New research has found that over two million Australians are currently seeking new banking providers, with many currently customers at one of the big four, via InvestorDaily.
The research produced by Nielsen found that 2.1 million Australians
are seeking new providers and 67 per cent of them are currently
customers at one of the big four.
The research found that Australians were increasingly looking away
from the established banks and instead looking at digital banks, with a
five-percentage point increase in Australians looking to change to
digital banks in the past twelve months.
Nielsen’s head of financial services and insurance Jo Brockhurst
believed that the open banking legislation would see this number
increase as consumers were given more choice.
“Open banking will allow consumers to own their data and have
personal financial information easily accessible and transferable to
other financial institutions. These changes will allow for more
competition, potentially leading to a huge change in the way customers
interact with and are marketed to by the financial industry,” she said.
Ms Brockhurst said that the trend towards digital banks would also
see neobanks like Xinja and Volt who already have restricted ADI
licences increase their market share.
“The trend towards digital banks is paving the way for neobanks to
gain market share. While early adopters of neobanks have traditionally
been millennials (age 18 to 35), their customer base has rapidly
expanded from 18 to 80-year-olds for some brands in Australia,” she
said.
Nielsen’s research found that 90 per cent of customers with digital
banks were very or quite satisfied with the banks and 75 per cent of
them would recommend their bank.
Meanwhile only 45 per cent of customers with one of the big four banks would recommend theirs.
Ms Brockhurst said this difference was down to ‘the promise gap’ with
consumers expecting the banks to deliver high quality experiences.
“While the big four banks are seeking ways to improve future
engagements, neobanks are at the forefront and growing their customer
base daily.
“Time will tell if traditional banks are able to transition or if neobanks will eat away their market share,” she said.
Xinja’s chief executive Eric Wilson said that neobanks put financial
ownership in the hands of the consumer and that was what people were
after.
“People are expecting a lot more than just ‘digital’ banks – digital
is a given these days – what they are looking for is something that
delivers an easy, frictionless and engaging experience, similar to those
they have found in other next generation companies from other
industries. They will also expect new business models built around
customers’ interests – a ‘win-win’.”
The open banking legislation that is expected to pave the way for neobanks comes into effect on 1 July this year.
The RBA minutes today highlighted slowing global growth, GDP growth expectations were stronger than in MYEFO, a decline in the demand for off-the-plan apartments, and average earnings had increased at roughly the same rate as consumer prices over the previous five years or so, leaving real average earnings relatively unchanged despite moderate productivity growth. In addition, there was a pick-up in business lending (mainly to large corporates) by the major bank as growth in their housing lending had continued to slow. The outlook for household consumption continued to be a source of uncertainty because growth in household income remained low, debt levels were high and housing prices had declined. They are still suggesting the next cash rate move is up!
International Economic Conditions
Members commenced their discussion of the global economy by noting that conditions had remained
positive, particularly in the major advanced economies, where growth had remained around or above
potential and labour markets had continued to tighten. However, growth in a number of economies had
slowed this year; softer external demand, at least partly related to trade tensions and the
associated uncertainty, had been a common driver of the slowdown. Bilateral US–China trade had
contracted following the increase in import tariffs between the two countries, while indicators of
external demand, such as new export orders, had softened in the euro area, Japan and other parts of
Asia.
In the major advanced economies, GDP growth outcomes had diverged further in the September quarter,
although there had been some loss of momentum in external demand in all regions. In the United
States, growth had remained strong in the September quarter, driven in part by fiscal stimulus. In
Japan, the pronounced slowing in year-ended GDP growth had been at least partly the result of
disruptions in the wake of natural disasters. One-off factors had weighed on growth in some parts of
the euro area, and business conditions and investment intentions there had also declined.
Employment growth had remained higher than growth in working-age populations across the major
advanced economies and unemployment rates had edged lower from already low levels. Wages growth had
continued to increase, but, with the exception of the United States, this had not yet translated
into higher inflation in underlying terms. Core inflation had remained below target in the euro area
and Japan. Members noted that headline inflation was likely to ease in coming months following the
recent decline in oil prices.
Members noted that it had continued to be difficult to gauge the underlying momentum in the Chinese
economy. Conditions had remained subdued in a number of sectors, including machinery & equipment
production and food & clothing. By contrast, the central authorities’ direction to local governments
to bring forward public spending had contributed to a rebound in infrastructure investment, and the
production of construction-related products had strengthened further. Infrastructure investment was
expected to continue to support growth in coming months. Growth in investment in the real estate
sector had continued to be driven by land purchases.
Elsewhere in east Asia, surveyed business conditions had remained around average and growth in
domestic demand had generally maintained its momentum. However, new export orders had declined and
growth in industrial production and export volumes had also eased somewhat in recent months. Growth
in the Indian economy had eased in the September quarter, but had remained strong in year-ended
terms.
The slowing in global trade and concerns about Chinese demand had been reflected in lower commodity
prices over preceding weeks. Iron ore prices had followed the recent decline in Chinese steel
prices, returning to levels previously seen in mid 2018. Coking coal prices had increased over the
previous month despite the fall in steel prices. Thermal coal prices had declined slightly, while
prices of rural commodities and base metals had been little changed.
Members noted that oil prices had declined by more than 30 per cent since their peak in early
October, mainly reflecting recent and prospective increases in global supply. Oil supply from the
United States had increased rapidly since the trough in oil prices in early 2016 and was expected to
increase further, while production from Saudi Arabia and Russia was expected to be sustained at high
levels. Members observed that the nature of US oil production allowed supply flexibility in response
to changes in oil prices.
Domestic Economic Conditions
Members noted that the national accounts for the September quarter would be released the day after
the meeting. Based on the partial data that were available, GDP was expected to have increased by
more than 3 per cent over the year to the September quarter, above most estimates of potential
growth and in line with the most recent set of Bank forecasts.
In relation to household consumption, members noted that liaison with retailers suggested that
underlying trading conditions had been stable and surveys suggested that households’ views about
their financial situation had remained around average.
Conditions in established housing markets had continued to ease. In Sydney, housing prices had
fallen by around 9 per cent since their peak in July 2017, to be around September 2016 levels. In
Melbourne, housing prices had returned to levels prevailing around March 2017, having fallen by a
little under 6 per cent since their peak in November 2017. Members observed that housing prices had
fallen across all price segments in Sydney, but housing prices had been fairly flat at the lower end
of the market in Melbourne. Auction clearance rates and indicators of private-treaty activity had
also declined a little further in both cities. Housing prices in Perth and Darwin had returned to
levels seen a decade earlier. At the same time, price rises were being recorded in some other
cities.
Preliminary data suggested that dwelling investment had continued around its recent high level in
the September quarter. Given the substantial amount of work outstanding and recent data on dwelling
approvals, dwelling investment was expected to remain around this level for at least the following
year or so before moderating. Liaison with developers indicated that demand for new detached housing
in eastern Australia had eased over the previous year or so and some developers had reported that
this decline in demand had become more pronounced. Demand for off-the-plan apartments had declined
significantly since mid 2017.
Partial indicators, including the Australian Bureau of Statistics (ABS) capital expenditure (Capex)
survey, suggested that both mining and non-mining business investment had declined in the September
quarter. Investment intentions for 2018/19 in the non-mining sector, as reported in the Capex
survey, had been revised higher. Members noted that these revised expectations were consistent with
surveyed business conditions, which had remained above average, and with the relatively high levels
of non-residential building approvals and work yet to be done on non-residential construction
projects.
Members observed that labour market conditions had continued to improve. Employment had increased
solidly in October to be 2.5 per cent higher over the year. This was well above growth in the
working-age population and had been driven largely by growth in full-time employment. Leading
indicators of labour demand had continued to point to employment growth being above average over the
following couple of quarters. The unemployment rate had remained at 5 per cent in October, following
the sharp decline in the previous month. Unemployment rates had fallen in almost all states and
territories over 2018. In trend terms, the unemployment rates in Victoria and New South Wales were
both at their lowest levels in a decade, at around 4½ per cent. Members noted that youth employment
(those aged between 15 and 24 years) had increased significantly over the previous year and the
youth unemployment rate had declined.
Wages growth had picked up a little in the September quarter. The wage price index (WPI) had
increased by 0.6 per cent in the September quarter to be 2.3 per cent higher over the year. This
pick-up had built on the small, gradual increases in WPI growth recorded over the previous two
years. The 3.5 per cent increase in minimum and award wages had contributed to growth in the
September quarter. Joint Reserve Bank–ABS analysis suggested that wages growth for jobs covered by
the other two wage-setting methods, namely enterprise agreements and individual agreements, had also
been stronger than a year earlier. This job-level analysis had also shown that, although there had
been little change over the preceding year in the size of a typical wage increase, the share of the
workforce receiving an increase in any given quarter had increased. Year-ended growth in the WPI had
picked up compared with the previous year across most industries and in all states and territories.
Even so, average earnings had increased at roughly the same rate as consumer prices over the
previous five years or so, leaving real average earnings relatively unchanged despite moderate
productivity growth. This had followed an extended period during the resources boom when real
average earnings had consistently risen faster than productivity. As a result, the gap between real
average earnings and productivity that had opened up during the resources boom had been largely
closed.
Members also discussed a paper on some longer-term trends in the division of aggregate income
between labour and capital. In Australia, the share of total income paid to workers in wages and
salaries (the ‘labour share’) had risen over the 1960s and 1970s but had gradually declined since
then. Over the same period, the share of income accruing to profits (the ‘capital share’) had risen.
Abstracting from fluctuations associated with the terms of trade cycle, the labour and capital
shares had been fairly stable for at least the previous decade. Although the Australian experience
appeared to have been similar to that observed in other advanced economies, the factors driving the
trends had been somewhat different. Members noted that the long-run increase in the capital share in
Australia had stemmed almost entirely from higher profits accruing to financial institutions (since
financial deregulation in the 1980s) and from higher rents paid to landlords and imputed to home
owners (particularly before the 1990s). Members observed that the increasing use of technology to
replace manual effort in the finance sector and long-run increases in the quality and size of homes,
as well as a greater number of dwellings per capita, were likely to have contributed to these
trends. Members also noted the measurement challenges associated with both financial services and
housing services in the national accounts.
Financial Markets
Members commenced their discussion of financial market developments by noting the pick-up in
business credit growth in Australia in the second half of 2018. While foreign banks had been the
main driver of growth in business lending for some time, the major Australian banks had also made a
noticeable contribution to business credit growth in recent months. The pick-up in business lending
by the major banks had occurred as growth in their housing lending had continued to slow. Members
observed that lending to large businesses had accounted for the bulk of the growth in business
credit over preceding years and all of the pick-up in business credit growth in the most recent few
months.
By contrast, lending by banks to small businesses had increased only modestly over the preceding few
years and had been flat in 2018. Moreover, small businesses’ perceptions of their access to finance
had deteriorated sharply over the year, according to the Sensis survey. Members noted that the
Australian Government had recently announced a number of initiatives to support lending to small
businesses.
Turning to housing credit, members noted that growth in lending to investors had remained very weak
and growth in lending to owner-occupiers had continued to ease, to be 5–6 per cent in annualised
terms. The slowing in housing credit growth had been almost entirely accounted for by the major
banks, where the rate of growth in lending had been the slowest in many years. Housing lending by
other financial institutions had continued to grow more strongly.
Members observed that the slowing in housing credit growth appeared to reflect both tighter lending
conditions and some weakening in demand. On the demand side, declining housing prices in some
markets had reduced investor demand. In this context, lenders had continued to compete for borrowers
of high credit quality by offering new loans at lower interest rates than those offered on
outstanding loans. On the supply side, credit conditions were tighter than they had been for some
time. Members noted that the focus on responsible lending obligations in response to the Royal
Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was likely
to have reduced some lenders’ appetite for lending to both households and small businesses.
Mortgage interest rates remained low by historical standards, but had risen a little for many
borrowers in previous months, as most lenders had passed on the increase in their funding costs
resulting from the rise in bank bill swap rates earlier in 2018.
Members noted that financial market pricing implied that the cash rate was expected to remain
unchanged for a considerable period.
Turning to global financial conditions, members noted that financial conditions in the advanced
economies remained accommodative, although they had become less so over the course of the year. A
few central banks had continued gradually to remove monetary policy stimulus and more recently
global equity prices had declined and credit spreads had widened a little (although spreads remained
relatively low).
Expectations regarding policy paths of the major central banks implied by financial market pricing
had been generally little changed over the previous month. However, in the United States the path
for the federal funds rate over 2019 implied by market pricing had moved further below that implied
by the median of Federal Open Market Committee (FOMC) members’ projections published following the
September FOMC meeting. Recent public comments by senior Federal Reserve officials had emphasised
that further withdrawal of monetary stimulus would increasingly depend on how the economy evolves.
Members noted that 10-year government bond yields in major markets had declined in November. In
part, this was likely to have reflected the lowering of market expectations for the federal funds
rate in 2019, as well as the recent sharp decline in oil prices and some easing in expectations for
global economic growth. In the United Kingdom, uncertainty surrounding the approval of a Brexit deal
was also likely to have weighed on long-term bond yields.
Over the year as a whole, diverging central bank policy paths and economic outlooks had seen bond
yields in the United States rise relative to those in Europe and Japan. Consistent with this, the US
dollar had appreciated by 5 per cent over 2018 on a trade-weighted basis.
Global equity prices had declined in October reflecting a range of factors, including US–China trade
tensions, building cost pressures in some countries and a moderation in earnings growth expectations
for 2019. Also, equity valuations in the United States had earlier been somewhat elevated. Members
noted, however, that the US equity market continued to be supported by strong growth in underlying
corporate earnings, with analysts’ expectations for earnings growth in 2019 having been revised down
only a little recently. In Europe, ongoing concerns about Italian fiscal policy settings, as well as
the moderation in growth in the euro area in 2018, had weighed on equity prices, particularly for
companies in the financial sector. Chinese equity prices had been declining throughout 2018,
although they had not fallen further in November. The decline over the year was likely to have
reflected concerns over US–China trade tensions and an easing in growth in economic activity.
Members observed that US corporate credit spreads had widened a little recently, although they
remained low by historical standards. Members noted that this modest tightening in credit market
conditions had occurred against a background of increased corporate leverage, with US non-financial
corporations having increasingly sourced funding from securities markets over the preceding decade
or so. Issuance of investment-grade bonds and, to a lesser extent, leveraged loans had been strong.
Members also observed that securities markets had been increasingly facilitating lending to
lower-rated corporations. While Europe and Australia had also seen increases in investment-grade
bond financing by corporations, banks remained the predominant source of corporate funding in these
markets.
Members noted that, although overall corporate leverage in the United States had increased over
preceding years, it was not high compared with levels in other economies. Nevertheless, high and
rising debt-servicing burdens and the relative increase in debt owed by borrowers of lower credit
quality were likely to have increased the vulnerability of the corporate sector to adverse future
shocks. On the lending side, the non-bank institutional investors that had recently provided most of
the debt financing for corporations tended to have more stable funding and less leverage than banks.
Members discussed implications of this for financial stability, given that, by itself, the reduced
lending role of banks means that the US financial system would be better placed to withstand a
deterioration in credit conditions than in the past. Overall, members agreed that developments in
these markets warranted continued monitoring.
In China, growth in total social financing had slowed through much of 2018, mostly due to a
contraction in non-bank lending, which had previously been a key source of funding for private
firms. This followed earlier measures by the authorities to restrict the availability of credit
provided by non-bank entities in order to reduce risks in the financial system. By contrast, growth
in bank lending, which historically had been disproportionately directed towards state-owned
enterprises, had been stable at a solid rate for a number of years. In recent months, the
authorities had been taking steps to encourage banks to increase their lending to the private sector
(especially smaller enterprises), although members noted that, relative to smaller banks and
non-bank lenders, larger banks were less accustomed to lending to this sector.
Considerations for Monetary Policy
Globally, the economic expansion had continued, although there had been some signs of a slowing in
global trade in the September quarter. In China, the authorities had continued to ease policy in a
targeted way to support growth, while paying close attention to the risks in the financial sector.
Members noted that balancing these considerations remained a key challenge for the Chinese
authorities. Globally, inflation remained low, although wages growth had picked up in economies
where labour markets had tightened significantly. Core inflation had picked up in the United States,
which had experienced a sizeable fiscal stimulus against the background of very tight labour market
conditions, but core inflation had remained low elsewhere. Members noted that the significant fall
in oil prices was likely to reduce global headline inflation over the following year or so, should
it be sustained.
Financial conditions in the advanced economies remained expansionary but had tightened somewhat
because of lower equity prices, higher credit spreads and a broad-based appreciation of the US
dollar over 2018, as the gradual withdrawal of US monetary policy accommodation had continued. In
Australia, there had been a generalised tightening of credit availability. There had been little net
growth in credit to small businesses in prior months. Standard variable mortgage rates were a little
higher than a few months earlier, while the rates charged to new borrowers for housing were
generally lower than for outstanding loans. The Australian dollar remained within its range of
recent years on a trade-weighted basis. Australia’s terms of trade had increased over recent years,
which had helped to boost national income.
Members noted that the Australian economy had continued to perform well. GDP growth was expected to
remain above potential over this year and next, before slowing in 2020 as resource exports were
expected to reach peak production levels around the end of 2019. Business conditions were positive
and non-mining business investment was expected to increase. Higher levels of public infrastructure
investment were also supporting the economy. The drought had led to difficult conditions in parts of
the farm sector.
The outlook for household consumption continued to be a source of uncertainty because growth in
household income remained low, debt levels were high and housing prices had declined. Members noted
that this combination of factors posed downside risks. Notwithstanding this, the central scenario
remained for steady growth in consumption, supported by continued strength in labour market
conditions and a gradual pick-up in wages growth. The unemployment rate was 5 per cent, its lowest
level in six years, and further falls in the unemployment rate were likely given the expectation
that the economy would continue to grow above trend. The vacancy rate was high and there were
reports of skills shortages in some areas.
Conditions in the Sydney and Melbourne housing markets had continued to ease and nationwide rent
inflation was low. Growth in housing credit was very weak for investors and had also eased for
owner-occupiers, reflecting both tighter lending conditions and some softening in demand. Mortgage
rates remained low, and competition was strongest for borrowers of high credit quality.
Taking account of the available information on current economic and financial conditions, members
assessed that the current stance of monetary policy would continue to support economic growth and
allow for further gradual progress to be made in reducing the unemployment rate and returning
inflation towards the midpoint of the target. In these circumstances, members continued to agree
that the next move in the cash rate was more likely to be an increase than a decrease, but that
there was no strong case for a near-term adjustment in monetary policy. Rather, members assessed
that it would be appropriate to hold the cash rate steady and for the Bank to be a source of
stability and confidence while this progress unfolds. Members judged that holding the stance of
monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy
and achieving the inflation target over time.
The Decision
The Board decided to leave the cash rate unchanged at 1.5 per cent.
ANZ chief executive Shayne Elliott has conceded that branches are losing their lustre as cash becomes a niche payment solution and consumers opt to bank online, via InvestorDaily.
Counsel assisting Rowena Orr asked why the major bank has been reducing its retail footprint during Mr Elliott’s time on the stand at the royal commission this week.
Mr Elliott estimated 35 ANZ branches closed this year and up to 50 had ceased operating last year.
ANZ has closed around 110 branches in the past decade: 55 in inner regional Australia, 44 in outer regional areas, six in remote locations and four in very remote areas.
Mr Elliott noted that some branches had also opened in that time, describing it as a redistribution of its network.
“Why so many branches this year, Mr Elliot?” Ms Orr asked.
“Well, consumer behaviour is changing very quickly. And not that it has changed just this year but over the last few years we’re seeing a number of fundamental changes,” Mr Elliott said.
“The Reserve Bank governor the other day referred to the fact that the usage of cash is almost becoming a niche payment solution.”
Mr Elliott added that most of what people are doing in branches is cash related, in deposits and withdrawals. He also noted a decrease in retail traffic of around 20 to 30 per cent over the last couple of years in areas where the bank had closed shops.
However, small business usage was said to remain reasonably solid.
“So essentially, we are confronted with a dilemma where we have shops and a distribution network with less and less people in it, and therefore, at some point they become uneconomic,” he said.
“At the same time, what we have seen is a rapid increase in the use of technology for people who prefer to do their banking on their phone or at home, or even in some cases, on the phone.”
Ms Orr asked if people still go into branches to inquire about loans.
“Yes, perhaps, although I would say for ANZ – and we may be different from our peer group – our home loan book only – less than a third of home loans are originated through a branch,” Mr Elliott said.
“Around 55 per cent come through brokers and another roughly 15 per cent come through our mobile banking network, ie, we send somebody to you. So the branch network is not a terribly efficient or well-used avenue for home loans.”
ANZ had considered two proposals with closing branches, one to sell and the other to continue with a branch by branch closure program. Mr Elliott said the organisation had chosen to continue with closures based on customer behaviour and impact data.
Mr Elliott was also asked about the considerations that ANZ takes into account during branch closures. He responded by saying the bank does not consider the financials of the branch, rather the transactions that are available in the area and local alternatives in close by branches and ATMs.
“There’s very little correlation between what happens in the branch and the economic outcome to the bank. What most people do in a branch drives very little value,” he said.
“We don’t charge fees for most of what they do. It is a service that is not necessarily correlated to where we generate our profits or earnings.”
He added that delinkage is accelerating, with more people using brokers.
ANZ’s attitude towards its retail banking division is in stark contrast to that of its largest competitor, CBA.
When CBA boss Matt Comyn gave evidence before the Hayne inquiry last week he made clear the group’s preference for consumers to use its extensive branch network.
Mr Comyn revealed that CBA had sought to introduce a “flat fee” commission-based model in January 2018, before choosing not to go ahead with the change in fear that the rest of the sector would not follow suit.
MFAA CEO Mike Felton said that CBA’s position was “not surprising”, but was “entirely self-serving” and was “designed to destroy competition and reduce the bank’s reliance on the broker channel”.
Commenting on CBA’s attempt to introduce a flat-fee remuneration model, Mr Felton said: “CBA’s model is anti-competitive and designed to drive consumers back into their branch network, which is the largest branch network of the major lenders.
“Mr Comyn’s solution for better customer outcomes is a new fee of several thousand dollars to be paid by consumers to CBA for the privilege of becoming a CBA customer.”
Mr Felton added: “Cutting what brokers earn by two-thirds would save CBA $197 million, which is good for CBA’s shareholders. However, it would destroy competition, leaving millions of customers without access to credit outside of major lenders.”
The Reserve Bank New Zealand says that risks to New Zealand’s financial system have eased over the past six months, but vulnerabilities persist. In particular, households remain exposed to financial shocks due to their large mortgage debt burden.
But they are easing the loan to value restrictions from January 2019.
Up to 20 percent (increased from 15 percent) of new mortgage loans to owner occupiers can have deposits of less than 20 percent.
Up to 5 percent of new mortgage loans to property investors can have deposits of less than 30 percent (lowered from 35 percent).
They say that both mortgage credit growth and house price inflation have eased to more sustainable rates, reducing the riskiness of banks’ new housing lending. In response, we are easing our loan-to-value ratio (LVR) restrictions on banks’ new mortgage loans. If banks’ lending standards are maintained we expect to further ease LVR restrictions over the next few years.
Debt levels also remain high in the agriculture sector, particularly for dairy farms, implying ongoing financial vulnerability. Balance sheets need to be further strengthened. In the medium-term, an industry response to a variety of climate change-related challenges appears likely, requiring investment.
While domestic risks have eased, global financial vulnerability has risen. Significant build-ups in debt and asset prices, and ongoing geopolitical tensions, overhang financial markets. This vulnerability is highlighted by the current elevated price volatility in equity and debt markets. New Zealand’s exposure to these global risks has reduced somewhat, as New Zealand banks have become less reliant on short-term, and foreign, funding.
The domestic banking system remains sound at present. We are using this period of relative calm to reassess whether the banking system has sufficient capital to weather future extreme shocks. Our preliminary view is that higher capital requirements are necessary, so that the banking system can be sufficiently resilient whilst remaining efficient. We will release a final consultation paper on bank capital requirements in December.
The banking system remains profitable, reflecting banks’ low operating costs and strong asset performance. While positive overall, banks’ low costs have been partly achieved through underinvestment in core IT infrastructure and risk management systems in New Zealand. This was highlighted in our review of bank’s conduct and culture with the Financial Markets Authority. We will be jointly reviewing banks’ responses to our review in March 2019, and following up as required.
CBL Insurance Ltd was placed into full liquidation by the High Court on 12 November. Aside from CBL, the insurance sector as a whole is meeting its minimum capital requirements. However, capital strength has declined and a number of insurers are operating with small buffers. The insurance industry must ensure it has sufficient capital to maintain solvency in all business conditions. Our ongoing review of conduct and culture in the insurance sector with the Financial Markets Authority will illuminate the industry’s risk management capability. The review will be released in January 2019.
The earnings of Australia’s four major banks are likely to fall further in the near term due to slowing credit growth, especially in the residential mortgage segment, and further remediation and compliance costs associated with inquiries into the financial sector, including the Royal Commission, says Fitch Ratings. The banks reported an aggregate decline in profitability in their latest full-year results.
Slower growth puts pressure on the banks to increase lending margins to maintain profitability. However, intense regulatory and public scrutiny of the sector, as well as strong competition, may make it difficult for the banks to reprice loans and pass on the recent increase in wholesale funding costs, as evidenced from the latest financial results. Net interest margins are therefore unlikely to improve in the short term.
The major banks made provisions for client remediation costs during the last financial year in response to the initial findings from the Royal Commission. Fitch expects some remediation costs to flow into the 2019 financial year as the banks continue to investigate previous behaviour. Meanwhile, compliance and regulatory costs to address shortcomings are likely to rise, despite the banks simplifying their business and product offerings. The banks also remain susceptible to fines and class actions as a result of the banking system inquiries.
The four major banks – Australia and New Zealand Banking Group (ANZ, AA-/Stable/aa-), Commonwealth Bank of Australia (CBA, AA-/Negative/aa-), National Australia Bank (NAB, AA-/Stable/aa-) and Westpac Banking Corporation (Westpac, AA-/Stable/aa-) – reported aggregated statutory full-year profit of AUD29.4 billion, a decrease of 0.8% from a year earlier, while cash net profit was down by 6.5%. CBA’s financial year ended June 2018, while ANZ’s, NAB’s and Westpac’s ended September 2018. The drop in aggregate profit was driven by slower lending growth, customer remediation charges and higher funding costs, especially in the second half of the financial year, as expected by Fitch. These pressures were partly offset by a benign operating environment that limited impairment expenses across the board.
All four banks reported lower or steady loan impairment charges during the reporting period. However, 90-day-plus past-due loans increased slightly, reflective of pressure on household finances from sluggish wage growth. Impairments are likely to rise from current historical lows due to the cooling housing market and high household leverage, which make households more susceptible to shocks from higher interest rates and unemployment. The ongoing tightening of banks’ risk appetites and underwriting standards should, however, support asset quality in the long term.
Common equity Tier 1 (CET1) ratios are broadly in line with the 10.5% threshold that regulators define as “unquestionably strong”. Banks have to achieve this level by 1 January 2020. ANZ reported a CET1 ratio of 11.4%, the highest of the major banks. ANZ is undertaking a share buyback and is likely to announce further capital management plans once it has received proceeds from recent divestments and asset sales. Westpac recorded a CET1 ratio of 10.6% and therefore already meets the new minimum requirement ahead of the deadline.
CBA reported a CET1 ratio of 10.1% at June 2018, which incorporates the AUD1 billion additional operational risk charge put in place following an independent prudential inquiry published in May 2018. However, this will translate to a pro forma CET1 ratio of 10.7% after already-announced divestments. NAB’s CET1 ratio is 10.2%, but we expect it to meet the 2020 deadline, with its capital position likely to be supported by an announced discounted dividend reinvestment plan and the potential sale of its MLC wealth-management business.
APRA released their monthly banking statistics for September 2018. This includes the total balances by ADI broken by investor and owner occupied lending. Total lending grew by 0.21% in the month to a total of $1.65 trillion, or 2.5% annualised. Within that lending for owner occupation rose by 0.36% to $1.09 trillion and investor loans fell 0.03% to $557.4 billion.
Investment loans now comprise 33.72% or the portfolio.
Looking at the individual major players, we see that only NAB grew their investment loan portfolio in the month, among the big four. Macquarie and Bendigo are lifting investor loans the most by value. ANZ dropped their balances the most.
This had little impact on overall market shares.
And the investor loan portfolio at the market level grew 1.35%.
We will look at the RBA aggregates in a separate post, but investor lending momentum continues to drift lower. Its surprising the owner occupied lending remains so strong, but that may change ahead.
The ABS released housing finance statistics today to the end of August 2018. The most striking observation is that lending flows for owner occupied buyers appear to be following the lead from the investment sector. Both were down. This is consistent with our household surveys.
Looking at the original first time buyer data, the number of new loans fell from 9,614 in July to 9,534 in August, a fall by 80, or 0.8%. As a proportion of all loans written in the month, the share by first time buyers fell from 18% to 17.8%.
The number of non-first time buyers remained about the same. The average first time buyer loan fell just a little to $345,000. Looking at the DFA investor segment of first time buyers – which is not reported in the official data, there was a further fall.
Thus our overall first time buyer tracker reveals a further slide in activity. Perhaps more are wanting to catch a bargain in a few months, although our surveys suggested the main issue is the inability to get a loan in the now tighter lending environment.
Looking at the trend lending flows, the only segment of the market which was higher was a small rise in refinanced owner occupied loans. These existing loans accounted for 20.5% of all loans written, up from 20.3%, and we see a rising trend since June 2017, from a low of 17.9%. Total lending was $6.3 billion dollars, up $31 million from last month.
Investment loan flows fell 1.2% from last month accounting for $10 billion, down 120 million. Owner occupied loans fell 0.6% in trend terms, down $81 million to $14.5 billion. 41% of loans, excluding refinanced loans were for investment purposes, the lowest for year, from a high of 53% in January 2015.
Looking at the moving parts, only refinance, and owner occupied construction loans rose just a little, all other categories fell.
On these trends,remembering that credit growth begats home price growth, the reverse is also true. Prices will fall further, the question remains how fast and how far? We will be revising our scenarios shortly.
Economist John Adams and I discuss the latest of the question on deposit account “Bail-In” and try to answer John’s question “Is Parliament “Too Stupid to be Stupid”?
Either way, the question of deposit bail-in remains unclear in our view.
We also discuss the Reserve Bank of New Zealand Dashboard which is designed to assist Kiwi’s as they try to pick which bank to place their deposits with. In New Zealand it is QUITE CLEAR, bank deposits are available for “Bail-In”!
The 12 month growth by category shows that owner occupied lending is still growing at 7.5% annualised, while investment home loans have fallen to 1.5% on an annual basis. Overall housing lending is growing at 5.4% (compared with APRA growth of 4.5% over the same period, so the non-banks are clearly taking up some of the slack). Still above wages and inflation. Household debt continues to rise.
The more noisy monthly data shows investor loans slowing, while business lending is up. Personal credit continues to slide.
The non-bank sector (derived from subtracting the ADI credit from the RBA data) shows a significant rise up 5% last month in terms of owner occupied loans. This is indicative, as there are timing and other issues when making this comparison, but its the best available. This is consistent with our survey data which slows that non-banks are indeed seeking to grow their books under the lighter non-ADI regulation.
Finally, total lending lose to 1.78 trillion, with owner occupied loans at $1.2 trillion and investment loans at $593 billion. The mix of loans fell to 33.2% of housing loans for investment lending. Business lending was $934 billion, comprising 32.5% of all credit.
In summary, housing debt is still rising too fast . Period. APRA needs to look at the non-banks. And quickly.
APRA has released their latest banking stats to end August 2018. Total lending for residential homes rose by 0.33% in the month to a total of $1.65 trillion. Another record. That would be an annual rate of 3.9% if repeated each month, a little lower, but still nearly twice wages growth, so household debt is STILL climbing.
Within that lending for owner occupation rose 0.48% to $1.09 trillion and lending for investment purposes rose 0.03% to $557.6 billion (last month it dropped by 0.02%). 33.8% of loans are for investment purposes.
Looking at the portfolio movements, NAB, CBA, Bendigo, HSBC and Macquarie reported a lift in investor loan balances. Westpac and ANZ reported a fall. ME Bank appears to be losing relative share on both fronts.
The market share of the major players hardly moved, with CBA the largest owner occupied lender and Westpac still holding the largest portfolio of investment loans.
Whilst officially the 10% speed limit on investor loans has been sidelined, it is worth observing that over the past year, Macquarie, AMP and some of the smaller players are running way ahead of the market rate of growth.
The RBA will post their aggregates later this morning, and we will then have a market view – and we can impute the non-bank lender share which we expect to be higher again.
But for now it is worth highlighting that despite all the grizzles from the property spruikers, mortgage lending is STILL growing…. and faster than inflation. We have not tamed the debt beast so far, despite failing home prices. No justification to ease lending standards – none.
The Federal budget status moving towards a technical surplus earlier (remember this is new debt, not the total outstanding debt…) may take the risk premium on Australia down a tad, but I still expect higher mortgage rates ahead – not least as the banks struggle to fund the fallout from the various legal claims and penalties which are being, and will be imposed; to say nothing of higher international funding costs.
