BOQ Joins The Mortgage Hike Jig, Again.

Showing again that mortgage repricing is more about margin protection than meeting capital requirements, non-IRB bank, Bank of Queensland has announced it will increase interest rates on its variable home loan products by 0.18 per cent per annum.

The increase will see the Bank’s Clear Path variable rate home loan lift to 4.60% per annum, the standard variable rate home loan for owner-occupiers move to 5.74% per annum, and the standard variable rate home loan for investors increase to 6.03% per annum.

Matt Baxby, Group Executive Retail Banking, said the decision was driven by the need to balance growth, risk and margins over the longer term.

“Standardised banks like BOQ still carry much higher funding costs and capital requirements than the major banks and we need to get the balance right between sustainable growth over the longer term, risk and margins,” he said.

“These are always difficult decisions but on balance we believe it is the right one in the current environment.

“The more resilient and financially strong that standardised banks are, the more we can compete on a range of fronts including further investment in our customer-facing systems and processes.”

The new rates will be effective from 20 November 2015.

They had a round of uplifts earlier in the year, and combined their margins will be fattened significantly.

Will Son of G-SIB Hit Local Banks?

Wayne Byres Chairman APRA has a great deal on his agenda, today in a speech he highlighted six issues that are likely to keep APRA particularly busy in 2016. The first three of these are especially relevant for banks and other ADIs; the other three may be of interest more broadly. Of note is the fact that whilst no Australian banks are G-SIBs, regulatory models based on G-SIBs will be applied. More capital will be needed.

Unquestionably strong

As I’m sure everyone in this room knows, the first recommendation of the FSI was that APRA should:

“set capital standards such that Australian authorised deposit-taking institution capital ratios are unquestionably strong.”

The Government’s response to the FSI agreed with this objective, and tasked APRA to get this done by the end of 2016. However, anyone who follows international banking regulation will also know that there are many issues still under discussion. Even if we could quickly agree domestically what an unquestionably strong bank looked like, we are not entirely masters of our own destiny: we must also be mindful of international developments, given the important foundational role played by the Basel Committee’s standards. Settling on a framework that makes sense for Australia, while at the same time continuing to meet international standards, will require a lot of time and attention during the year ahead. The task is quite manageable, but will require industry participants to be ready to constructively participate in the debate.

We are, of course, fortunate not to be starting from a position of weakness. We continue to have a soundly-capitalised banking system overall in Australia and, with the aid of recent capital raisings, the relative positioning of the major bank capital ratios against their international peers is much closer to that recommended by the FSI. That means that, given where we are today, APRA and the banking industry have time to manage the transition to any new requirements in an orderly fashion.

One important point I have made elsewhere is that an unquestionably strong ADI requires more than just plenty of capital. We need to think about ‘unquestionably strong’ in the context of the other risks to which an ADI is exposed, and the environment in which it operates.

Funding profile of the banking system

That is a natural point to turn to the funding profile of the banking system.
It is well known that the Australian banking system has a relatively high dependence on offshore funding. Taking steps to ensure that, even during times of stress, foreign creditors will be more likely to maintain confidence in the viability and creditworthiness of Australian ADIs was an important part of the rationale for the FSI’s recommendation for ADI capital to be made unquestionably strong.

It will not surprise you to hear me say that, in such circumstances, strengthening capital ratios certainly makes sense. But it should not be the only solution we employ. The introduction of global liquidity and funding standards in Basel III – the 30-day Liquidity Coverage Ratio (LCR), and the longer-term Net Stable Funding Ratio (NSFR) – are significant and complementary additions to the regulatory framework, and hence the resilience of the banking system, in this country.

The LCR was introduced for a group of larger banks at the beginning of this year and, in simple terms, substantially lifted the quantity and quality of liquidity held by banks, providing them with much greater capacity to manage periods of liquidity stress.

The NSFR, which provides a longer-term funding mismatch measure to complement the short-term LCR, is not due to come into effect until 2018. To assist with its orderly introduction, however, APRA will begin consultation in the near future on the Australian implementation of the NSFR, and the consultation and review process will no doubt occupy much of 2016. The new standard is designed to guard against excessive funding of long-term illiquid assets with short-term, unstable funding – a combination that proved dangerous when interbank funding and capital markets seized up in 2008. As things stand, some further adjustment to Australian bank maturity profiles is likely to be needed over time to truly strengthen their resilience, continuing the trend of recent years for the banking system to seek more stable sources of funding1.

Total loss absorbing capacity

Nevertheless, as much as we try to reduce the probability that financial firms will reach the point of failure, there can be no guarantees.

Acknowledging this, the Financial Stability Board (FSB) has been working on a new international standard for globally-systemically important banks (G-SIBs) to have a minimum amount of total loss absorbing capacity (TLAC). The overarching objective of the TLAC requirement is to ensure that G-SIBs have sufficient loss absorbency to enable the authorities to implement an orderly resolution which:

  • minimises the impact on financial stability;
  • maintains critical functions; and
  • avoids exposing taxpayers to loss.

Although Australia has no G-SIBs, the FSI recommended the implementation of a domestic TLAC framework in line with emerging international practice. The Government’s response endorsed APRA to implement this recommendation, and I am sure we will not be alone in extending the TLAC regime beyond G-SIBs.

Assuming the international ground rules are settled by the end of this year, APRA will begin discussions on an Australian framework for loss absorbing and recapitalisation capacity during the course of 2016, in consultation with the members of the Council of Financial Regulators, and other interested stakeholders. The FSI suggested that Australia should not get ahead of international developments, and this is an area – perhaps more than most others – where the devil is in the detail, so it makes good sense that we hasten slowly.

Inevitably, there are going to be some tricky technical issues to resolve, including clarity over the mechanisms and triggers under which holders of particular instruments will absorb losses. On this issue, we are seeing a range of approaches internationally: from purely contractual triggers to statutory tools which vary widely in their scope. Given these global developments, we will have the benefit of a variety of thinking in this area as we progress our work.

But as well as monitoring international developments, it will clearly be important to consider what best suits the particular characteristics of the Australian financial system. This will include consideration of the increased ‘going concern’ loss absorbency being provided by our work to ensure Australian ADIs have unquestionably strong capital ratios. In addition, we already have a form of ‘gone concern’ loss absorbency through Tier 2 capital instruments, so the interaction with the capital framework will be an important consideration, as will providing for appropriate transition periods for building up any additional loss absorbing capacity.

Powers for dealing with failing firms

Moving beyond TLAC, and to issues that extend beyond ADIs, APRA’s current crisis resolution powers are a vital but often overlooked component of the prudential framework.

The global financial crisis put the spotlight on the lack of credible resolution options in many jurisdictions: indeed, the inability of regulators to resolve failing financial firms often exacerbated the crisis, and quickly led to the need for significant public sector support. The FSB has since established the Key Attributes of Effective Resolution Regimes (Key Attributes) to provide an international standard on financial crisis resolution. As noted in the FSI’s Final Report, there are some gaps and deficiencies in the Australian resolution framework when compared with the Key Attributes. We were therefore pleased to see the Government endorse improvements to APRA’s crisis management powers as a matter of priority.

Many of these legislative measures were initially raised in a September 2012 Consultation Paper, Strengthening APRA’s Crisis Management Powers, and included broader investigation powers; strengthened directions powers; improved group resolution powers; enhanced powers to deal with branches of foreign banks; and more robust immunities to statutory and judicial managers.

Cumulatively, these proposals will significantly enhance APRA’s resolution toolkit and align our powers more closely with international expectations. We certainly hope to use these powers rarely, but ensuring our capacity to deal with a distressed firm is robust and effective is a low-cost investment in protecting the interests of beneficiaries of regulated firms, and the stability of the financial system more broadly, without putting taxpayer funds at risk.

Of course, having a wide set of powers is not all that is needed. Crisis planning is also a critical, and the Key Attributes require jurisdictions to put in place processes for recovery and resolution planning for relevant firms. On recovery planning, APRA will be working further with larger ADIs (and in due course other relevant firms) to ensure they have plans that are credible – that is, a realistic and continuously-reviewed menu of actions that can be practically implemented in stressed operating conditions. On resolution planning, we will be commencing more detailed work on the planning required to ensure that we are able to use our resolution powers when needed. Although resolution plans are the responsibility of regulators, these plans will require the input of relevant firms and, potentially, consideration of pre-positioning measures that could help to improve resolvability.

Governance and culture

Regulators have a task to reduce the risk of a repeat of the sins of the past, but so do financial firms themselves.

I’ve made the point elsewhere that building up capital and liquidity, and ensuring loss absorbing capacity in the event of failure, will undoubtedly make for a more resilient financial system, but they will only offer a partial remedy to the problems that were experienced unless there are behavioural changes within financial firms as well. At the heart of that challenge are the related topics of governance, culture and remuneration. That is why we have recently created a new team within APRA to provide dedicated expertise on these issues. To be clear, we are not proposing significant new policy here: the team’s work will primarily focus, at least in its early stages, on improving our supervisory scrutiny of the specific requirements set out in existing prudential standards.

Under the broad heading of governance, culture and remuneration, we obviously can’t do everything and be everywhere at once. Our immediate priority is the area of risk culture, and in particular how banks and insurers are implementing the requirements of CPS220 Risk Management. As many of you know, this standard came into effect at the beginning of this year and, amongst other things, contains an ostensibly simple requirement for Boards to form a view of the risk culture in the firm, and the extent to which that culture supports the ability of the firm to operate consistently within its risk appetite.

Forming a view sounds relatively simple, but making sure that the Board’s view of risk culture is well-informed and reliable is more challenging. Therefore our first step will be to undertake a stocktake of practices that Boards are employing to fulfil this obligation. This stocktake will not only help us to refine and hone our supervisory approach to assessing risk culture, but will also hopefully help firms benchmark their own practices and understand a little better how they stack up against their peers.

Our next area of priority will be to review the current state of remuneration arrangements within ADIs and insurers. Specific requirements came into force in 2010 with the goal of ensuring personal rewards appropriately take account of risk-taking behaviour. These requirements are no longer new, so we will be looking to see that after the initial period of implementation, they are now fully in force and meaningfully applied. We’ll also be comparing Australian approaches with current and emerging international thinking – not necessarily to copy what’s done offshore, but at least make sure we are fully aware of differences in industry and regulatory practices and satisfy ourselves that we are not falling ‘behind the game’ due to any inattention to the issue.

Technology

The final issue I wanted to touch on is technology, particularly as the organisers of this event were keen to make technology a theme for the discussions. There is no doubt that technology, the innovations it brings, and the way in which it is changing the way financial services are provided, are increasingly topical. But, without in any way dismissing the increasing importance of the issue, it is not new.

APRA has employed a small but proactive team of IT experts for about the past 15 years, and the effective management of technology-related issues has always been a large part of their agenda. For example, on the risk side of things we have for a long time been focussed on ensuring that boards are educated and well-informed regarding cyber-risk; management has strategies and plans to address the evolving forms of cyber-risk; firms undertake penetration testing (ethical hacking), vulnerability management and testing, and have a systematic approach to managing and securing operating systems and software; and firms are able to detect cyber incidents in a timely manner, and possess response and recovery capability for plausible scenarios. We have done this not just for APRA-regulated firms, but also on occasion for systemically-important service providers.

We have used this work to develop guidance on good practice. For example, in 2010 we published a practice guide CPG 234 Management of Security Risk in Information and Information Technology. This is both principles- and risk-based, and continues to be relevant despite the rapidly evolving environment. More recently, we have published an information paper on Outsourcing involving Shared Computing Services (including Cloud). Outsourcing of various technology functions to service providers is not new, but the information paper responds to a trend for sharing services across a larger cross-section of entities (including non-financial industry entities) and the introduction of higher-order shared computing services (e.g. software). We have no wish to try to hold back the tide; we simply wish to ensure that the risks it involves are managed adequately. That will remain a major focus in the year ahead.

As firms continue to increase the openness of their systems (including greater use of digital channels), regulators like APRA need to evolve their supervisory approaches to respond to the changing risk profile. Moreover, we also need to monitor the broader strategic shifts that are underway, given the potential for new technologies to challenge the revenue streams of existing financial firms. New entrants and innovations that nip at the heels of the existing players, and keep them on their toes, are a positive for the Australia community. We should welcome them. But we also need to watch for the emergence of new risks, and the transfer of activities outside the regulatory net that the community expects to be appropriately regulated. Like regulated firms, we regulators will also need to be on our toes.

US Banking Supervision, More To Do

Fed Chair Janet L. Yellen addressed the Committee on Financial Services, U.S. House of Representatives on Banking Sector Supervision. She said that before the crisis, their primary goal was to ensure the safety and soundness of individual financial institutions. A key shortcoming of that approach was that they did not focus sufficiently on shared vulnerabilities across firms or the systemic consequences of the distress or failure of the largest, most complex firms. Although changes have been made, substantial compliance and risk-management issues remain.

There has since been a significant shift in focus has led to a comprehensive change in the regulation and supervision of large financial institutions. These reforms are designed to reduce the probability that large financial institutions will fail by requiring those institutions to make themselves more resilient to stress. However, recognising that the possibility of a large financial institution’s failing cannot be eliminated, a second aim of the post-crisis reforms has been to limit the systemic damage that would result if a large financial institution does fail. This effort has involved taking steps to help ensure that authorities would have the ability to resolve a failed firm in an orderly manner while its critical operations continue to function.

They created the Large Institution Supervision Coordinating Committee (LISCC). The LISCC is charged with the supervision of the firms that pose elevated risk to U.S. financial stability. Those firms include the eight U.S. banking organizations that have been identified as GSIBs, four foreign banking organizations with large and complex U.S. operations, and the four nonbank financial institutions that have been designated as systemically important by the Financial Stability Oversight Council (FSOC).

With regard to capital adequacy, the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR) is designed to ensure that large U.S. bank holding companies, including the LISCC firms, have rigorous, forward-looking capital planning processes and have sufficient levels of capital to operate through times of stress, as defined by the Federal Reserve’s supervisory stress scenario. The program enables regulators to make a quantitative and qualitative assessment of the resilience and capital planning abilities of the largest banking firms on an annual basis and to limit capital distributions for firms that exhibit weaknesses.

The financial condition of the firms in the LISCC portfolio has strengthened considerably since the crisis. Common equity capital at the eight U.S. GSIBs alone has more than doubled since 2008, representing an increase of almost $500 billion. Moreover, these firms generally have much more stable funding positions. The amount of high-quality liquid assets held by the eight U.S. GSIBs has increased by roughly two-thirds since 2012, and their reliance on short-term wholesale funding has dropped considerably. The new regulatory and supervisory approaches are aimed at helping ensure these firms remain strong. Requiring these firms to plan for an orderly resolution has forced them to think more carefully about the sustainability of their business models and corporate structures.

Nevertheless, while they have seen some evidence of improved risk management, internal controls, and governance at the LISCC firms, they continue to have substantial compliance and risk-management issues. Compliance breakdowns in recent years have undermined confidence in the LISCC firms’ risk management and controls and could have implications for financial stability, given the firms’ size, complexity, and interconnectedness. The LISCC firms must address these issues directly and comprehensively.

Their examinations have found large and regional banks to be well capitalized. Both large and regional banking organizations experienced dramatic improvements in profitability since the financial crisis, although these banks have also faced challenges in recent years due to weak growth in interest and noninterest income. Both large and regional institutions have seen robust growth in commercial and industrial lending.

Finally, community banks are significantly healthier. More than 95 percent are now profitable, and capital lost during the crisis has been largely replenished. Loan growth is picking up, and problem loans are now at levels last seen early in the financial crisis.

Another Bank Lifts Mortgage Rates

Adelaide Bank announced an increase to its standard variable interest rate as follows, effective Friday, 20 November.

The rates are as follows:

  • 0.07% p.a. to 4.21%. for Smart Saver loans
  • 0.12% p.a. to 4.26%. for SmartFit loans
  • 0.12% p.a. to 4.66%. for Smart Saver investor loans
  • 0.17% p.a. to 4.71%. for SmartFit investor loans

Bendigo and Adelaide Bank Managing Director Mike Hirst said the decision to adjust rates takes into account a wide range of factors, including the needs of all stakeholders, maintaining competitive pricing and capital requirements.

The fact that another non-IRB lender has lifted rates to existing mortgage holders (ME Bank already did), demonstrates that the repricing is all about market competition and margin protection using the alibi of regulator driven capital changes.  It also provides room for deep discounting on new owner occupied loans, where the battle currently lies.  We do not see changes to deposit rates, so the banks pocket the difference.

We expect other banks to follow the herd.

FSB Updates G-SIB List

The FSB and the Basel Committee on Banking Supervision (BCBS) have updated the list of global systemically important banks (G-SIBs), using end-2014 data and the updated assessment methodology published by the BCBS in July 2013.  One bank has been added to and one bank has been removed from the list of G-SIBs that were identified in 2014, and therefore the overall number of G-SIBs remains 30. None are Australian.

The changes in the institutions included in the list and in their allocation across buckets reflect the combined effects of data quality improvements, changes in underlying activity, and the use of supervisory judgement.

In November 2011 the Financial Stability Board published an integrated set of policy measures to address the systemic and moral hazard risks associated with systemically important financial institutions (SIFIs).  In that publication, the FSB identified as global SIFIs (G-SIFIs) an initial group of G-SIBs, using a methodology developed by the BCBS. The November 2011 report noted that the group of G-SIBs would be updated annually based on new data and published by the FSB each November.

Since the November 2012 update, the G-SIBs have been allocated to buckets corresponding to the higher loss absorbency requirements that they would be required to hold. The higher loss absorbency requirements begin to be phased in from 1 January 2016 for G-SIBs that were identified in November 2014 (with full implementation by 1 January 2019). The higher loss absorbency requirements for the G-SIBs identified in the annual update each November will apply to them as from January fourteen months later. The assignment of the G-SIBs to the buckets in the updated list published today determines the higher loss absorbency requirement that will apply to each G-SIB from 1 January 2017.

G-SIBs in the updated list will be required to meet a new standard on Total Loss Absorbing Capacity (TLAC) alongside regulatory capital requirements set out in the Basel III framework.4 The new TLAC standard will be phased-in as from 1 January 2019.

G-SIBs are also subject to: Requirements for group-wide resolution planning and regular resolvability assessments. In addition, the resolvability of each G-SIB is also reviewed in a high-level FSB Resolvability Assessment Process (RAP) by senior policy-makers within the firms’ Crisis Management Groups. Higher supervisory expectations for risk management functions, risk data aggregation capabilities, risk governance and internal controls.

Since November 2013 the BCBS has published the denominators used to calculate banks’ scores, and the thresholds used to allocate the banks to buckets.6 In November 2014 the BCBS published a technical summary of the methodology, as well as the links to the GSIBs’ public disclosures. Starting this year, the BCBS also publishes and provides the links to the public disclosures of the full sample of banks assessed, as determined by the sample criteria set out in the BCBS G-SIB framework.

The list of G-SIBs will be next updated in November 2016.

HSBC
JP Morgan Chase
Barclays
BNP Paribas
Citigroup
Deutsche Bank
Bank of America
Credit Suisse
Goldman Sachs
Mitsubishi UFJ FG
Morgan Stanley
Agricultural Bank of China
Bank of China
Bank of New York Mellon
China Construction Bank
Groupe BPCE
Groupe Crédit Agricole
Industrial and Commercial Bank of China Limited
ING Bank
Mizuho FG
Nordea
Royal Bank of Scotland
Santander
Société Générale
Standard Chartered
State Street
Sumitomo Mitsui FG
UBS
Unicredit Group
Wells Fargo

RBA Cash Rate Unchanged

At its meeting today, the Board decided to leave the cash rate unchanged at 2.0 per cent.

The global economy is expanding at a moderate pace, with some further softening in conditions in the Asian region, continuing US growth and a recovery in Europe. Key commodity prices are much lower than a year ago, in part reflecting increased supply, including from Australia. Australia’s terms of trade are falling.

The Federal Reserve is expected to start increasing its policy rate over the period ahead, but some other major central banks are continuing to ease monetary policy. Volatility in financial markets has abated somewhat for the moment. While credit costs for some emerging market countries remain higher than a year ago, global financial conditions overall remain very accommodative.

In Australia, the available information suggests that moderate expansion in the economy continues. While GDP growth has been somewhat below longer-term averages for some time, business surveys suggest a gradual improvement in conditions over the past year. This has been accompanied by somewhat stronger growth in employment and a steady rate of unemployment.

Inflation is low and should remain so, with the economy likely to have a degree of spare capacity for some time yet. Inflation is forecast to be consistent with the target over the next one to two years, but a little lower than earlier expected.

In such circumstances, monetary policy needs to be accommodative. Low interest rates are acting to support borrowing and spending. While the recent changes to some lending rates for housing will reduce this support slightly, overall conditions are still quite accommodative. Credit growth has increased a little over recent months, with growth in lending to investors in the housing market easing slightly while that for owner-occupiers appears to be picking up. Dwelling prices continue to rise in Melbourne and Sydney, though the pace of growth has moderated of late. Growth in dwelling prices has remained mostly subdued in other cities. Supervisory measures are helping to contain risks that may arise from the housing market.

In other asset markets, prices for commercial property have been supported by lower long-term interest rates, while equity prices have moved in parallel with developments in global markets. The Australian dollar is adjusting to the significant declines in key commodity prices.

At today’s meeting the Board judged that the prospects for an improvement in economic conditions had firmed a little over recent months and that leaving the cash rate unchanged was appropriate at this meeting. Members also observed that the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand. The Board will continue to assess the outlook, and hence whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target.

September ADI Data Highlights Mortgage Shift

The monthly data from APRA on the banks for September makes interesting reading. This month we will focus on the home loan story (cards and deposits being pretty much as normal). First the total value of home loans in the bank’s books rose by 0.84% to $1.388 bn (compared with a total market of $1,495 bn as reported by the RBA – the gap is the non bank sector).  Among the ADI’s, owner occupied loans rose 1.48% to $856 bn, whilst investment lending FELL by 0.57% to $532 bn, and is 38.3% of all home lending. We saw a fall the previous month in investment loans of 0.75%, so investment lending continues to drift lower as the pressure from the regulators finally flows through.

Of course, the banks still need the mortgage lending drug, so they have switched to grabbing owner occupied refinance loans, and are discounting heavily now (thanks to the back book repricing they have shots in the locker).

Looking at the bank specific data (and yes, we think the data is still noisy), the market shares in September look pretty similar, with Westpac still the king pin for investment lending, and CBA the champion of owner occupied loans.

MBS-Sept-2015---Home-Loan-Shares

Looking at the portfolio movements though, from August to September, we see a significant swing at three of the big four, with Westpac, CBA and ANZ all dropping their investment loan portfolio a little, whilst driving owner occupied loans really hard. Suncorp also went backwards on investment lending. The focus is clearly owner occupied loans.

MBS-Sept-2015---Home-Loan-Portfolio-MovementsLooking at the 12 month moving data on investment loan portfolio growth, we see that some are still above the 10% speed limit, but several of the majors are now below the hurdle. The industry average is now at 7.75%. We expect it to fall further, because more banks will need to throttle back to keep their annual rates below 10%.

MBS-Sept-2015---INV-MovementsGrowth in owner occupied loans is stronger now than it has been for some time. The market annual average is 7.45%, and we expect the rate of growth to continue to rise. This begs the question, at what point will the regulators decide to erect a speed trap on the owner occupied side of the ledger?

MBS-Sept-2015---OO-Movements  The deep discounting of new owner occupied loans more than offsets any price increases on the headline rates for existing borrowers. We do not think the RBA should cut rates, as this will just stoke owner occupied demand further.

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.

WBC-NIM-2015There 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 $7,820 million, up 3%, and cash return on equity (ROE) of 15.8%, down 57 basis points. Australian retail and business banking has been the key driver of performance, with Westpac RBB increasing cash earnings by 8% and St. George up by 7%. The New Zealand division also reported a 6% increase in cash earnings (in NZ$).

WBC-Cash-2015The 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%.

WBC-Equity-2015Allowing 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%.

Lending-Aggregates-Sept-2015Looking 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.

Housing-Aggregates-To-Sept-2015 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.