Party into the Senate due to my party’s ongoing commitment to overcome
the systemic failure in our banking system and, more importantly, in bank
management per se.
So, to the markets. The ASX 100 rose just 0.08% on Friday
to 4,989.20 and is now up 3.71% over the past year. The local volatility index was up a little to
12.73, and is down 30.09% from a year back, as market concerns continue to
ease. The ASX 200 Financials rose 0.15% on Friday to end at 5,779.80 and is
still down 7.58% from a year ago. The banks are a riskier proposition these
days as mortgage lending continues to slow.
ANZ was up 1.02% to 26.81, down 3.26% from last year. CBA
was up 0.31% to 70.81 and is down 4.33% from this time last year. NAB was down
a little to 24.22 and has fallen 16.11% over the past year. They are currently
the least trusted bank, according to recent Roy Morgan research, and the recent
leadership changes are clearly not helping. Westpac was up 0.19% to 26.24, down
13.8% from a year back, and of course the ASIC HEM case remains unresolved.
Bank of Queensland was up 0.3% to 9.95, down 17.2% from this time last year.
SunCorp who reported this week with a lower margin, and higher costs (including
a number of insurance claims events) was up 0.92% to 13.10, down 1.65% from
last year. Bendigo and Adelaide Bank who also reported again with margin down
and costs up, was up 0.1% to 9.87, down 9.38% from this time last year. Its tough being a regional bank in a slowing
and competitive mortgage market. AMP who also reported this week, with a
significant, if not signalled drop in profit following the Royal Commission,
fell 3.11% on Friday to end at 2.18, down 57.39% from a year ago. I find it
hard to know what the true value of the company is, given the remediation challenge
ahead.
Macquarie, who gave a bullish update, was down 0.98% to
124.22, up 21.42 since last year, and they remain confident of the outlook,
helped by their international footprint.
Genworth the lenders mortgage insurer fell 0.83% to 2.38,
down 8.75% over the year and Aggregator Mortgage Choice rose 0.63% to 79.5
cents, down 64.44% from last year, as the broker commissions question bites.
The Aussie was up 0.11% to 71.47, still down 10.61% from a
year ago. More falls ahead me thinks. The Aussie Gold cross was up 0.16% to
1,850.35, up 8.71% from last year. And the Aussie Bitcoin cross was down 0.5%
to 4,552.1 down 62.69% from a year ago.
In the US, headline nominal retail sales fell by 1.2% over the month, their
sharpest monthly decline since the financial crisis. Notwithstanding ongoing
strong job creation, consumption weakened on the back of low confidence and
market turbulence. Yet Wall Street rallied on Friday, with the Dow and the
Nasdaq posting their eighth consecutive weekly gains as investors grew hopeful
that the United States and China would hammer out an agreement resolving their
protracted trade war.
Talks between the United States and China will resume in Washington next
week, with both sides saying progress has been made toward resolving the two
countries’ contentious trade dispute. With just weeks to go until the March 1
deadline, President Donald Trump offered an optimistic update on the second
round of U.S.-China trade talks, prompting traders to turn bullish on stocks. Trump
said that trade talks “are going extremely well,” stressing that the
United States is closer than ever to “having a real trade deal” with
China. Without a trade deal secured by March 1, the U.S. could implement
further tariffs on China. Trump said, however, that he would be
“honored” to remove tariffs if an agreement can be reached.
This newfound optimism on trade pushed energy stocks sharply higher, as
traders had long feared a prolonged trade war would hurt economic growth in
China, the world’s largest oil consumer, denting oil demand.
The Dow Jones Industrial Average rose 1.74 percent, to 25,883.25, up 2.19% from last year, the S&P 500
gained 1.09 percent, to 2,775.6 up 1.76% on last year and all 11 major sectors
in the S&P 500 ended the session in the black. The SP 100 was up 1.09% to 1,217.96, up 0.97%
from last year. The Volatility index was
down 8.08% on Friday to 14.91, 15.78% lower than a year back, and well off its
nervous highs.
The S&P Financials index was down 0.55% to 425.53, still down 11.01%
from a year earlier reflecting concerns about future earnings. Goldman Sachs
was up 3.1% to 198.50, still 26.68% lower than last year.
The Nasdaq Composite was up 0.61 percent, to 7,472.41 and is 3.97%
higher than this time last year. Apple was down 0.22% to m170.42. Up 2% from a
year back. Google was down 0.85% to 1,119.63, up 5.27% while Amazon was down
0.91% to 1,607.95, up 11.83% after scrapping its plans for a New York
headquarters. Facebook was down 0.88% to 162.50, down 8.67% from a year back.
Intel was up 1.67% to 51.66, and 11.67% up from last year.
The Feds weaker stance continues to flow through to a lower 10-Year
treasury rate, and it was up 0.2% on Friday to 2.664. The 3 Month rate was also
down 0.13% to 2.427. As a result, funding costs are easing a little, taking
some of the risk pressure off, but of course leaving the US cash rate lower
than the FED would have liked to see – the economy has not escaped the QE bear
trap yet.
The US Index was down a little to 96.92 and is 8.91% higher than a year
back. Across the pond, the British Pound US Dollar was up a little, to 1.2897,
down 8.61% from a year ago. The UK Footsie was up 0.55% to 7,236.68, and is
slightly lower than a year back, which given the Brexit uncertainly says
something. Prime Minister May
suffered another humiliating defeat as Parliament voted against her amendment
to seek reaffirmation of support to see changes to her Brexit deal. The vote
only slightly raised the risk of a no-deal Brexit, but the base case still
remains Article 50 will need to be extended. The Footsie Financials index was up 0.37% to 656.38
and down 1.57% from a year back. The Royal Bank of Scotland, who reported this
week was up 2.44% to 247.50, but down 12.11% from last year. Its profits were
up, and it also reported making big loans to companies to allow them to forward
buy and hold goods ahead of Brexit. The RBS is till majority owned by the
Government following its bail-out a decade ago.
The Euro US Dollar was up a little to 1.1296, down 9.34% from last year,
Deutsche Bank was up 4.94% to 7.65 Euros, but still down 42.3% from this time
last year.
The Chinese Yuan US Dollar ended at 0.1476, down 6.29% from a year back, WTI Oil was up 2.57% to 55.81, down 9.65% from last year, Gold reversed earlier losses following the huge retail sales miss number and rose 0.83% to 1,324.75 down 5.43% over the year, Silver was up 1.46% to 15.755, down 7.78% over the past 12 months and Copper was up 1.51% to 2.816 down 14.22 % annually.
Finally, Bitcoin ended at 3,665.3, down 61.29% over the past year. It broke above the upper bound of a downside channel recently that was containing the price action since January 14th. On top of that, the rally brought the price above the 3500 mark, with the crypto hitting resistance near the key obstacle of 3700, before retreating somewhat. JPMorgan announced that they became the first U.S. bank to create and successfully test a digital coin representing a fiat currency. This is quite the pivot, as many will recall the CEO Dimon’s comments that bitcoin is a fraud and any employee trading it would be fired for being stupid. JPM Coin will run on the JPMorgan’s own blockchain, called Quoroum. This is the very early stages for JPMorgan’s digital coin and initial goal is to accelerate corporate payments. While cryptocurrency fans may love the announcement, this does not necessarily bode well for bitcoin, as JPM Coin could be the beginning of severe competition for the digital currency.
Now that nearly 80 percent of S&P 500 companies having reported, fourth-quarter earnings season is largely in the rearview mirror. Analysts now see a profit increase of 16.2 percent for the quarter, but going forward, however, the outlook continues to worsen. First quarter earnings are currently seen falling by 0.5 percent, the first year-on-year decline since mid-2016.
I discuss the Royal Commission outcomes with businessman John Dahlsen, who was a director at ANZ for many years.
He brings his extensive experience to the issues facing the sector, and
lays out an approach which would create more customer centric, efficient
and lower risk banks.
We talk about mortgage brokers, bank boards, front line staff and transformation programmes, plus ASIC and APRA, as well as the effectiveness of the Royal Commission itself.
ASIC says it will shortly be able to pursue harsher civil penalties and criminal sanctions against banks, their executives and others who have breached corporate and financial services law, after a significant bill passed the Senate last night.
The Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Bill 2018
implements recommendations of the ASIC Enforcement Review Taskforce by
amending the Corporations Act 2001, ASIC Act 2001 as well as the
National Consumer Credit Protection Act 2009 and Insurance Contracts Act
1994. It strengthens existing penalties and introduces new penalties
for those who have breached the corporate laws of Australia designed to
protect its citizens.
Notable features of the Bill include:
maximum prison penalties for the most serious offences will increase
to 15 years. These include breaches of director’s duties, false or
misleading disclosure and dishonest conduct;
civil penalties for companies will significantly increase, now to be capped at $525 million;
maximum civil penalties for individuals will increase to $1.05 million and can also take in to account profits made;
civil penalties will apply to a greater range of misconduct,
including licensee’s failure to act efficiently, honestly and fairly,
failure to report breaches and defective disclosure.
The Bill will return to the House of Representatives.
‘The passing of the penalties bill is a significant step for ASIC’s
enforcement regime. The legislation is the culmination of ASIC’s
recommendations to Government to increase penalties and provides the
legislative reform to ensure breaches of the law are appropriately
punished,’ said ASIC Deputy Chair Daniel Crennan QC.
‘Without this bill very significant aspects of the law lacked
sufficient penalties to properly punish corporate wrongdoing in
Australia. In part, the core obligations owed by banks and other
financial services licensees to the citizens of Australia did not carry
any penalties.’
‘ASIC will now be in a stronger position to
pursue harsh civil penalties and criminal sanctions against those who
have breached the corporate laws of Australia,’ concluded Crennan.
Markets require regulators. As Adam Smith, the champion of the invisible hand, notes in The Wealth of Nations, when individual interests are left unregulated they work to turn competitive markets into monopolies.
But what happens when regulators meant to check individual interests fail to promote the public interest?
Consider Australia’s banking sector. The banking royal commission has
found plenty of fault in the ways the corporate and prudential
regulatory agencies performed their vital roles – due not to lack of
power but an unwillingness to use that power.
University of Chicago economist and 1982 Nobel laureate George
Stigler was the first to outline how regulators can become “captured” by
the very firms and industries they are meant to be regulating,
beginning with an article in 1971.
Stigler’s idea has come to be known as “regulatory capture theory”,
and it causes us to confront the uncomfortable question of how to ensure
regulators act in the public interest, not in the interest of the firms
they regulate.
Supply and demand
Stigler thought about regulation through the lens of supply and
demand. Self-interested politicians supply regulation. Firms demand it –
usually because they want a competitor regulated.
His classic example concerned regulations on the weight of trucks
that could travel on state roads in the United States in the 1930s. He
found empirical evidence that where trucks were more of a threat to
traditional train transport (like on short-haul routes where railroads
were less competitive) more stringent weight limits were enacted.
Rather than the regulator being a beneficent protector of the general
public interest, it had become a self-interested actor responding to
political pressure from the railroad owners.
This may strike you as rather cynical, but there is a swathe of evidence that across industries and time, regulators often act more in the interests of industries than the public.
These regulations usually have a plausible rationale behind them.
Consider licensing of doctors. Nobody wants a poorly trained doctor let
loose on them, so some form of certification makes sense. But does the
medical profession limit the number of doctors and exclude
foreign-trained doctors to push up their incomes? You be the judge.
It’s easy to think of other examples: “tickets” in the construction
industry, certification of train and truck drivers in mining, licensing
of plumbers, and on and on.
There are lots of ways this can arise. Politicians often depend on
support and campaign contributions. And there is all too often a
revolving door between regulators and the regulated.
Financial regulators
This brings us to the regulation of Australia’s banks.
The corporate and prudential regulatory agencies may have been
unwilling to use their power, but the the big four banks were not.
And the banks have plenty of power – financial and political. They
are utterly vital to the operation of the entire economy. They are among
the very largest companies in the country (so a lot of retirement
savings are invested in them). And they employ a lot of people.
We should stop assuming the Australian Securities and Investments
Commission and the Australia Prudential Regulatory Authority, among
others, are unquestionably acting in the public interest and start
asking a bunch of questions.
What are the backgrounds of the people who head up these
organisations and what perspective does that lead them to bring to the
job? What jobs do they get after they leave the regulator, and how might
that affect their motivations while acting as regulator? What would be
the social sanction imposed on them if they decided to get really tough
with financial industry players?
Regulators typically aren’t bad people. But sometimes they have bad
implicit incentives. And the laws they are tasked with enforcing often
favour a particular group – quite frequently those being regulated.
What about the politicians who make the laws in the first place? Are
they really acting for all Australians with a thoughtful and balanced
perspective? Or do they represent tribal interests?
We need to close revolving doors, provide more resources to regulators and scrutinise what they do much more. Let’s not be naive about regulation.
Author: Richard Holden, Professor of Economics, UNSW
While the banks would hope the fall-out from the Royal Commission can now be contained, and business as usual can apply, it seems another Inquiry is on the cards down the track, further evidence of continued pressure on the sector.
Treasurer Josh Frydenberg has told the banks and regulators that they will face an inquiry down the track to ensure they have lifted their game post-royal commission; via InvestorDaily.
In a letter to the ABA, ASIC and APRA, Mr Frydenberg directed the organisations to implement Commissioner Kenneth Hayne’s recommendations from the final report directed at them.
The Treasurer sent out three letters to the heads of the organisations and made it clear that the government wanted to see lasting change within the sector.
“We will establish a follow-up independent inquiry, commencing in three years, to assess changes in industry practice and consumer outcomes since the royal commission,” said Mr Frydenberg.
Alongside implementing recommendations, Mr Frydenberg underlined the importance of ASIC changing its approach to enforcement, particularly shifting to a ‘why not litigate’ stance.
“I am aware that change is already underway, including through the establishment of the Office of Enforcement within ASIC, the move to a ‘why not litigate’ approach to enforcement and the introduction of initiatives such as close and continuous monitoring, to more intensively supervise the sector,” Mr Frydenberg wrote.
Mr Frydenberg committed to ASIC it’s continued support in providing new powers, expanding its role as a super regulator, removing barriers and strengthening penalty provisions.
“The government remains committed to ensuring that ASIC has the resources it needs, and will give further consideration to ASIC’s resourcing needs as part of the 2019–20 budget,” he said.
ASIC and ABA were also told by Mr Frydenberg to work together to create an enforceable banking code of conduct.
“I also expect the ABA to work co-operatively with ASIC to have the relevant provisions of the banking code approved as ‘enforceable code provisions’ as soon as practicable after legislation providing ASIC with these powers has been enacted,” he said.
In a letter to the ABA, the treasurer said he expected the banking code to be amended to support more inclusive practices, expand the definition of small business and eliminate default interest from being charged on loads declared to be impacted by natural disasters.
Mr Frydenberg told ABA chief executive Anna Blight that it was imperative that its members commit to putting customers at the heart of their business.
“I ask that you work with your members to take action and truly commit to restoring trust in the financial system. Only strong and decisive action of the kind that leads to lasting change, will ensure that the misconduct revealed by the royal commission is not repeated and that the public’s trust is regained,” he said.
Mr Frydenberg also called on APRA to strengthen its regulating and enforcement approach and prompted the authority to act on issues relating to the prudential standards, ADI responsibilities and supervision of regulated firms.
“It is my expectation that APRA will consider seriously the findings that the royal commission has made, echoed in the Productivity Commission’s superannuation inquiry, including whether its supervisory approach is appropriate for its mandate with regard to superannuation,” he said.
The Treasurer reiterated the governments support for the body and said it would give further powers and funding to the authority as needed.
The letters come as the opposition party has accused the government of not moving fast enough to implement Commissioner Hayne’s findings.
Labor had tried to force Parliament to hold extra sitting weeks to pass legislation the dealt with the royal commission recommendations but has been unable to get the support of the crossbench.
Yesterday Bendigo and Adelaide Bank released their results for the half year to December 2018. The after tax statutory profit was $203.2 million up 0.2% on the prior half, but significantly lower than the $231.7 million in 1H18. The cash earnings was flat at $219.8 million, but again lower than $225.3 million in 1H18. The earnings per share was 45.1 cents, down 0.2 cents and the fully franked dividend was 35 cents per share. The return on equity fell 19 basis point half on half.
They are positioning as “Australia’s fifth largest retail bank” and they saw a rise of 18% in new customers joining and according to research are the 9th most trusted brand in Australia. Have no doubt the franchise and “local” approach is attractive to some customers, but the question is, can the current formula work in the current tight margin, highly competitive market at a time when home loan momentum is falling. One signal is cost to income, which is rising – a reflection of the high touch model.
Mortgage book growth was 2.7%, compared with system growth of 3.3% with a portfolio of $23.1 billion. They saw more growth in investor loans than owner occupied loans.
Earnings were support by other income (card activity and commissions on managed funds plus FX transactions), but net interest income was flat and Homesafe reflects changes to its accounting treatment.
Net interest margin was down 2 basis points reflecting discounting for new loans, higher funding costs and deposit repricing.
The exit margin was 2.34% and will remain under pressure ahead.
Homesafe contribution was subject to a review of their portfolio valuation methodology, as a result they removed the overlay and revised down valuation growth rates to 0% in year 1, 3% year 2 and 4% year 3 and beyond. The result was a $1.9m change to the valuation. Essentially, they tweaked the property valuations lower (from 6% growth) but then changed the discount rate to mask the effect. A little sneaky! We said last year their home price projections were heroic… but there is still more downside risk here in our view.
Their costs were higher, up 30 basis points to a cost income ratio of 57.3%, including higher staff costs, technology and legal and compliance.
Along with the other banks, they continue to adjust their provisions to AASB9 which has lifted the collective provisions. It stands at 8 basis points, below the long term average.
Arrears appears well contained at the moment. There was a small spike in 90 days plus credit card arrears, and business loans. Note though these figures EXCLUDE impaired loans over 90 days.
Capital position is 8.76% CET1, up 14 basis points. They are still working on advanced APRA accreditation (though the benefit looks increasing questionable in my view given APRA’s moves to lift the advanced ratios, relative to standard approaches.
Funding from deposits increased to 82.4% but they noted that higher BBSW impacted the cost of wholesale and securitisation funding.
So to conclude, we wonder about ongoing margin compression and the slowing housing sector and mortgage growth. Their cost base appears to contain significant fixed elements, which means they may have ongoing cost ratio issues. The benefit of advanced capital accreditation may be lower as APRA turns the screws. A tricky time for a player which gets the consumer, but has difficulty in competing in the current environment.
The government has announced the panel that will lead the capability review of the Australian Prudential Regulation Authority as recommended by the Hayne royal commission; via InvestorDaily.
One of Commissioner Hayne’s recommendations in his final report on the royal commission was to conduct regular capability reviews into both ASIC and APRA with a review to be undertaken immediately for APRA.
In Mr Hayne’s report he noted that ASIC had recently undergone a review while APRA had not and therefore recommended it be the first to undergo one.
“I recommend that a formal capability review be undertaken of APRA, with that review being completed as soon as is reasonably practicable after the publication of this report,” he said.
Treasurer Josh Frydenberg as part of his response to the royal commission accepted the need for regular reviews and recently announced the independent panel that would lead the APRA review.
Former chairman of the ACCC Graeme Samuel will be chairman of the review and will be joined by Diane Smith-Gander a former senior executive at Westpac and Grant Spencer a former acting governor of the Reserve Bank of New Zealand.
Mr Frydenberg said the review would look into APRA’s ability to promote financial stability, as well as its capabilities to regulate superannuation entities and its enforcement activities.
“The APRA capability review will provide a forward-looking assessment of APRA’s ability to respond to an environment of growing complexity and emerging risks for APRA’s regulated sectors,” he said.
APRA and ASIC were found by the royal commission to be too soft on misconduct and prone to negotiate settlements and part of the panel’s role will be to review the authority’s readiness to respond to issues as raised in the commission.
APRA recently appointed John Lonsdale to lead a review into the authority’s enforcement policies, stating that it would be completed by the end of March this year.
The government has yet to respond to the recommendations that the APRA-administered BEAR be extended to insurers and super funds or that the principles of the BEAR regime be applied to the regulators as well.
APRA recently released a statement saying it was committed to implementing the recommendations with a plan to implement by the end of 2020.
“There are 10 recommendations requiring APRA’s direct attention. Of the 10, it is expected that nine will be completed by the end of 2020; of those, four are expected to be completed in 2019,” a press release from APRA said.
APRA also said it is examining 12 matters in relation to individual entities that were referred by the royal commission and is working with ASIC to address those.
APRA also said it would work with Treasury, ASIC and other stakeholders to implement the extension of BEAR and strengthening of trustee duties.
The panel will commence in March 2019 to report to the government by the end of June.
