Economics and Banking – Page 407 – Digital Finance Analytics (DFA) Blog

NAB Set To Lift Investment Mortgage Rates

National Australia Bank will announce a rate rise for a group of its property investors, according to the Australian Financial Review.

Street Talk has revealed that NAB will up rates by 0.15 of a percentage point for property investors who are paying off principal, as well as interest.

The rate increase is part of a new tiered home loan pricing structure and expected to come into effect on April 4.

The move comes as the bank launches a new mortgage pricing structure where it will group its home loan products by both borrower type (owner-occupier or investor) and loan structure (interest-only or principal and interest).

Barclays decision to pull out of Africa is a sign of the bank’s weakness, not the continent’s potential

From The Conversation.

Barclays has announced it is to withdraw from Africa. It will gradually reduce its 62% stake in Barclays Africa Group over the next two to three years – and, naturally, this raises questions about the prospects for banking in Africa, where Barclays has had a presence since 1925.

But the decision is more a signal of the bank’s weak finances than a gloomy outlook for African banking. Barclays made the announcement alongside its annual results, which reported a 2% profit drop and a dividend cut of more than 50% per share. It also needs to raise funds to meet capital adequacy requirements. The underlying fundamentals of African banking, meanwhile, are sound.

A different banking model

Like other emerging economies, those across the African continent have been hurt by the fall in oil prices and other commodities since mid-2014, in part due to a slowdown in China, which is a leading consumer of African exports. Of particular concern for Barclays has been the weakening of African currencies. The South African Rand in particular has reduced the value to UK shareholders of its African business, listed on the Johannesburg Stock Exchange.

Nevertheless, a reduction in economic growth caused by cyclical factors should have little effect on the long-term prospects for banking in Africa, the nature of which is rather different to the traditional image of bricks and mortar banks.

Barclays’ Africa presence. Rasagy, CC BY-SA

A typical African consumer of banking services is as likely to associate the word banking with their mobile phone as they are with a high street branch or an ATM. The proportion of people living in remote, rural areas in Africa is nearly 60%. The challenges posed in reaching them and catering to the needs of lower income households have produced innovative solutions that are now copied elsewhere in the world.

Kenya’s mobile money system, known as M-Pesa is perhaps the most innovative and well known. Developed by mobile phone operator Vodafone and launched by its Kenyan subsidiary Safaricom in 2007, it grew rapidly and is now used by more than 14m customers (70% of Kenya’s adult population).

To use M-Pesa, customers must first register at an authorised retail outlet where they are assigned an electronic money account linked to their mobile phone number and SIM card. Whereas prepaid mobile phone credit is normally used for calls or text messages, with an M-Pesa account it can also be used to transfer funds and pay bills. The number of M-Pesa outlets in Kenya greatly exceeds the combined number of post offices, bank branches and ATMs.

The M-Pesa service is also widely used in neighbouring Tanzania and versions of it can be found in the Ivory Coast, Zimbabwe, Botswana, Rwanda, South Africa and the Democratic Republic of Congo, where the government transfers civil servant salaries using mobile technology. It has also been effectively rolled out to emerging countries in other continents, such as M-Paisa in Afghanistan.

In 2010 Barclays followed the lead of other banks and entered into a partnership with Safaricom to offer its account holders the opportunity to withdraw or deposit money using M-Pesa. This helped widen access to financial services and increase the convergence between conventional and mobile banking. But its delay in getting into this market is indicative of how Barclays has struggled against competitors in Africa – perhaps another reason it is withdrawing.

More growth on the horizon

Another, more recent, example of innovative banking in Africa is agency banking. This involves a third-party, such as a local supermarket or post office, providing financial services on behalf of a bank, which usually gives the agent the necessary equipment and technology to provide the financial services.

Agency banking has also experienced rapid growth. For example, within two years of its launch in Kenya in 2011, 11 commercial banks had contracted more than 18,000 active agents that were facilitating over 48.4m transactions valued at US$3 billion. The growth of agency banking has allowed financial institutions to service those previously with no access to banking and has increased the level of deposits in the banking system.

This kind of creative thinking and the innovative use of technology has been a trademark of banking in Africa this century. It has allowed banks to access a far wider customer base than ever before, which should bode well for bank profits. As well as increasing financial inclusion, these trends have increased the potential for economic growth in the world’s second largest and second most populous continent, with a billion people spread across 56 countries. Whoever takes over Barclays’ African business will reap the eventual benefits of this growth.

Authors: Kevin Campbel, Senior Lecturer in Finance , University of Stirling; Fredrick Kibon, Changwon, Early Career Fellow in Accounting & Finance, University of Stirling

Central banks and digital currencies

In a speech delivered at the London School of Economics, Ben Broadbent outlines the importance of innovations in digital currencies – and what the economic implications of central banks introducing their own might be.

Ben explains that digital currencies like Bitcoin are, in themselves, extremely unlikely to become widely used alternative units of account, displacing the dollar or pound. Rather, the interesting aspect of these digital currencies is the settlement technology that underpins them, the so-called “distributed ledger”. This system allows transfers to be verified and recorded without the need for a trusted third party: the role that central banks currently perform for commercial banks.

Ben argues that, while clearing payments through a distributed ledger rather than a central bank may not have any significant macroeconomic effects in and of itself, what would prove significant is how the technology could be used to widen access to the central bank’s balance sheet beyond the commercial banks it currently serves.

Ben states: “That might mean adding only a narrow set of counterparties – non-bank financial companies, say. It might mean something more dramatic: in the limiting case, everyone – including individuals – would be able to hold such balances.”
The potential that distributed ledgers offer to expand access to central bank balance sheets encapsulate the distinction between ‘private’ digital currencies – which essentially seek to substitute central banks as settlement agents – and ‘central bank digital currencies’, which could result in central banks expanding their role as trusted third parties.

The macroeconomic impact of central bank digital currencies would depend on their precise design and the degree to which they competed with the main form of money in the economy currently: commercial bank deposits. As Ben notes, the public is already able to hold claims on the central bank through cash – and if all a central bank digital currency did was to offer a substitute for paper currency, it’s not clear the macroeconomic effects would be that substantial.

Even then, however, Ben argues you would expect to see some drain from commercial banks. This drain would be greater the more closely a central bank digital currency resembled a genuine bank account. Notably, flows into central bank digital currencies, and out of commercial banks, would pick up at times whenever people were concerned about the strength of the financial system.

Any such shift towards a relatively widely accessible central bank digital currency would therefore have two important implications: “On the one hand, it would probably make [commercial banks] safer. Currently, deposits are backed mainly by illiquid loans, assets that can’t be sold on open markets; if we all tried simultaneously to close our accounts, banks wouldn’t have the liquid resources to meet the demand. The central bank, by contrast, holds only liquid assets on its balance sheet. The central bank can’t run out of cash and therefore can’t suffer a “run”.

Ben adds: “On the other hand, taking deposits away from banks could impair their ability to make the loans in the first place. Banks would be more reliant on wholesale markets, a source of funding that didn’t prove particularly stable during the crisis, and could reduce their lending to the real economy as a result.”

Ben reflects that, in many ways, this debate on the future of digital currencies is resurrecting some of the older arguments in economics. Some admirers of private digital currencies like Bitcoin see them as a means of bypassing central banks altogether – a campaign recognisable to advocates of “free banking” in the 19th century. If it were a close substitute for bank deposits, on the other hand, a central bank digital currency would mean a more prominent role for the central bank; it would also represent a shift towards a “narrower” banking system, another argument with a long history.

Ben notes that while some have suggested that central banks will have to issue digital currencies to meet the “competitive threat” posed by private sector rivals. However, for Ben, “the more important issue for central banks considering such a move will be what it might mean for the funding of banks and the supply of credit”.

ASIC and brokers: Communication breakdown?

Further information on the debate about Mortgage Brokers, this time from MPA. The article highlights the issues in play.

From Sam Richardson, Mortgage Professional Australia.

Navigating Regulation is part and parcel of running a business. Occasionally however, it determines the future direction, not only of a business, but of an entire industry, as it did in 2008/9 with the passing of the National Consumer Credit Protection Act. Eight years on, 2016/17 looks likely to have an equally strong impact on brokers’ businesses, driven by a perfect storm of regulatory and political activity.

At the request of the Assistant Treasurer, brokers’ remuneration is set to be investigated by ASIC, who are themselves the subject of a government ‘capability review’ – just one of many consequences of 2014’s Financial System Inquiry. That’s not to mention debates over user-pays funding, interest-only lending and more.

In short, brokers and ASIC will need to closely engage with each other – more than they have at any time since the NCCP. Yet, a recent poll by MPA sister-title Australian Broker found that understanding between the industry and regulators appears to be at alarming lows. The magazine asked its readers, ‘Do you agree that ASIC understands the mortgage industry?’, and 86% of respondents disagreed. The magazine took the results of the poll to several prominent brokers, who provided suggestions for this lack of trust.

What they found is that brokers have four areas of concern: that ASIC doesn’t understand the technical aspects of brokers’ compliance procedures; that ASIC should instead be investigating the banks; and finally – and crucially – that ASIC don’t communicate enough with brokers or industry associations. Undoubtedly, current debates, such as over interest-only lending, have not endeared the regulator to brokers, and this dissatisfaction appears both more deeply engrained and wide-ranging. Therefore, this article will also look beyond current debates, examining where communication between brokers and their regulator has broken down, and what can be done to repair the relationship.

1 Broking’s industry bodies and ASIC
Beginning with ASIC’s understanding of the industry, it seems that brokers hold a very different view to their own industry associations. MPA put the 86% statistic to the FBAA’s Peter White, whose reply was unequivocal. “Unfortunately, that is the brokers’ problem,” he explained. “ASIC understands brokers, and to say that they don’t is very, very wrong.”

Drawing on his work with regulators from the introduction of the NCCP onwards, White insisted that “ASIC’s got some enormous skillsets and [people] who understand broking very, very well”.

Similarly, the MFAA’s CEO Siobhan Hayden doesn’t believe the statistic is completely fair. “They [ASIC] are fairly well versed,” she said. “They come out to some of our broker events, they talk to brokers, they engage with us regularly. They have a good understanding of how brokers work and how they’re remunerated.”

Indeed, ASIC personnel have attended recent broker events, including the FBAA’s national conference last November, where they addressed attendees and then answered brokers’ questions.

Within ASIC’s corporate structure – illustrated in our box out – there are several individuals of whom brokers should be aware. The MFAA point to Michael Saadat, senior executive leader of deposit takers, credit & insurers (which includes brokers), who is overseen by ASIC deputy chair Peter Kell. In terms of experience, Saadat worked in compliance at ASIC, Citibank and previously PwC, while Kell comes from a consumer protection background, at ASIC, the Australian Competition and Consumer Commission and CHOICE. Both are well established in their jobs – Saadat has been at ASIC since 2005 (excluding a brief two year spell at Citibank), Kell from 1998-2004, rejoining the regulator in 2013.

2 How ASIC relates to other regulators
Saadat and Kell certainly have the experience to understand broking, but they’re not the only decision makers brokers have to deal with. Australia’s regulatory framework has several layers, of which ASIC is just one. As FBAA chief White notes, ASIC isn’t necessarily the decision maker, but instead the ‘policeman’ tasked with enforcing them. The Treasury sets ASIC’s priorities and is thus the cause of much misunderstanding. “We get changes of ministers on a regular basis now,” says White. “Not all the ministers understand brokers on a federal level.” The remuneration inquiry, for instance, was announced by assistant treasurer Kelly O’Dwyer, although the inquiry itself will e carried out by ASIC.

The importance of the Federal Government in fi nancial regulation was underlined by the MFAA’s appointment of a professional lobbyist, GRACosway, which CEO Hayden says at the time was a response to members who believed government needed to be educated about broking. “It is clear from media comments in the past 12 months that some representatives of Reserve Bank of Australia (RBA), Australian Prudential Regulation Authority (APRA) and Treasury do not have a detailed understanding of our industry and this needs to change,” says Hayden.

Indeed, while not the subject of this article, APRA have enormous infl uence over brokers. As Hayden puts it, brokers are not APRA’s ‘direct customers’ – the organisation regulates lenders – but deals with brokers as a distribution channel of those lenders. APRA regularly makes comments about brokerintroduced loans, as they did in 2015, but has a much lower level of engagement – it meets with the MFAA around twice a year, unlike ASIC’s quarterly consultations. The two have clashed, notably in August last year when APRA chairman Wayne Byres warns that broker-originated loans were ‘higher risk’.

While ASIC and APRA co-ordinate through the Council of Financial Regulators, brokers who approach ASIC about APRA policies (or vice versa) will get nowhere, leading to frustration and confusion between the two. “I think sometimes the mandates ASIC and APRA have are not well understood by brokers”, MFAA CEO Hayden tells MPA. “I understand why, when a broker’s business is affected by these changes, they do get a sense of frustration from it, but sometimes it’s not channelled at the correct regulator.” She mentioned complaints by brokers aimed at ASIC about recent bank rate rises and serviceability changes – measures that were driven by APRA.

3 Where communication is failing
Both the MFAA and FBAA see broker misinformation as a cause for their distrust of ASIC, but it’s also a symptom. What it indicates is that a significant number of brokers aren’t being provided with the information so that they can deal with the appropriate regulator at the right time – and it’s not the fi rst time this problem has been raised. In 2013, ASIC commissioned a report into its stakeholders – including brokers – where ‘clearly communicating what ASIC is doing’ was among four key limitations identified by ASIC Chairman Greg Medcraft in his introduction to the report.

In response, Medcraft proposed four measures, two of which related to ASIC’s MoneySmart fi nancial literacy program for consumers, the others being to improve social media channels and review ASIC’s website. He defended ASIC’s record on communication, noting the organisation sends out around 300 media releases and takes part in 100 interviews a year. With tens of thousands of stakeholders, a large quantity of communication is understandably necessary, yet brokers still don’t appear to be getting the information they need.

ASIC’s communication directly with brokers and the press is generally to the point, relating to the results of individual enforcement actions, bans and other penalties. There are notable exceptions: ASIC’s publicly available corporate plans (which are generalist in scope); Saadat’s talk at the FBAA’s conference; and deputy chairman Kell’s interview with Australian Broker in April 2015, in which he discussed the ASIC’s focus on interest-only lending for the year ahead. Overall, however, ASIC rarely discusses future priorities or coming regulation in public, despite this being exactly the sort of information brokers need.

So how does ASIC consult and communicate with brokers? The answer – or rather the impression brokers get – is almost entirely through the two industry bodies, the MFAA and FBAA.

There are good reasons for a top-down approach, MFAA CEO Hayden explains. “They just don’t have the resources to adequately engage with all the brokers that may seek them out with enquiries or questions to ASIC.” The MFAA invites ASIC personnel to its PD days and relays its messages through its email and LinkedIn networks, in part because ASIC are “defi nitely not resourced adequately to directly support the market”. Indeed, a glance at ASIC’s budget (illustrated in the accompanying sidebar) shows that just five per cent of its budget for credit licensees goes into engagement and education.

Both the MFAA and FBAA told MPA that ASIC involves them throughout the development of regulation, but as White puts it, “What you’ll see when it becomes public domain is nearing the end of the stick”. Until that point, ASIC’s dealings take place not only behind closed doors, but under the understanding that everything discussed is confi dential. That explains why, when consultation papers do appear, the regulation they discuss is relatively fully formed. The advantage of this for brokers is that the consultations are more relevant, both in their subject matter and timing, Hayden explains. “It’s prudent to talk about information when it’s meaningful and you’re wanting feedback.”

There’s another reason why ASIC deals with industry bodies, according to FBAA CEO White. “The whole objective of writing regulation is not about achieving commercial bias,” he notes. “If I’m the head of a major brokerage or aggregator, and I’m pushing hard on the door of a regulator for something, it’s probably because it’s got a commercial advantage for me.” ASIC can deal with industry associations as “representatives of the total marketplace.”

While most major players in broking tend to deal with ASIC through the MFAA and FBAA, ASIC themselves say they also deal directly with major brokerages and aggregators. AFG managing director Brett McKeon revealed in a January letter to brokers that he’d met with representatives of ASIC and APRA, in addition to two senators.

Indeed, as regulation begins to really affect brokers businesses, one would expect an increasing number of aggregators and franchises to directly challenge the regulators. Their arguments are undoubtedly commercially biased, but their insights and data may nevertheless be valid, meaning regulators and legislators will (and indeed already do) listen to them. As ASIC tells MPA: “We are conscious that some perspectives are only available directly from the firms themselves.”

4 Finding a new approach to communication
Practically, the disadvantage of the behind closed-doors approach is that brokers experience new regulation as a fait accompli, with their opinion or expertise seemingly ignored by the regulator. So how can ASIC challenge that perception? MPA looked at the relationship between broking and regulation in New Zealand and how small business stakeholders can be better integrated in the
regulatory process.

Despite being a much smaller market than Australia, regulation of brokers and financial advisors in New Zealand makes for an interesting comparison. The MFAA has been working increasingly closely with New Zealand’s Professional Adviser’s Association, who will be involved in the MFAA’s Darwin and Beyond conference in June, and who, since 2012, represent brokers and financial advisors to the New Zealand regulator, the Financial Markets Authority.

MPA spoke to PAA board member Angus Dale-Jones about the difference between regulator-industry engagement in Australia and New Zealand. Dale-Jones is well equipped to make the comparison, having worked at ASIC for 17 years, including time as WA regional commissioner, before moving to the New Zealand Securities Commission, the predecessor of the FMA. As in Australia, the FMA are looking to strengthen financial services regulation, Dale-Jones tells us, but are doing so in a much more positive way.

Crucially, the way regulation is developed in New Zealand is “superbly better then Australia”, as Dale-Jones puts it. This is thanks to an extra layer in the process – the Code Committee, which is made up of 11 industry figures appointed by the FMA. The committee originally drew up and now periodically reviews the New Zealand code for financial advisors.

“It’s proved to be incredibly flexible and useful in the New Zealand context,” Dale Jones explains. “It’s meant that advisors and their associations have been able to get on board with the committee and understand their objectives and the direction of their thinking.”

According to Dale-Jones, the committee is a way of drawing on the expertise of “current practitioners who understand today’s issues.” It also means that minor changes to the code don’t have to involve changes in legislation, as the committee can make these changes. Moreover, Dale-Jones believes such regulator industry convergence isn’t just a New Zealand phenomenon. “In the past decade, around the world there has been a colossal change in the interaction between professional associations, industry bodies and the regulators,” he says. “Now it is seeking more of a convergence between those players, looking at ways of getting outcomes that makes everybody happy, so you’re starting to see far greater interest in self-regulatory solutions.”

5 Moving towards self-regulation in Australia
With regulatory initiative trickling down from government or even international level – such as the raising of bank capital requirements – Australia doesn’t appear to have a particularly self-regulating financial system, at least in the third-party mortgage space. Indeed, one might presume the level of misunderstanding between brokers and ASIC would stop such an initiative in its tracks. Nevertheless, there are a number of reasons why brokers should make themselves part of the regulatory process.

Whether or not they seek it, ASIC needs brokers’ input. One major changeover in the past 12 months has been ASIC’s use of industry-generated reports, according to MFAA CEO Hayden. “What I’ve tried to bring to the table, with the support of the board, is getting our hands on more data… Things like the Ernst and Young report, which [involved] 700 customers and nine key lenders in our industry, was really well received by ASIC. Michael Saadat and Robert Allen both called me and said, ‘That’s great information – how often will you run it?’”

Similar one-off reports will appear throughout the year, including a study at the major banks’ loan books by accountancy giant Deloitte to counter APRA’s comments about the risks relating to broker-originated loans. In late February, the MFAA released the first in a series of regular reports, the Industry Intelligence Service (IIS), providing regular twice-yearly statistics on brokers, in conjunction with business benchmarking firm Comparator.

In order for their reports to have the most impact, the MFAA has begun consulting with ASIC before commissioning reports. “We’re not an agent of them as such,” notes Hayden. “But we’re trying to ensure that if we’re investing money in this analysis, that we’re meeting the stakeholders’ requirements – not just aggregators and brokers, but ASIC as well… I don’t think they’ve got the time or the resources to do the detailed analysis that we conduct.”

Industry-driven reports have two beneficial effects. Firstly, by dictating the focus of the reports the industry can help influence the terms of the debate at a regulatory level, for example, countering accusations of broker commission distorting the market by showing how much the average broker actually makes (as the MFAA’s abovementioned benchmarking studies reveal). It also helps correct inaccuracies in reporting by external players, such as by consumer advocacy group CHOICE, which talked to just five homebuyers for their report slamming brokers back in May 2015.

Secondly, by showing the willingness to rigorously investigate itself, the industry demonstrates to ASIC it has the right culture. This might sound vague, but ensuring industries have the right culture, rather than simply processes, is the new focus of financial regulators worldwide, and ASIC is no exception.

“Culture is a significant driver of the behaviour of firms,” ASIC chairman Medcraft wrote in ASIC’s Corporate Plan 2015/16 to 2018/19. “Where we find a firm’s culture is lacking, it is a red flag that there may be broader regulatory problems.”

Following from this, ASIC’s 2016 forum is titled ‘Culture Shock’, with culture being the main talking point. The wider financial community is following suit. In January 2016, ANZ bank was roundly criticised for the ‘toxic culture’ of its trading department, leading to major management changes.

Ultimately, the industry doesn’t just have an incentive to report upon itself, it has a responsibility, as FBAA CEO White explains. “ASIC can only police what they see. Some things go under the radar … if no-one’s brought it to attention [but] how can they? They’re reliant on us, the industry, to tell them what’s going on.”

6 What can you do?
By virtue of their size and public profile, the MFAA, FBAA, major franchises and aggregators all have a responsibility to involve themselves in regulation – but what about the individual broker? While acknowledging ASIC’s preference to work through industry associations, the MFAA and FBAA are keen to get their members more closely involved in responding to regulation.

That starts with an engaged broker effectively communicating their opinion on a new piece of regulation, notes White. “It’s one thing to make a momentary stand on a blog site, but the real depth comes from when people send in their submissions to their industry bodies, or write to their parliamentarian, but if people don’t come to us, we can’t express their view.

“You’ve got to be prepared to put some time in to get results. That time may be an email, or it may be getting more involved in the council, or at board level, of an industry body.”

For brokers who want to go further, the FBAA has a number of national and state representative positions, while the MFAA has various panels for different types of brokers and female brokers (i.e. the Women In Mortgage Broking Network). Hayden sends out a CEO column to members of these panels and believes there is definitely more scope for engagement. Although, she said: “Most people are too busy with their own jobs to worry about that and they rely on their industry association to manage it on their behalf.”

It’s this point which is crucial – negotiating regulatory politics is not what a broker is best at, nor what earns them a living. The vast majority who don’t want to get involved rely on ASIC to understand their industry and regulate accordingly, which is why it’s so alarming that 86% of polled brokers don’t believe that is the case.

As an industry, broking is increasingly producing the data and reporting that underresourced industry regulators need, driven by those brokers and industry leaders – often outside the MFAA and FBAA – who do care about the culture of third party channels. In return, these brokers and leaders need a regulator who actively and publicly engages with them and systematically integrates their expertise into its regulation.

ASIC RESPONDS
MPA asked ASIC to respond to the key points in this article. Here’s what they told us:

“ASIC engages in regular and ongoing communication with all sectors of the credit industry. A key way we do this is via industry peak bodies, and with more than 5,000 credit licensees, and more than 25,000 authorised credit representatives, the broker peak bodies play an important role. However, this is not the only way we engage with industry.

“ASIC delivers presentations to national industry events, such as the FBAA National Conference on the Gold Coast and the MFAA National Conference, including from ASIC Deputy Chair Peter Kell . In addition, ASIC staff regularly attend and make presentations at state-based industry functions for both the MFAA and FBAA and use those forums to discuss current industry issues and regulatory priorities.

“We are speaking in all states at the upcoming MFAA Broker 2020 series. We write articles for and engage in interviews with industry publications. And ASIC does have direct discussions and engagement with the larger mortgage broking and aggregator businesses, as we are conscious that some perspectives are only available directly from the firms themselves.”

ASIC advises brokers to look at the regulator guides on their website, including RG 209 on Responsible Lending, RG 205 on General Conduct, and INFO 146 on Responsible Lending. With regard to their regulation of lenders, they point to recent action taken against Bank of Queensland, Wide Bay (now Auswide Bank) and CUA in addition to their interest-only and low doc lending reviews.

They then conclude: “We do, however, believe that brokers play a very significant role in arranging lending, and that it is critical that consumers have trust and confidence in the broking industry, as well as lenders… ASIC’s job is to enforce the laws that are passed by Parliament so that, ultimately, consumers benefit from a safe and well-functioning market. There may be disagreement in some parts of industry about these laws, but that does not mean ASIC doesn’t understand the industry.”

Further Insights Into Mortgage Brokers Via LTI and LVR

My post yesterday “The Truth about Mortgage Brokers” created quite a a number of requests for more information, especially around my comment that broker originated loans tend to have higher loan-to-income and loan-to-value ratios compared with bank originated loans.

So today, I am posting further data on these two dimensions, drawing more data from our household surveys.

First, here is a plot of the average loan to income (LTI) bands separated by bank direct and broker channels of origination, which clearly shows that broker loans have a relative distribution of higher LTI loans.

Running the same analysis on loan to value (LVR) bands, we also see a higher distribution of broker loans above 85%.

We can take the analysis a little further by comparing interest only loans and principal and interest repayment loans. The LVR distribution analysis shows that interest only loans have a higher LVR, and those with a third party channel of origination are the highest.

The LTI picture is not so clear cut, though there is a slightly higher distribution of interest only loans via brokers across the LTI bands.

It is worth thinking about what may be causing this. First, we know that different customer segments have different propensities to use brokers, and possibly those looking to borrow more, at higher LVR and LTI are more naturally inclined to go to a broker. Interest only loans have lower repayments, so for a given level of income, should allow access to a larger loan amount as the repayments only cover interest (though of course the principal will need to be repaid eventually). In addition, brokers will know from their panel lists where the higher LVR and LTI deals can be done. The data in the surveys includes bank and non-bank lenders.

However, irrespective of the channel of origination, lenders still need to complete their underwriting analysis. So it would seem different criteria are being applied depending on the origination channel.

Also, we should say that the data in the survey comes from loans written in the past 12 months, and there have been some changes to underwriting in that time.

Nevertheless, the additional analysis reinforces the view that broker originated loans are on average more risky, supporting APRA’s statement.

Suncorp Intensifies Focus On Mortgage Brokers

From Australian Broker.

Suncorp Bank has launched a new reward program designed to reward loyal brokers of all business sizes and support their relationships with their customers.

The Elevate program offers brokers priority service and preferential turnaround times and is accessible to brokers at all business levels.

Suncorp Bank head of intermediaries, Steve Degetto, says Elevate doesn’t just favour the top loan writers and big broker businesses, making it one of the most equitable reward programs in the market.

“This new, innovative approach to reward and recognition means brokers don’t need to be big writers or have an enormous portfolio to realise the benefits, with all levels of business being rewarded.

“The program focuses equally on quality and volumes of business written, with the aim to provide strengthened customer relationships at every tier which is essential in such a competitive market.”

Degetto says the non-major is committed to investing in its third party channel and will continue to consult its broker network on how to invest further in the channel this year.

“Suncorp Bank is committed to developing sustainable long term relationships with brokers, and
Elevate is just one of the ways we aim to recognise and reward our broker partners.

“The program also demonstrates our focus on continuous improvement of our own business to fulfil broker needs.”

The program currently features three tiers: gold, silver and bronze. Each tier has access to unique special offers and dedicated support teams.

Bank Profits Up 6.9% To $36.8 bn At December 2015

APRA released the quarterly banking performance statistics today, to December 2015. On a consolidated group basis, there were 157 ADIs operating in Australia as at 31 December 2015, compared to 159 at 30 September 2015 and 166 at 31 December 2014.

The net profit after tax for all ADIs was $36.8 billion for the year ending 31 December 2015. This is an increase of $2.4 billion (6.9 per cent) on the year ending 31 December 2014.The cost-to-income ratio for all ADIs was 49.4 per cent for the year ending 31 December 2015, compared to 49.2 per cent for the year ending 31 December 2014. The return on equity for all ADIs was 13.8 per cent for the year ending 31 December 2015, compared to 14.3 per cent for the year ending 31 December 2014.

The total assets for all ADIs was $4.58 trillion at 31 December 2015. This is an increase of $241.3 billion (5.6 per cent) on 31 December 2014.The total gross loans and advances for all ADIs was $2.95 trillion as at 31 December 2015. This is an increase of $206.4 billion (7.5 per cent) on 31 December 2014.

The total capital ratio for all ADIs was 13.9 per cent at 31 December 2015, an increase from 12.5 per cent on 31 December 2014.The common equity tier 1 ratio for all ADIs was 10.2 per cent at 31 December 2015, an increase from 9.1 per cent on 31 December 2014.The risk-weighted assets (RWA) for all ADIs was $1.87 trillion at 31 December 2015, an increase of $120.6 billion (6.9 per cent) on 31 December 2014.

For all ADIs, impaired facilities were $13.6 billion as at 31 December 2015 (chart 7). This is a decrease of $2.3 billion (14.6 per cent) on 31 December 2014. Past due items were $11.7 billion as at 31 December 2015. This is an increase of $317 million (2.8 per cent) on 31 December 2014. Impaired facilities and past due items as a proportion of gross loans and advances was 0.86 per cent at 31 December 2015, a decrease from 1.00 per cent at 31 December 2014. Specific provisions were $6.4 billion at 31 December 2015. This is a decrease of $543 million (7.9 per cent) on 31 December 2014; and specific provisions as a proportion of gross loans and advances was 0.22 per cent at 31 December 2015, a decrease from 0.25 per cent at 31 December 2014.

Turning to the big four major banks, we see that 62% of all of their lending is for housing (either owner occupied or investment), so they are highly concentrated in this sector of the market. Note the rise from mid-fifties in 2004, the peak in 2011, and the new upward trend in recent quarters. Banks have their eggs firmly in the residential property basket.

If we look at their ratios, we see capital rising, under the direction of the regulators, with the ratio of share capital to gross advances rising from 4.9% to 5.3%, but you can still see the highly leveraged state of the banks, and their absolute reliance on profits from home lending. For every $100 lent on housing, shareholders are risking $5. Not a bad proposition (for them).

The Truth About Mortgage Brokers

Recent media coverage about mortgage brokers has been quite negative, with allegations of poor ethical standards and false application data being used by some to bolster loan applications. So in this post and in our latest video blog we look at data from our household surveys to portray the current state of play.

To begin, mortgage brokers have become a significant feature in the mortgage industry landscape. Indeed almost half of new loans are now originated by brokers. Different household segments have different propensities to use brokers. Those seeking to refinance, first time buyers and property investors are most likely to use a mortgage broker.

We expect this growth to continue, thanks to the current appetite for refinancing, and the broker focus now apparent among major banks. For example CBA, in their recent results reported to December 2015 that 45% of their loans came via the broker channel, up from 40% a year earlier. In addition regional players and credit unions are using brokers, alongside foreign banks operating here and the non-bank sector.

Commissions have been tweaked recently, and the industry commission take is now back up to pre-GFC levels, (after adjusting for inflation) because whilst overall commissions were trimmed, volumes have grown.

Remember that brokers get a commission payment at the start of the loan, as well as a trail paid in subsequent years. The bigger the loan, the bigger the commission. Very few aggregators normalise actual commissions paid – although Mortgage Choice does, so they claim their brokers are less influenced by commission structures.

“At Mortgage Choice we pay your broker the same rate, no matter which home loan you choose from our wide choice of lenders. That means you can tap into a Mortgage Choice broker’s expertise at no charge, with peace of mind that they have your best interests at heart”.

Some brokers refund a proportion of the commission from the lender back to the borrower. For example Peach Home Loans says:

“When we arrange your loan we are doing quite a bit of the work that the lender’s staff would otherwise have to do and as a result the lenders pay us a commission on the upfront (loan amount) – this is typically around 0.6% or $600 per $100,000. We try to recover our costs from this commission and then share what is left over with you. Lenders also pay us a small trailing commission typically from 0.15% to 0.25% pa paid on the outstanding loan balance … and this is where we try to make our profit.. after all we are in business to make a profit.”

Consider next who is the broker working for? Whilst some are directly employed by banks or aggregators, others are self employed businesses. They are mostly aligned to aggregators or banks to get access to the lender lists and access to various tools and calculators. As a broker, they want to do a deal and the legislation controlling their conduct says they need to consider the financial status of an applicant to ensure the loan is “not unsuitable.” From ASIC’s responsible lending provisions:

“As a credit licensee, you must decide how you will meet the responsible lending obligations. RG 209 sets out our expectations for compliance. Meeting your responsible lending obligations will require taking three steps:

make reasonable inquiries about the consumer’s financial situation, and their requirements and objectives;

take reasonable steps to verify the consumer’s financial situation; and

make a preliminary assessment (if you are providing credit assistance) or final assessment (if you are the credit provider) about whether the credit contract is ‘not unsuitable’ for the consumer (based on the inquiries and information obtained in the first two steps).

In addition, if the consumer requests it, you must be able to provide them with a written copy of the preliminary assessment or final assessment (as relevant)”.

This is quite weak protection, because suitability may depend on many factors, including financial sophistication of the potential borrowers, income and expenditure assessments and other elements.

The list of lenders a broker may consider will depend on the lender panel they have access to. Most brokers will access a restricted list of potential lenders, and cannot offer a “whole of market” view of options. Quite often they will use on-line tools with a client to come up with the best deals, although often the basis for selection and lender recommendation is vague and is often not fully disclosed.

Some brokers are very proactive when it comes to shepherding the loan application through to funding, others less so. Some brokers will also keep a diary note to instigate a possible refinance conversation down the track.

But, to be clear, whilst many brokers will give good advice, they are in an area of potential conflict thanks to commissions, and limitations thanks to the panel. Brokers should be disclosing potential commissions and also their selection criteria.

The alleged poor conduct where brokers falsify applicant data is in our view a marginal activity of a “few bad apples.” That said, consumers should be using a mortgage broker with their eyes open. Ask yourself if the broker is truly working in your best interests.

APRA recently said that they considered loans written via brokers to be more risky than loans written direct by the banks. APRA chairman Wayne Byres said:

“Third-party originated loans tend to have a materially higher default rate compared to loans originated through proprietary channels.”

So we decided to analyse our current household survey data, looking at relative risks between third party (broker) and first party (bank) loans. We tested risks by asking households about their perceived sensitivity to interest rate rises on mortgage loans. You can read about our approach here.

The results show that households who originated loans via brokers have less headroom and more exposure to potential interest rate rises (should they occur). For example, among owner occupied first time buyers, 28% of those who got a loan direct from a bank said they would have difficulty if rates rose at all from their current levels, whereas for owner occupied borrowers via a broker this rose to 43%, a significantly higher proportion. Further analysis showed that on average loans via brokers was at a higher loan to value and loan to income ratio than those direct via the bank.

There was a similar, though less extreme shift in risk across all owner occupied portfolios, with 40% of borrowers direct from a bank saying they could cope with more than 7% rise, compared with 20% of those via a broker.

Looking at refinanced owner occupied loans we again saw a higher proportion less able to cope with a rise in rates among households who got their loan via a broker channel.

On the investment property side of the ledger, among portfolio investors – those with multiple properties in a portfolio, there was a higher proportion who would be exposed by any rate rise among those going direct to a bank, compared with a broker – but the difference is quite small and combined more than 40% of portfolio investors would have issues if rates rose.

When we looked at all investment loans, we found that households who obtained a loan via a broker were slightly more likely to be under the gun if rates rose, and a significantly higher proportion of borrowers who went direct to a bank were confident of handling a rise of more than 7% from current levels.

Consolidating all the results, we conclude that households who accessed loans via brokers have on average less head room to accommodate rate rises compared with those who went direct. APRA is correct.

ADI Housing OO Loans Grew 0.9% In January

The APRA Monthly banking statistics for January 2016 came out today. Whilst overall ADI lending for housing grew 0.6%, lending for owner occupation grew 0.9%, from $898 bn in December to $906 billion in January. Much of this will be refinancing of existing loans, and some first time buyer activity. Investment lending grew very slightly. However, there was a $1.4 bn adjustment between OO and investment loans, so the splits are not that reliable. So, whilst lending may be slowing a little, there was significant momentum in the market in January. Total lending reached $1,424 bn, up by $8.1 bn.

Looking at the individual banks, the market shares did not change that much, with CBA holding 27.6% of owner occupied loans, whilst Westpac holds 26.13% of investment loans.

The portfolio movements (which are not adjusted for reclassifications between OO and investment loans) highlights growth in OO loans across the board. Movements in investment loans is more patchy.

For what it is worth (and we have consistently used the monthly data, adjusted where we can), we see that market growth in investment loans is now sitting at 2.14%, for the 12 months to January 2016. The big four are all below the APRA 10% speed limit. Others, for various reasons are still speeding.

The splits between OO and investment lending varies by lender, with HSBC, Bank of Queensland and NAB holding the larger proportion of investment loans, expressed as relative market shares.

Tuning to credit cards, total balances fell $747m in the month, to $41 billion. CBA is growing its relative share of cards, with 27.8% of the market. NAB also grew slightly in relative terms, whilst ANZ and WBC fell a little.

Looking at the monthly movements, we see that households are paying down loans they took over the Christmas.

Turning to deposits, total deposits grew 0.8% to $1.92 trillion. CBA grew its share a little, from 24.6% to 24.8% and remains the largest holder of deposits in Australia.

ANZ lost a little share in the month as it attracted less money in than the other three majors. CBA lifted net balances by $7.3 bn, compared with WBC’s $3.9 bn and NAB’s 3.6 bn.

Given the higher margins on overseas funding at the moment, with speads elevated thanks to a range of global uncertainties, local deposits are more valuable, and we expect to see some strong competition for balances in the months ahead.

Housing Lending Still Grows – Now $1.53 Trillion

The RBA credit aggregates released today to end January 2016, shows that there is still momentum in home lending – centered of course around refinancing.

Total home lending was up 0.53% in the month, and $8bn was for owner occupied lending. Investment lending went sideways, but note also though that there were further adjustments between OO and investment loans.

“Following the introduction of an interest rate differential between housing loans to investors and owner-occupiers in mid-2015, a number of borrowers have changed the purpose of their existing loan; the net value of switching of loan purpose from investor to owner-occupier is estimated to have been $35.3 billion over the period of July 2015 to January 2016 of which $1.4 billion occurred in January. These changes are reflected in the level of owner-occupier and investor credit outstanding. However, growth rates for these series have been adjusted to remove the effect of loan purpose changes”.

As a result, the proportion of loans for housing investment purposes has fallen a little further, from 35.98% to 35.8%, but this is still a big number.

Turning to the overall aggregates, home lending was up 0.53%, business lending rose 0.63% and personal credit fell 0.79% as households paid off their Christmas binge.

Business investment remains at a relative low level, with one third of all lending going to business, once again showing how debt to households is being relied on to grow the economy.

We know from our own analysis that significant numbers of households would find any rise in interest rates a big problem, and loading up households further with ever more debt is a flawed strategy. When are we going to get serious about getting real long term growth via business investment?

We will discuss the parallel APRA data, also released today, later.