Economics and Banking – Page 420 – Digital Finance Analytics (DFA) Blog

Westpac FY15 Result Shows Growth Pressure Building

Westpac Group today announced statutory net profit for the 12 months to 30 September 2015 of $8,012 million, up 6% over the prior year. The Group benefited from some one-off items, stable NIM, but lower non-interest income whilst credit quality improved. The the real challenge is finding future growth, in an environment where mortgage lending growth is likely to slow.

There were a number of significant infrequent items that in aggregate increased net profit. These included the partial sale of the Group’s shareholding in BT Investment Management Limited (BTIM) which generated an after tax gain of $665 million, several tax recoveries of $121 million, partially offset by higher technology expenses of $354 million (post-tax) following changes to accounting for technology investment spending and derivative valuation methodologies changes which resulted in an $85 million (post-tax) charge.

Net interest income of $14,239 million was up 6%, with net interest margin unchanged. It increased $725 million or 5% compared to Full Year 2014, with total loan growth of 7% and customer deposit growth of 4%. Net interest margin was stable at 2.09%, with lower Treasury income, reduced asset spreads and higher liquidity costs offset by reduced cost of funds from both deposit products and wholesale funding.

There was an 8 basis points decrease from asset spreads. The primary driver was increased competition in mortgages, with business, institutional and unsecured lending spreads also lower, offset by a 10 basis points benefit from customer deposit impacts, mostly from improved spreads on term deposits and savings accounts. Treasury and Markets contribution to the Group net interest margin decreased 2 basis points reflecting lower returns from the management of the liquids portfolio and balance sheet management in Treasury.

Non-interest income increased $980 million or 15% compared to Full Year 2014 primarily due to the gain associated with the sale of BTIM shares ($1,036 million). Excluding this item, non-interest income reduced $56 million or 1%, from lower trading income and lower insurance income reflecting higher insurance claims predominantly associated with severe weather events. Fees and commissions decreased $14 million, or 1%. Growth in business lending line fees and institutional fees were offset by seasonally lower Australian credit card point redemption income and promotional credit card point awards related to the launch of the Westpac New Zealand Airpoints loyalty program.

Operating expenses increased $926 million or 11% compared to Full Year 2014. This included $505 million related to changes to accounting for technology investment spending. Excluding this item, operating expenses increased $421 million or 5% primarily due to higher investment related costs, including increased software amortisation and foreign currency translation impacts.

Cash earnings of $7,820 million, up 3%, and cash return on equity (ROE) of 15.8%, down 57 basis points. Australian retail and business banking has been the key driver of performance, with Westpac RBB increasing cash earnings by 8% and St. George up by 7%. The New Zealand division also reported a 6% increase in cash earnings (in NZ$).

The Board increased the final dividend by 1 cps to 94 cps (compared to the interim 2015 dividend). This takes the total dividends for the year to 187cps, up 3% and represents a payout ratio of 75% of cash earnings.

Asset quality improved over the year with stressed exposures to total committed exposures falling 25bps reducing from 1.24% to 0.99%, while impairment charges rose 16%, at 12 basis points or $103 million compared to Full Year 2014. Direct write-offs were also higher. Total impairment provisions were $3,332 million with individually assessed provisions of $669 million and collectively assessed provisions of $2,663 million.

In the consumer sector, unsecured consumer delinquencies trended higher over Full Year 2015 as unemployment increased. Group consumer unsecured 90+ day delinquencies increased 8 basis points since 30 September 2014, but have fallen 10 basis points since 31 March 2015 (typically delinquencies fall in the second half of the year). In New Zealand delinquencies reduced further in Second Half 2015 to be 20 basis points lower than at 30 September 2014.

Australian 90+ day mortgage delinquencies were at 0.45% at 30 September 2015, 2 basis points lower than 30 September 2014 and 31 March 2015, as the portfolio continues to be supported by a strong property market and falling interest rates. The investment property segment has a 90+ day delinquency rate of 0.31% which is lower than the portfolio average. Despite low delinquencies, the modest pace of economic growth and rising
unemployment has led to some increase in delinquencies in those states and regions closest to mining and where there has been a structural shift in manufacturing. This is being offset by robust conditions in NSW where economic activity has been stronger.

Australian properties in possession decreased by 8 over Second Half 2015 to 255. Realised mortgage losses were $70 million for Full Year 2015, equivalent to 2 basis points of Australian housing loan balances.

New Zealand mortgage 90+ day delinquencies improved 7 basis points since 30 September 2014 to 0.14% at 30 September 2015. The low level of delinquencies reflects the improving economy and the strong Auckland housing market.

Westpac first raised around $2.0 billion in capital at its First Half 2015 results by partially underwriting the DRP. Capital was further increased by $0.5 billion following the partial sale of shares in BTIM. These two actions added $2.5 billion to the Group’s capital base and contributed to lifting Westpac’s CET1 capital ratio at 30 September 2015 to 9.5%, above the Group’s preferred range of 8.75% – 9.25%.

Allowing for the approximately $3.5 billion of ordinary equity expected to be raised through its recent renounceable entitlement offer, Westpac will be well within the top quartile of banks globally with a CET1 ratio of over 14% on an internationally comparable measure.

Looking at the segmentals, Westpac RBB’s focus on service and having Australia’s leading mobile/online capability for customers helped deliver both core and cash earnings growth of 8%. Record customer growth of over 191,000 helped drive loan and deposit growth up 6% and 7% respectively.

St. George Banking Group’s brands, St. George, BankSA, Bank of Melbourne and RAMS contributed to the 7% increase in cash earnings, with core earnings rising 8%. The Bank of Melbourne opened its 100th branch during the year and was voted best regional bank in Australia for the second time2. Revenue increased 7% with net interest income up 7% due to 8% growth in lending and a 3% rise in deposits.

BT Financial Group continues to be the leading wealth provider in Australia, ranking number 1 on all Platforms, with Funds under Administration (FUA) share of 19.9%. BTFG delivered flat cash earnings over the year with the result impacted by the partial sale of BTIM, lower performance fees, and higher insurance claims.

Westpac Institutional Bank is the number one institutional banking franchise in Australia. Financial conditions have been challenging, with margins 15 basis points lower in line with global capital market conditions. This contributed to a 12% reduction in cash earnings to $1,286 million. The decline was also due to methodology changes to derivative valuations (which reduced revenue by $122 million) and a lower impairment benefit. The business continued to achieve good underlying growth, with lending up 12% and customer revenue up 2%.

Westpac New Zealand delivered another solid result with a 7% increase in core earnings and a 6% increase in cash earnings (9% and 8% respectively in A$). The result was supported by revenue growth of 7% and good balance sheet growth, with a 7% rise in lending and a 5% increase in deposits.

Following changes to the Group’s technology and digital strategy, rapid changes in technology and evolving regulatory requirements, a number of accounting changes have been introduced, including moving to an accelerated amortisation methodology for most existing assets with a useful life of greater than three years, writing off the capitalised cost of regulatory program assets where the regulatory requirements have changed, and directly expensing more project costs. The expense recognised this year to reduce the carrying value of impacted assets has been treated as a cash earnings adjustment given its size and that it does not reflect ongoing operations.

Housing Lending Still Higher At $1.5 Trillion

The RBA credit aggregates for September shows that overall credit (excluding to government) rose by 0.75% to $2,459 bn. Within that, lending for housing rose 0.68% in the month to $1,495 bn, yet another record, representing an annual rise of 7.5%. Lending to business rose 1.18% t0 $815 bn, representing just 33.2% of all lending – still at the lower end of the range showing business is still not that eager to borrow. Annual growth was 6.3%. Personal credit fell by 0.83% to $148 bn, an annual rate of 0.5%.

Looking in more detail at the housing data, owner occupied loans rose by 1.33% in the month to $932 bn, whilst investment loans fell by 0.38% to $563 bn. As a percentage of all loans, investment loans fell to 37.63%, from 38.55% in August.

We see the results of the clamp down on investment loans coming through – finally – but they still make up a massive share of all loans (in the UK they are worried by an 18% share of investment loans!). We also see a massive drive to acquire and refinance owner occupied loans, as the banks now are backing this horse as the next growth lever. The share of investment loans is still higher than the rates reported by the banks before their reclassification, and it is worth remembering the regulators were worried about shares circa 35% when they imposed their speed limits. We are still higher than this.

We will update APRA’s monthly banking stats (ADI’s).

More Lenders Raise Mortgage Rates

After the big four have announced their uplifts, Bankwest, part of CBA, has said it will increases variable home loan interest rates by 18 basis points for owner occupiers to 5.65% p.a. (5.70% p.a. comparison rate) and to 5.97% p.a. (6.02% p.a. comparison rate) for investors, effective 17 November 2015.

However, ME Bank has said they will increases variable home loan interest rates by 0.20% to 5.08% p.a. (comparison rate 5.09% p.a.) for its Flexible Home Loan effective 20 November 2015.

We expect price hikes to continue to ripple through the market.

ANZ 2015 Full Year Results Mixed Bag

ANZ has announced a statutory profit after tax of $7.5 billion up 3% and a cash profit of $7.2 billion up 1%. The second half profit was down on expectations. On a cash profit basis, income was $14.6 bn, up 4.8% on FY14, and expenses were $9,4bn, up 6.8% on FY14. In the second half of the year, revenue grew only 1.5% whilst expenses lifted 3.8%, and 2H provisions were also higher. Customer deposits grew 10% with net loans and advances up 9%. Return on Equity (RoE) was 14.0%. Overall net interest income grew 5.9%, (a mix of rising volumes +9.3%, and falling NIM -4.2%). Group net interest margin fell 2H14 of 212 basis points to 204 basis points, thanks to loan discounting and FX impacts, despite higher returns from deposits and improved funding mix. However, NIM was more stable in the second half.

Gross impaired assets decreased 6% over the course of the year. While the total provision charge increased to $1.2 billion or 22 bps, loss rates remain well under the long term average having risen from their historically low levels. However, second half provisions were higher. The individual provision charge declined $34 million and while the collective provision charge increased it remained low in absolute terms at $95 million compared to a net release the prior year. During FY15 the movement in the risk profile component of the charge reflected moderating economic activity with a lower number of credit downgrades being recorded whereas the prior year saw a higher level of upgrades.

Final Dividend 95 cents per share (cps) fully franked. Total Dividend for the year 181 cps up 2%. Earnings per share was flat at 260.3 cents, reflecting increased shares on issue following the capital raising in the second half.

At the end of FY15 the Group’s APRA CET1 ratio was 9.6%, up 87 basis points (bps) from March 2015. On an Internationally Comparable basis the CET1 ratio was 13.2%, placing ANZ within the top quartile of international peer banks. The completion of the sale of the Esanda Dealer Finance portfolio will deliver a further 20 bps of CET1.

ANZ raised a total of $4.4 billion of new equity throughout the past year, including $3.2 billion in response to APRA’s increased capital requirement for Australian residential mortgages which applies from July 2016. ANZ expects the APRA CET1 ratio to remain around 9% post implementing the mortgage RWA change next year. The Group continues to retain significant capital management flexibility to progressively adjust to further changes in regulatory capital requirements if required.

Segmentals

The Australia Division continued its trend of cash profit improvement with profit and PBP growth of 7%. The result was driven by growth in customer numbers (to 5.3 million) along with increased product sales and market share. Cash profit rose 7.2% and impaired assets fell from 0.43% in 2014 to 0.38% in 2015. However NIM fell 2 basis points. Investment focused on digital platform enhancement, increasing distribution sales capacity and capability, growing presence in particular in New South Wales (NSW), a high growth market where ANZ has historically been underweight, and building out specialist propositions in key sectors of Corporate and Commercial Banking (C&CB). Lending grew 9% with deposits up 5%. Sales performance has been strong, particularly in Home Lending, Credit Cards and Small Business Banking. ANZ has grown home lending market share consistently now for six years driven by capability and capacity improvements in branches, online, in ANZ’s mobile lender team and improved broker servicing. Home loans went from $209bn in 2014 to $231 in 2015.

Excluding non=performing loans, home loan delinquencies 90day+ sit at 0.63%, with higher rates in QLD and WA.

ANZ’s C&CB business grew lending by 6% despite patchy sentiment in the Commercial sector, with Small Business Banking performing particularly strongly, up 12%. Increased specialist capability saw lending to the Health sector up 16% in the second half. ANZ has seen strong commercial outcomes from its investment in digital capability with increased numbers of customers engaging with the business via digital channels. In FY15 sales via digital channels grew 30%, new to bank goMoney customers grew 89% and product purchases on mobile devices increased 121%.

International and Institutional Banking cash profit declined 1.6% from $2.7 bn in 2014 to $2.66 bn in 2015. NIM fell from 1.5% in 2014 to 1.34% in 2015. While it has been a challenging year for the business they continued to develop the customer franchises in Asia, New Zealand and Australia with particularly good outcomes in Asia. Customer sales in higher returning products demonstrated good growth with cash deposits up 11%, commodities sales up 44% and rates sales up 32%. Global Markets customer income continued a pattern of steady year on year (YOY) increases, up 7%. Despite a strong performance over the nine months to the end of the third quarter, changed financial market conditions in the last six weeks of the fourth quarter caused significant dislocation and a widening of credit spreads, which particularly impacted trading income as well as suppressing sales. This meant total Global Markets income finished the year down 2%. A multi-year investment in the high returning Transaction Banking Cash Management capability has seen Cash Management deposits up 48% over the past three years. Similarly investment in Global Markets product, technology and customer sales capability has driven good outcomes with Foreign Exchange income up 24% over the past three years to represent 42% of the book. IIB has been refining key business areas. Reduced exposure to some lower returning areas of the Trade business, while lowering Trade income slightly, has improved returns. In the Global Loans business, increased focus on RWA efficiency over the course of the second half saw profit decline but margins and returns on RWA begin to stabilise.

New Zealand Division cash profit grew 3% with PBP up 7%. NIM fell 1 basis point in the year. Ongoing business momentum is reflected in balance sheet growth which along with capital and cost discipline (costs +2%) has grown returns. While underlying credit quality remains robust and gross impaired assets continued to decline from 0.61% in 2014 to 0.35% in 2015, a lower level of provision write-backs YOY saw the provision charge normalising although remaining modest at $59 million. Lending grew 8% with deposits up 14%. Brand consideration remains the best of the top four banks, strengthening further. In turn, this is translating into lending demand with ANZ now the largest mortgage lender across all major cities. ANZ has grown market share in key categories during the year including mortgages, credit cards, household deposits, life insurance, KiwiSaver and business lending. The Commercial business grew strongly across all regions with lending up 8%. ANZ increased investment in digital and in sales capability. Sales revenue generated from digital channels increased 32%. A focus on delivering a great digital experience for customers has seen ANZ’s mobile banking app ‘goMoney’ consistently scoring above 98% in customer satisfaction and, with over half a million customers, it is the most downloaded banking app in New Zealand.

The Global Wealth Division increased profit by 11%. Positive performance was experienced across all business units. Insurance delivered growth in in-force premiums along with stable claims and lapse experience, which contributed to an 18% increase in both embedded value and in the value of new business. Private Wealth continued to deliver growth through customer focused investment solutions – with FUM increasing 22% and customer deposits 33% YOY. Global Wealth continues to reshape the customer experience through new digital solutions. Recent innovations include ‘Advice on Grow™’, new tools improving the advice experience, while ‘Insurance on Grow™’ will soon be released to the market. ANZ Smart Choice Super leads the industry in value for money and innovation. FUM now exceeds $4.3 billion and for the second year ANZ Smart Choice received the prestigious Super Ratings Fastest Mover award. ANZ KiwiSaver continues to build its market position with FUM growing 32% to A$7 billion. Global Wealth’s focus on improving customer experience is reflected in the increased sale of Wealth solutions through ANZ channels with growth of 8% YOY.

Overall contribution by region shows how reliant ANZ is on Australian net income.

Finally there was a clear emphasis on their strategy to drive digital channels, with considerable volume growth and focus, as well as efficiency. FTE declined 3%.

NZ Cash Rate Unchanged

The NZ Reserve Bank today left the Official Cash Rate (OCR) unchanged at 2.75 percent.

Global economic growth is below average and global inflation is low despite highly stimulatory monetary policy. Financial market volatility has eased in recent weeks, but concerns remain about the prospects for slower growth in China and East Asia especially. Financial markets are also uncertain about the timing and effects of monetary policy tightening in the United States and possible easings elsewhere.

The sharp fall in dairy prices since early 2014 continues to weigh on domestic farm incomes. However, growth in the services sector and construction remains robust, driven by net immigration, tourism, and low interest rates. Global dairy prices have risen in recent weeks, contributing to improved household and business sentiment. However, it is too early to say whether these recent improvements will be sustained.

House price inflation in Auckland remains strong, posing a financial stability risk. While residential building is accelerating, it will take some time to correct the supply shortfall. The Government has introduced new tax requirements and the Reserve Bank’s new LVR restrictions on investor lending come into effect on 1 November.

CPI inflation remains below the 1 to 3 percent target range, largely reflecting a combination of earlier strength in the New Zealand dollar and the 60 percent fall in world oil prices since mid-2014.

Annual CPI inflation is expected to return well within the target range by early 2016, as the effects of earlier petrol price falls drop out of the CPI calculation and in response to the fall in the exchange rate since April. However, the exchange rate has been moving higher since September, which could, if sustained, dampen tradables sector activity and medium-term inflation. This would require a lower interest rate path than would otherwise be the case.

Continued economic expansion is expected to result in some pick-up in non-tradables inflation, despite the moderating effects of strong labour supply growth.

To ensure that future average CPI inflation settles near the middle of the target range, some further reduction in the OCR seems likely. This will continue to depend on the emerging flow of economic data. It is appropriate at present to watch and wait.

CMA Proposes Better Deal for UK Bank Customers

Banks must address long-term problems and make it easier for customers to take charge of their accounts, the UK’s Competition and Markets Authority (CMA) stated this week.

Publishing its provisional findings as part of an in-depth investigation into the £16 billion current account and business banking sectors, the CMA has found that banks do not have to work hard enough to compete for customers.

The investigation has identified a number of competition problems in both the personal current account (PCA) and small and medium-sized enterprise (SME) banking markets. Low levels of customer switching mean that banks are not put under enough competitive pressure, and new products and new banks do not attract customers quickly enough. There is a particular problem in SME banking where many SMEs open their business current accounts (BCA) at the same bank where they have their PCA, then stick with that bank for their business loans.

57% of consumers have been with their PCA provider for more than 10 years, and 37% for more than 20 years. Customers with current accounts are faced with complex overdraft charges and limited information on product and service quality, which, along with limited effective comparison tools, makes it very difficult for customers to know what they are paying and to compare banks and products.

Bank customers fear that switching their current account to a new bank will be complicated, time-consuming and risky. The Current Account Switch Service (CASS) was set up to make the process easier and is functioning reasonably well, but awareness and confidence remain low. Only 3% of customers switched their PCA in 2014 and just 16% looked at alternative accounts.

The CMA found that overdraft users are even less likely to switch PCAs than other users. Heavy overdraft users, in particular, could save up to £260 a year if they switched. On average, current account users could save £70 a year by switching.

The investigation also discovered that accounts which are more expensive and below average quality are not losing customers to cheaper and better alternatives at the rate that would be expected in a well-functioning market.

The lack of competitive pressure in SME banking is highlighted by the fact that more than 50% of start-ups looking for a SME account choose the bank with which they have a personal current account, over 90% stay with their BCA when the initial free banking period comes to an end, and around 90% then go to their BCA provider when they are looking for business loans.

As in the case of PCAs, the opening and/or switching process is seen to be time-consuming, and at risk of things going wrong. SME charging structures are complex and difficult to compare, there are no service quality measures to aid comparison and there are limited effective price comparison tools for SMEs.

The CMA investigation did find a number of positive developments: new entrants into both PCA and SME banking, innovative products becoming available, the digital innovations associated with online and mobile banking, and new tools like Midata and CASS, which have the potential to increase searching and switching.

Despite these encouraging developments, because too few customers are switching, banks do not have strong enough incentives to work hard to compete for customers through better products or cheaper prices, and smaller or better banks find it hard to gain a foothold.

The CMA has published an initial list of remedies, which sets out possible measures aimed at addressing these issues by increasing competition and securing a better deal for customers. It will develop these proposals over the coming months. It is important that any new remedies are really effective, so the CMA will be testing its proposals carefully.

Potential remedies include:

Requiring banks to prompt customers to review the service they receive from their bank through receiving individual messages at certain ‘trigger points’. These trigger points could include a loss of service, closure of their local branch, unarranged overdraft charges or a change in the terms and conditions of their account. In the case of SMEs a key trigger point could come at the end of free banking periods.
Making it easier for consumers and businesses to compare bank products by upgrading Midata, an industry online tool, launched with the support of government, that gives consumers access to their banking history at the touch of a button. Midata allows consumers to easily access their banking data from their bank and input it directly into a price comparison website which can then analyse their transactions, and alert them to available bank accounts which best suit their needs. An improved Midata could have a radical impact on consumer choice in retail banking markets.
Requiring the creation of a new price comparison website for SMEs – currently nothing effective exists to fulfil this role.
Requiring banks to help raise public awareness of, and confidence in, switching bank accounts, through increasing their funding for a widespread and sustained advertising campaign promoting CASS and improving the service it offers.
Requiring better sharing of information with credit reference agencies, banks and financial advisers – making it easier for SMEs to shop around for loans and cutting out the need for multiple application form filling.

The CMA provisionally decided not to recommend remedies aimed at ending free if-in-credit (FIIC) accounts as it saw no convincing evidence that the prevalence of the FIIC model distorted competition, noted that some banks have already devised accounts which compete with FIIC through the rewards they offer, and also noted that FIIC accounts give a reasonable deal to many customers.

Structural remedies, such as forcing the break-up of banks, were also provisionally rejected as it was decided that they were not likely to be effective in addressing the competition concerns found. The problems in the market are unlikely to be resolved by creating more, smaller banks; it is the underlying issue of lack of switching which has to be addressed.

Alasdair Smith, Chairman of the retail banking investigation, said:

Banking is a sector of huge importance that affects every household and business in the country.

We think customers need to be put in charge of their banking.

There have been long-standing concerns about the retail banking market, where many customers could save money and get better services by switching accounts. This investigation was an opportunity to take a detailed and independent look at the sector.

Despite some encouraging developments, particularly in the shape of challengers that have entered the market in recent years, for too long banks have been able to sit back and take their existing customers for granted.

We don’t think that customers will truly benefit from a more competitive marketplace until they can compare accounts more easily and feel confident that they can switch without risk, and that is why our provisional remedies are aimed at giving customers control.

We are considering a series of measures that will have a far-reaching impact on how banks operate and will empower account-holders to search for and switch to the account that suits them.

The investigation is looking separately at Northern Ireland, but has made the same findings for Northern Ireland as it has for Great Britain.

The full provisional findings report along with over 30 appendices will be published later next week. The CMA will now consult and hold detailed discussions with all interested parties on the findings and possible remedies ahead of publishing its final report in May 2016. The CMA is also reviewing measures put in place by its predecessor body, the Competition Commission, in 2002 and 2008, to remedy concerns in the SME banking and Northern Ireland personal current account sectors.

UK Bank Ring-Fence Unlikely to Cause Material Rating Gaps

The Prudential Regulation Authority’s (PRA) ring-fencing policy proposals limit, but do not prevent, ring-fenced banks (RFB) to lend to non-ring-fenced sister banks (NRFB) and impose no added restrictions on dividend payments. This will allow some fungibility of funding and capital within group companies. Standalone Viability Ratings (VR) assigned to RFBs and NRFBs will therefore remain interdependent, reducing rating gaps between them, says Fitch Ratings.

The PRA has sought to eliminate the use of intra-group concessions across the ring-fence and now expects banks to apply third-party credit discipline to such exposures. This will improve analytical transparency which we view positively.

We envisage that UK banks subject to ring-fencing will adopt one of two models depending on the relative size of their non-ring-fenced activities, prior to the January 2019 deadline. Banks have to submit their plans by January 2016, according to the PRA’s consultation paper published on 15 October.

VRs assigned to RFBs are likely to be constrained by limited geographical and product diversification and, provided these remain largely focused on UK retail and SME lending, we do not expect to see much ratings differentiation between them. We already indicated in our September 2014 comment, accessed by clicking on the link below, that VRs for RFBs narrowly focused on domestic retail and SME business are likely to be capped in the ‘a’ range.

The UK ring-fencing rules apply to banks with more than GBP25bn of core deposits from SMEs and individuals. Most banks affected by ring-fencing have very limited (if any) wholesale and investment banking activities and therefore these groups will adopt models dominated by RFBs. This will be the case for Lloyds and RBS.

In these instances, the ability of the larger RFB to lend up to 25% of its regulatory capital to the smaller NRFB should be a significant positive ratings factor for the NRFB’s VR. This is because the NRFB will be able to benefit from ordinary support flowing from the larger RFB.

For groups whose non-retail, corporate and investment banking business is significant, as is the case for Barclays and HSBC, the importance of the NRFB within the restructured group is likely to be significant, or even dominant. The RFB’s ability to fund its NRFB sister will likely be less material simply because of the banks’ relative sizes. Under this model, we believe that management will seek to structure RFB and NRFB subsidiaries to ensure these remain robust on a standalone basis, maintaining strong and balanced funding and liquidity and meeting adequate capitalisation levels.

A clearer picture about the likely ratings outcome for RFBs and NRFBs will emerge once further details of group restructuring are available. Much will depend on exactly what activities are kept in or out of the fence. Resolution strategies (‘single point of entry’ or ‘multiple point of entry’), depending in particular on the volumes, form and source of ‘loss absorbing’ debt, will also be relevant for ratings and will add a separate layer of uncertainty to ratings within a UK banking group until more clarity emerges.

But, as far as regulations are concerned, our opinion is that the PRA proposals will not create a particularly ‘high’ fence, reducing intra-group rating differentials. By preserving the ability to share capital and funding across RFBs and NRFBs, the PRA is demonstrating that it is keen for RFBs to continue to enjoy the benefits of remaining part of broader banking groups.

Government’s FSI Support Will Strengthen Aussie Banks

The Australian government’s acceptance of almost all of the recommendations of the Financial System Inquiry (FSI) will lead to a strengthening of the banking system with improved resiliency to shocks, says Fitch Ratings. The decision to back the recommendations reinforces Fitch’s view that bank capital requirements will rise in line with regulatory changes over the medium term.

The Australian government released its response to the FSI on 20 October, agreeing with all of the inquiry’s recommendations pertaining to banking system resilience and regulation. The government stated that the Australian Prudential Regulation Authority (APRA) would implement key recommendations related to banking system stability.

This reinforces earlier policy announcements and bank capital issuance trends since the original announcement of the FSI recommendations in December 2014. Since then, APRA announced an increase in minimum mortgage risk-weights for internal ratings-based (IRB) banks in July, while each of the “Big 4” Australian banks have undertaken multi-billion dollar capital raises totaling an aggregate AUD17bn this year.

The government has also committed to APRA ensuring banks have an “appropriate” total loss-absorbing capacity (TLAC) in place at some point beyond 2016. A TLAC framework has been proposed by the Financial Stability Board for global systemically important banks, but this does not apply directly to Australia. Australia’s commitment to implementing a TLAC requirement would be credit positive for bank Viability Ratings, and is likely to reinforce the trends towards higher capital levels.

Implementation of the FSI recommendations will include reducing implicit government guarantees and implementing a bank resolution regime in line with evolving international practice. Fitch maintains that developing a stronger resolution framework would be likely to result in the removal of the sovereign Support Rating Floor for the banking system. Support Ratings for the largest Australian banks are at ‘1’, indicating a high level of government support. But, as a resolution regime is implemented, Fitch would expect Support Ratings and Support Rating Floors to migrate to ‘5’ and ‘No Floor’, respectively.

It is important to note that this should not have an effect on Australian banks’ Issuer Default Ratings (IDRs), as none of the banks’ ratings are at their Support Rating Floors.

How Sheffield City Council is supporting payday loan alternatives

From MoneySavingExpert. Sheffield City Council has recently supported the setup of Sheffield Money, a not-for-profit organisation tackling unfair access to finance. Sally Preece, a support and advice worker for Sheffield Money, explains what’s happening and why.

An emerging trend in the UK today is that an increasing number of people need help with their finances, particularly when faced with unexpected financial challenges.

People are increasingly ignored by mainstream lenders when they need help the most, and as a result are turning to high cost alternatives.

Last year, the debt charity StepChange was contacted by nearly 600,000 people with problem debt. Debt owed on catalogues and home credit is rising, with the second highest level of demand for debt advice coming from Yorkshire.

Sheffield City Council has also identified a need for affordable finance in the city – it found that the following is happening in Sheffield each year:

Around 34,000 people take, on average, two payday loans of £250 for 30 days.
Around 20,000 people borrow, on average, £650 on their doorsteps.
Around 3,000 people borrow, on average, £600 for two years through a weekly payment store.

An innovative alternative to high cost credit

To combat this growing issue, in August this year Sheffield City Council supported the setup of Sheffield Money, a not-for-profit organisation which specifically tackles unfair access to finance.

Sheffield Money offers residents of the city access to competitive loans, Financial Services Compensation Scheme-protected savings accounts, current accounts, lower cost white goods and appliances, as well as money and debt advice.

The organisation doesn’t sell products directly, but instead operates as a broker for existing suppliers with shared objectives such as credit unions, community development finance institutions, and Citizens Advice. These have a similar fair, ethical and flexible approach to finance as well as crucially offering the best rates and incentives for residents of the Sheffield City Region.

There is also a free, specialist money adviser in branch once a week to help people with all things finance, such as budgeting, savings, benefit eligibility, and improving credit scores to ease access to credit in future.

By offering alternatives, Sheffield Money hopes to improve and reduce debt crisis cycles, as well as help customers to start regularly saving in order to create a financial buffer for the future. It also won’t ever recommend a loan to someone who can’t afford it.

Since August, the service has received a great deal of positive attention from local organisations hailing this much-needed alternative to high cost lenders. It has had over 4,000 hits on its website, and almost 600 applications for loans.

…And ANZ Makes A Rate Hike Quorum

The last of the big four, ANZ has confirmed it will lift variable rates on owner occupied and investment home loans, effective 20 November.

The standard variable rate for owner-occupier home loans will increase by 0.18% to 5.56% whilst the standard variable rate for residential investment property loans will also increase by 0.18% to 5.83%.

Its the same story, ANZ also refers to rising regulatory capital requirements causing the rise.

“This decision reflects the significant additional cost of capital banks are now required to hold against home lending,” ANZ CEO Australia Mark Whelan said.

ANZ says the 18 basis point increase will add $36 per month to the average home loan of $242,000 and currently 42% of ANZ home loan customers are already at least one month ahead on their repayments.

Now, the fun begins – will the regionals tag along?