Category: Economics and Banking

ANZ Q3 2019 Update

ANZ today provided an update on credit quality, capital and Australian housing mortgage flows as part of the scheduled release of its Pillar 3 disclosure statement for quarter ending 30 June 2019 and associated chart pack. Given the strategy was to shed a portfolio of businesses and focus on the Australian retail market, we need to give attention to their shrinking mortgage book and rising delinquencies.

Total provision charge of $209m for the June quarter remained broadly flat compared with the 1H19 quarterly average, while the individual provision increased $68m to $258m. Total loss rate was 13bp (consistent with the 1H19 loss rate of 13bp).

90+ Days Past Due Loans rose in the quarter.

Mortgage delinquency rose in 3Q19, with 90 day increasing 14bp to 114bp. On a geographic basis, ~9bp of the movement came from NSW and VIC in aggregate. On a product basis, ~1/3 of the movement came from Interest Only home loan conversion to Principal & Interest.

WA still leads the way, but delinquencies are also rising in other states. FY17 & FY18 vintages continue to perform better than FY15 & FY16 (when of course lending standards were at their most loose, plus as we know from our mortgage stress work, it can take 2-3 years for households in financial stress to go delinquent). ANZ’s performance is likely to be biased higher given its shrinking mortgage portfolio, as we discuss below.

Group Common Equity Tier 1 ratio (APRA Level 2) was 11.8% at the end of June 2019, a ~30bp increase for the June quarter. On a pro-forma basis, inclusive of announced divestments and the recently announced capital changes, ANZ’s Level 2 CET1 ratio is 11.5%.

As indicated at ANZ’s first half result presentation, expectation was for home loan volumes in Australia to decline during the June quarter, with Owner Occupied down 0.2% and Investor down 1.8% (June 2019 compared with March 2019).

They say that home loan applications improved in July 2019 with actions taken in recent months to clarify credit policy and reduce approval turnaround times having a positive impact.

Westpac Changes Mortgage Underwriting Policies

Following its Tuesday victory against ASIC, with the court dismissing the regulator’s allegations of irresponsible lending, Westpac has announced a spectrum of changes to its home lending policies. From Australian Broker.

The updated guidelines are set to go into effect on 20 August, at not only the major, but its associated brands: St. George, Bank of Melbourne, and Bank SA.

Perhaps most notably, Westpac is to update and add new expense categories to its household expenditure measure “to reflect industry guidelines on the HEM values we use as our customer expense benchmarks” – bringing the total number of categories from 13 to 18.

Further, the bank will apply income-based HEM bands based on total gross unshaded income, including gross rental income.

Particularly relevant in light of the recently dismissed court case, in instances when total liability is seven times or more higher than total gross income, the loan applications will be reviewed by a credit assessment officer rather than run through the automated system.

ASIC’s case against the bank had hinged on the allegation Westpac breached the National Consumer Credit Protection Act 2009 through assessing loans via its automated system which solely considers the benchmark HEM rather than customers’ declared living expenses.

Westpac additionally addressed the changes being made to tax debt through changing its approach to margin loans. They will now be assessed on the higher of 1% of the balance or the customer’s monthly declared commitment.

Further, Westpac will require a more comprehensive understanding of payment plans businesses have made with the ATO and decline to lend to customers with an overdue amount payable to the ATO for the previous year’s tax without a formal payment plan in place.

The policy changes will impact all new and re-submitted applications made from Tuesday, requiring brokers to utilise the expanded 18 categories for expenses, as well as heed the new seven times debt-to-income ratio.

Westpac also announced that changes to the commercial, SME and private wealth broking channels will be made later this year.

NZ Council Of Financial Regulators New Vision

The New Zealand Council of Financial Regulators (CoFR) has announced a new vision for New Zealand’s economic wellbeing and has welcomed the addition of the Commerce Commission to the forum.

The new vision aims to contribute to maximising New Zealand’s sustainable economic wellbeing through responsive and coordinated financial system regulation, and allows for a longer term view that more effectively recognises the specific responsibilities of each agency.
 
CoFR works to identify and respond to issues of cross-agency relevance. CoFR’s members are the Reserve Bank, Financial Markets Authority, the Treasury, Ministry of Business, Innovation and Employment, and now the Commerce Commission. Responsibility for chairing CoFR alternates between the Reserve Bank Governor and the FMA Chief Executive.
 
The Reserve Bank’s Governor, Adrian Orr, said: “We recognise our responsibility for joint stewardship (te hunga tiaki) of a healthy and efficient financial system that benefits all New Zealanders.”
 
The Financial Markets Authority’s Chief Executive, Rob Everett, said: “The Council was instrumental in launching the recent conduct and culture review of New Zealand’s banks and life insurers. This illustrated the importance and benefits of regulators working together to tackle issues that span across the financial markets’ regulatory system. Ensuring a coordinated response to such issues will help to build confidence in the regulation of New Zealand’s financial markets.”
 
Mr Orr says, “Bringing the Commerce Commission on board with its consumer credit focus is a welcomed addition to this forum.”
 
CoFR meets quarterly to discuss financial markets regulatory issues, risks and priorities, and is attended by the heads of each agency. The existence of CoFR does not derogate from the existing statutory rights and responsibilities of the respective authorities. The most recent meeting occurred yesterday.
 
Its main objectives are to:

  • Develop a collective view on longer-term strategic priorities for the financial system;
  • Identify and monitor important issues, risks and gaps in the financial system that may impinge upon achievement of member agencies’ regulatory objectives;
  • Agree collaborative responses to issues that require cross-agency involvement and put in place appropriate mechanisms to deliver them.


About the Council of Financial Regulators
 
The Council of Financial Regulators (CoFR) has been operating since 2011 as a forum for agencies with responsibility for financial sector regulation. CoFR is comprised of the Reserve Bank, Financial Markets Authority, the Treasury, Ministry of Business, Innovation and Employment, and recently the Commerce Commission as a forum to share information, identify issues and develop coordinated responses to issues that may require cross-agency involvement.
 
CoFR agreed to a financial markets regulatory charter in 2016, which sets out how we operate our shared ownership of regulatory functions in this area. MBIE developed the charter as a management tool to set expectations and provide an overview of the regulatory system. The new vision seeks to build on this charter.
 
CoFR formally meets quarterly to discuss financial markets regulatory issues, risks and priorities. It comprises senior leaders from each agency and from time to time, CoFR may invite representation from other regulatory agencies and public authorities, as required.
 

More information:

HEM Westpac Win

The Federal Court has dismissed ASIC’s responsible lending case against Westpac and ordered the regulator to pay the bank’s costs. Via ABC.

I will make a separate post on the implications of this finding, in the light of ASIC stated intent to change the responsible lending laws, and the current hearings underway.

ASIC had alleged that Westpac breached responsible lending laws on up to 262,000 home loan approvals made using an automated process that relied on the Household Expenditure Measure benchmark, rather than using each applicant’s individually assessed living costs.

In September last year, Westpac agreed to pay a $35 million settlement to ASIC and admit that it breached responsible lending laws.

However, in November Justice Nye Perram sensationally rejected the settlement, finding that it was ambiguous and that the parties did not actually agree on what the responsible lending laws required and, therefore, how many loans were in breach and what the penalty should be.

Today, Justice Perram dismissed ASIC’s case against the bank, awarding costs against the regulator and leaving it negotiating with Westpac over the legal bill in reaching the failed settlement.

In the rejected settlement, Westpac had admitted its automated loan approval system used the Household Expenditure Measure (HEM) — a relatively low estimate of basic living expenses — to calculate potential borrowers’ living costs.

The bank used the HEM instead of actually evaluating the customers’ declared living expenses, and admitted this practice breached the National Consumer Credit Protection Act in certain circumstances.

However, there was an irreconcilable difference of opinion between ASIC and Westpac over when use of the HEM breached the law.

Out of 261,987 loans approved using the HEM benchmark, 211,937 involved customers declaring expenses that were lower than the HEM — that is, below the typical household’s spending on basic goods and services, and in the bottom 25 per cent of household spending on less essential items.

In these cases, use of the HEM actually reduced the amount of money the customer could borrow compared to what they declared.

In the roughly 50,000 cases where declared living expenses were higher than the HEM, use of the benchmark increased the loan amount the customer could receive.

However, in about 45,000 of these cases, both ASIC and Westpac agreed the use of the customers’ actual expenses rather than the HEM would have had no impact on whether they were deemed suitable for the loan.

That left 5,041 loans approved using the HEM that may not have been if actual declared expenses were used — they would have been referred to manual credit assessment instead.

This meant some of those customers might have been approved for home loans they potentially could not afford to repay without financial hardship.

In rejecting the settlement, Justice Perram said neither party could explain what would have happened after that manual loan assessment process, whether any of these 5,041 loans were actually unsuitable and whether any significant harm had been done to any or all of those customers

The War On Cash – The Biggest Audience Ever On DFA

Well, who would have though it. My show with the CEC’s Robbie Barwick has now had 105,000 views in the past week and counting. So this draft bill is really hitting a nerve.

This is the biggest audience we have ever had for any of our shows. Thanks to all those who watched it and shared it.

Still time to get your submission into the Treasury today, when the consultation closes.

The country of origin is also interesting with 50% based in Australia, followed by the USA, Great Britain Canada and New Zealand. So this has significant international interest.

And if I count up the messages I have received from viewers who have posted a response to the treasury, then they will have received not tens but hundreds of submissions. Now, I wonder if they were expecting that. And if they will report the true volumes received.

And if you have submitted a response, remember to also contact your local MP and Senators in your home states. Contact details are easily found on the Parliamentary website.

List of Senators

List of Members

BBSW Slides Some More

Reflecting the era ahead, the BBSW fell again and is now 114.9 basis points from peak just over 6 months ago.

This week we get June wages growth data on Wednesday and Jobs growth Thursday. We will also get more consumer confidence data on Tuesday and Wednesday, as well as a further read on business confidence.

In addition, China will release more data on Wednesday covering sales, investment and production, interesting in the context of the trade wares.

The profit reporting continues with Bendigo and Adelaide Bank already released today and Insurer QBE on Thursday.

Finally, the RBA will be busy, with Christopher Kent, Assistant Governor (Financial Markets) speaking on Tuesday, and Guy Debelle, Deputy Governor – Risks to the Outlook – on Thursday.

Bendigo And Adelaide Bank Profit: $376.8 million, down 13.3 percent

Bendigo and Adelaide Bank, Australia’s fifth-largest retail bank, today announced results for the year ending 30 June 2019.

  • Statutory net profit: $376.8 million, down 13.3 percent, as a result of remediation and redundancy costs and unrealised losses relating to Homesafe due to the decline in property valuations in Melbourne and Sydney
  • Cash earnings after tax: $415.7 million, down 6.6 percent, primarily attributable to remediation and redundancy costs
  • Underlying earnings: $435.7 million, down 2.5 percent, excluding remediation and redundancy costs
  • Net interest margin: 2.36 percent, steady year-on-year, increasing 2 basis points (bps) in second half, compared to the first half
  • Total income: $1.6 billion, steady
  • Bad and doubtful debts: $50.3 million, down 28.8 percent
  • CET 1: 8.92 percent, up 30 bps
  • Cash earnings per share: 85 cents per share (cps), down 8 percent
  • Total fully franked dividends: 70.0 cps, steady
  • Total lending: $62.1 billion, up 1.1 percent, with residential lending above-system, at 3.5 percent
  • Total deposits: $64.0 billion, up 1.5 percent, with retail deposits up 3.3 percent

“Earnings for the year were impacted by remediation and redundancy costs. Despite this, we delivered total income of $1.6 billion, in line with the prior year, in an environment of low growth, political uncertainty, subdued consumer confidence and increasing competition.

“Net interest margin was steady year-on-year, and, half-on-half, increased by 2 basis points, reflecting the active management of margin and volume for both lending and deposits.

Key metrics

Total lending grew by 1.1 percent to $62.1 billion, with noticeably stronger growth of 3.6 percent in the second half – well above system growth of 2.6 percent. In the second half, residential lending was up 4.3 percent and agribusiness showed growth influenced by seasonality up 12.8 percent, both well above system; whilst small and medium-sized business lending grew 9.5 percent.

Bad and doubtful debts being down 28.8 percent to $50.3 million.

During the year, the Bank divested Bendigo Financial Planning which serves to further simplify and de-risk the business and deliver cost savings.

The Board declared a final dividend of 35 cents2 per share, taking the fully franked full year dividend to 70 cents per share, continuing our history of rewarding shareholders with a high yield and long-term returns.

During the year, the Bank launched Australia’s first and largest next-gen digital bank, Up, which has exceeded initial customer growth expectations. We also became the first lender globally to offer a digital home loan application and assessment process under its own brand, Bendigo Express, using Tic:Toc’s instant home loan technology.

Remediation

Total costs for remediation for the year were $16.7 million. These were all self-reported to the regulator and relate to:

  • Insufficient documentation to demonstrate that services had been provided to Bendigo Financial Planning customers in accordance with their service contracts. This business was subsequently sold.
  • Products not operating in accordance with their terms and conditions.

Operating expenses were $954.5 million, up 5.9 percent on prior year. This included $16.7 million remediation costs; and $11.9 million redundancy costs.

Excluding remediation and redundancy costs, adjusted cost to income ratio was 57.4 percent, up from 55.4 percent in prior year, attributable to staff costs, including the additional Elders agri-finance managers; insurance premiums; and IT investment.

RBNZ Reveals Submissions on the New Proposed Mortgage Bond Standard

The New Zealand Reserve Bank has today published a summary of submissions on its consultation proposing a new mortgage bond standard aimed at supporting confidence and liquidity in New Zealand’s financial markets.

Submissions on the new proposed mortgage bond standard are broadly supportive of the introduction of a high grade residential mortgage backed securities framework for New Zealand – known as Residential Mortgage Obligations (RMO).

The new standard aims to reduce contingency risks for the Reserve Bank as a lender of last resort, ensuring financial intermediaries supply sufficient high quality and liquid assets. The standard also aims to provide issuers and investors with an additional funding and investment instrument, supporting the development of deeper markets.

Assistant Governor and General Manager of Economics, Financial Markets and Banking Christian Hawkesby said he was pleased with the range and depth of feedback received during the consultation process.

“The consultation process has been successful in delivering improvements to the initial concept for a new mortgage bond standard to support financial intermediation, liquidity management and funding in New Zealand’s markets.”

The feedback from issuers, investors and other market participants has been constructive and it will help inform the Reserve Bank’s final policy decision which is expected to be published by the end of 2019.

The Reserve Bank has decided to update repo-eligibility conditions for RMBS in the transition to the final RMO policy. This includes a new approval process and requirement for a more detailed RMBS reporting template.

More information: