Category: Banking Stats

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.