Economics and Banking – Page 427 – Digital Finance Analytics (DFA) Blog

ADI Data July 2015 – Investment Loans Grow Again – However…

APRA released their monthly banking stats for ADI’s to end July 2015 today. Looking in detail at the data, we start with home loans. Total ADI loan portfolios grew in the month by 0.4% to $1.37 trillion. The RBA data, already discussed gave a total growth of 0.6% to $1.48 trillion, so this suggests the non-banking sector is growing faster than ADIs. There are lags in the non-bank data streams, so we need to watch future trends carefully. Investment lending grew more than 11% in the past 12 months.

Looking at the mix between owner occupied and investment home lending, we see that owner occupied loans were static, ($827,905, compared with $827,700 in July), whilst investment loans grew (from $827,905 to $827,700 million) with a rise of $5,799 million, or 1.1%. However, we think the data is corrupted by further restatements of loans as they are reclassified between owner occupied and investment categories.

Looking at the lender data, we start with the all important year on year portfolio movements. Depending on how you calculate this (sum of each month movement, last 3 month annualised, etc) you can make the number move around. We have adopted a simple approach. We sum the portfolio movement each month for 12 months. This gives a market growth average for the year of 11.46%. We also see that many banks – including some of the majors, are still well above the speed limit of 10%. Regulatory pressure does not seem to be having much impact, despite the rhetoric, and repricing. Our thesis appears proven.

For completeness, we show the same picture for owner occupied loans – though there is of course no formal speed limit as we think currently competitive action is focussed here.

Turning to the portfolio movements, we see a significant swing at Westpac – we suspect a restatement of loans – but have not found any announcements on this so far. Logically, a $3bn lift in investment lending is too significant to be normal market behaviour, in our opinion. We have factored in the restatements at NAB and ANZ.

The relative market share analysis shows that Westpac has the largest investment portfolio, whilst CBA has the largest owner occupied loan portfolio.

It is also worth looking at the relative percentage splits between owner occupied and investment loans by bank. Westpac and Bank of Queensland have the largest relative proportions, so are under more pressure from the 10% question.

In the credit card portfolio, total balances were up 1% from $40.4 billion to $40.8 billion. We see small movements in relative share, with CBA loosing a little whilst Westpac and Citigroup grew share slightly.

Finally, on deposits, we see three of the majors growing their portfolio, with NAB showing the largest inflow. Total balances grew from $1.83 billion to 1.86 billion, of 1.27%.

Relative deposit share changed just slightly as a result.

Housing Lending Higher Again in July to $1.48 Trillion

The latest RBA credit aggregates to end July 2015 show continued momentum in the home lending sector, up 7.4% in the year to July, compared with business lending up 4.8% and personal credit up 0.9%. Lending for housing comprised more than 60% of all lending on the books. 23.5% of all lending goes to investment housing. As APRA said recently, we hope it is as “safe as houses“. Total lending for housing is a seasonally adjusted $1,476.1 billion, up $8.5 billion, up 0.58% on the previous month.

We need to point out that the various restatements by the banks (including NAB and ANZ), especially between the owner occupied and investment categories has had quite an impact on the numbers. In the month, lending for investment grew 3.6bn, up 0.64% to $569.8 billion in the month, whilst owner occupied lending grew 4.9 billion to $906.4 billion, up 0.54%. Overall growth for investment lending was an adjusted 10.2% on total balances. This includes both ADI’s and others lenders. However, there was a significant movement shown from July 2014, where the restatements kick in, and we see that on the old basis investment housing was 36.2% of all lending for housing, whereas on the new basis, it has now risen to 38.6%. A sizable change. A record, and given the intrinsically higher risks in investment loans, a concern.

Given all the noise in the numbers, it is hard to conclude other than home investment lending remains buoyant – in line with the DFA household surveys and expectations. We will report on the APRA monthly banking stats shortly, were individual bank movements can be analysed.

ME Bank Joins The Rate Changes

Another lender, ME has announced changes to its variable and fixed home loan interest rates for investor and selected owner occupied loans. Keeps the consistency in pattern, with higher rates for existing and new investment loans, and a cut to attract new owner occupied lending. This is in line with our expectations. Again we make the point, that ME bank is not subject to the APRA changes for advanced IRB banks, once again their pricing is more about competitive dynamics, than directly connected with the 10% speed limit on investor loans.

Effective 15 September 2015 ME’s Basic Variable home loan interest rate for new investor borrowers will rise by 0.40% to 4.69% p.a.* (comparison rate 4.70^#) and its Flexible home loan with member package^ interest rate for new investor borrowers will increase by 0.36% to 4.89% p.a.* (comparison rate 5.28^#). Rates across existing investor loans will also rise by 0.41%.

Fixed rates for new owner occupied borrowers will fall between 0.09% and 0.50% across its 3 to 7 year terms, including our 3-year fixed rate falling 0.09% to 4.19% p.a.* (comparison rate 4.71^#).

ME CEO, Jamie McPhee, said the changes have been precipitated by a major changes in the banking industry which have forced banks including ME to review their lending practices and pricing.

APRA introduced new regulatory measures to reinforce sound residential lending practices last December, including actions to restrict investor lending growth to no more than 10% p.a.

“The changes we have announced today will advantage owner occupied borrowers particularly those seeking to buy their first home,” McPhee said.

“The decision to increase investment rates was a difficult one, but after careful consideration we believe that combined with rate cuts across selected owner occupied home loans it strikes the right balance across our portfolio.”

AMP Bank reduces owner occupied home loan rates

Another non-major lender, AMP Bank has reduced interest rates across variable and fixed home loans for new customers making them some of the most competitive in the market.

The AMP Essential Home Loan will be reduced to 4.09 per cent per annum, down from 4.20 per cent.

The Basic variable will be reduced to 4.19 per cent per annum, down from 4.50 per cent.

In addition, the Basic two year fixed rate loan will be reduced to 4.18 per cent, down from 4.55 per cent.

The changes to the Basic variable and fixed loans provide an attractive option for customers who may wish to split their loan and pay a portion fixed and a portion variable.

The rate changes are in line with AMP Bank’s commitment to help more Australians own their own homes.

The changes are effective Sunday 30 August for fixed and Monday 31 August for variable rates and are available for new loan applications.

Australia’s banks are safe, so deposit levy is looking like a revenue grab

From The Conversation.

The closer one looks at the government’s recent decision to levy a deposit tax against Australia’s Big Four banks, the more it seems like a revenue grab. Nothing more, nothing less.

An inspection of the legislation reveals that in the event of the failure of an Australian bank, there is no need for a levy to fund a depositor bailout. That means this proposal is not a deposit levy. It is simply another tax, with little to do with protecting depositors in the event of a bank failure.

Three crucial factors substantiate this assertion: the Banking Act, the levels of retained capital, and hypothecation (the practice of pledging collateral against debt).

We’ll explain why.

First, to the Banking Act of 1959, in particular s 13A, which provides that in the event of insolvency, an Australian bank (referred to as an authorised deposit taking institution, or ADI) is required to reimburse Australian “protected” depositors before settling claims by international creditors or offshore depositors.

Section 4 of the Act defines a protected account as:

An account, or covered financial product, that is kept under an agreement between the account-holder and the ADI requiring the ADI to pay the account-holder, on demand by the account-holder or at a time agreed by them, the net credit balance of the account or covered financial product at the time of the demand or the agreed time (as appropriate).

Effectively therefore, protected accounts are all demand deposits. That is to say, deposits where the owner of the funds can withdraw their funds at any time.

The University of Melbourne’s Professor Kevin Davis has run the numbers, and his findings are that in the event of insolvency, no Australian bank would be so bankrupt that it would not, at least, be able to reimburse Australian depositors.

If Australian depositors are protected as preferential creditors (which they are), and if at current capital adequacy levels no Australian bank would be unable to refund domestic depositors, then the obvious question is why do we need this levy?

Secondly, the notion that this is some kind of “user pays” scheme is disingenuous. Today in Australia it is almost impossible to exist, in any meaningful economic sense, without a bank account.

That means any deposit into an account in any of the big four – drawing a wage or conducting any kind of business – will be covered by this levy. So as revenue grabs go, this one catches in the net something like 80% of all deposits.

In theory, the monies collected by the levy will be held in (that is, hypothecated to) a new entity, the Financial Stability Fund (FSF). Other than its name, little is known about this new fund. It is obviously meant to be a long-term mechanism as it will take many years – the exact timing being dependent on the levy rate chosen – before the fund will cover even a small percentage of potential pay-outs to depositors.

However, the fund is not designed to cover all pay-outs to depositors in the event of a bank failing, but only any amounts not recovered by other means. Calculating the size of the levy is problematic and must then take account of other measures, particularly the amount of capital that banks hold.

In suggesting that a so-called “ex-ante” levy be introduced to promote financial stability, the IMFalso recommended that additional capital, in the form of so-called Higher Loss Absorbency (HLA), be required for “systemic” banks (which in the case of Australia would be the Four Pillars).

This recommendation has been accepted by banking regulator APRA and, from January 2016, the big four banks will be required to hold an additional 1% HLA capital buffer. This additional 1% capital, which APRA admits is at the low end of international levels, must be met through so-called Tier 1 Equity capital, which helps to explain the current capital raising efforts of the banks and the negative impact on their share-prices.

Since it is expected that a bank’s capital should be sufficient to withstand all but the most severe shocks, it is a moot point whether the belt-and-braces approach of collecting an additional levy would add much towards ensuring financial stability. As it is not yet known how much of a buffer the new levy will actually provide over time and no mechanism has as yet been created to manage the monies collected, the decision to go ahead with the levy appears to be a path of least resistance (blame it on the previous government) rather than well-considered public policy.

In particular, the use of a fixed levy (of the order of 0.05% of deposits) is not in line with international experience, where a risk-adjusted fee is often used, and may be more appropriate to the Australian banking system.

The Murray inquiry went so far as to reject the idea of a deposit levy in favour of requiring Australian banks to be “unquestionably strong” and in the top tier of international banks as regards capital. It appears that by cherry picking recommendations from the IMF and the Murray inquiry, the government may be in danger of increasing the costs of banking in Australia without improving the stability of the system. Who would have guessed?

Authors: Andrew Schmulo, Principal, Clarity Prudential Regulatory Consulting Pty Ltd. Visiting Researcher, Oliver Schreiner School of Law, University of the Witwatersrand, Johannesburg. at University of Melbourne; Pat McConnel, Honorary Fellow, Macquarie University Applied Finance Centre at Macquarie University

Bendigo Hikes Investment Loan Rates

Bendigo Bank has announced it will increase its residential investment standard variable interest rate by 0.20% p.a. to address recent industry-wide concerns regarding residential investment lending.

The residential investment package variable rate will also increase by 0.20% p.a. for new business and most existing investor variable rate loans.

Bendigo and Adelaide Bank Managing Director Mike Hirst said implementing this measure supports the Bank’s prudent management by appropriately pricing for risk and assists restraining investor mortgage book growth to less than 10 percent per month as required by the Australian Prudential Regulatory Authority (APRA).

“When it comes to setting interest rates, our Bank takes into account a wide range of factors and carefully consider its key stakeholders including borrowers, depositors, staff, shareholders, partners and the wider community,” Mr Hirst said.

“We believe this approach considers the needs of our stakeholders while continuing to provide customers with market competitive rates,” he said.

The adjustment is effective 1 September for new business and 1 October 2015 for existing residential investment loans.

As DFA has said previously, APRA has given the banks a convenient excuse to lift rates. It is really more to do with competitive dynamics.

APRA Data Shows Major Banks Mortgage Book Now $1.43 Trillion – But Shareholder Equity Just 4.7%

APRA today released the Quarterly Authorised Deposit-taking Institution Performance publication for the June 2015 quarter. This publication contains information on ADIs’ financial performance, financial position, capital adequacy and asset quality. There were 160 ADIs operating in Australia as at 30 June 2015, compared to 165 at 31 March 2015. There were eight changes were mainly to some credit unions having their licences revoked.

Over the year ending 30 June 2015, ADIs recorded net profit after tax of $38.0 billion. This is an increase of $5.7 billion (17.6 per cent) on the year ending 30 June 2014.

As at 30 June 2015, the total assets of ADIs were $4.4 trillion, an increase of $376.4 billion (9.3 per cent) over the year. The total capital base of ADIs was $238.1 billion at 30 June 2015 and risk-weighted assets were $1.8 trillion at that date. The aggregate capital adequacy ratio for all ADIs was 13.2 per cent.

Impaired assets and past due items were $26.7 billion, a decrease of $5.4 billion (16.8 per cent) over the year. Total provisions were $13.4 billion, a decrease of $5.2 billion (27.9 per cent) over the year.

Looking in detail at the average of the four majors, we have plotted loans, housing loans and capital ratios again, to June 2015. We see the growth in lending, and the ongoing rise of housing lending. We also see the capital adequacy ratio and tier 1 ratios rising. However, the ratio of loans to shareholder equity is just 4.7% now. This should rise a bit in the next quarter reflecting recent capital raisings, but this ratio is LOWER than in 2009. This is a reflection of the greater proportion of home lending, and the more generous risk weightings which are applied under APRA’s regulatory framework. It also shows how leveraged the majors are, and that the bulk of the risk in the system sits with borrowers, including mortgage holders. No surprise then that capital ratios are being tweaked by the regulator, better late then never.

At the moment impairments are low, this of course may change if economic momentum slows, unemployment or interest rates rise, or house prices slip. Other risks include external shocks, like China and the impact of rates in the US rising.

RBA Opening Statement to the Inquiry into Credit Card Interest Rates

RBA Assistant Governor (Financial System) Malcolm Edey’s Opening Statement to the Senate Economics References Committee Inquiry into Matters Relating to Credit Card Interest Rates touches on some important points. The RBA’s full submission is one of 23 made, and is worth reading. The terms of reference for the inquiry are wide ranging. Borrowings on cards are worth more than $41bn.

The economic effect of matters including the difference between cash rates and credit card interest rates, with particular reference to:

the Reserve Bank of Australia‘s cash rate announcement and associated changes in credit card interest rates;

the costs to banks, credit providers, and payments systems, including those related to:

borrowings,

credit risk and default rates, and credit risk pricing,

various credit card loyalty programs, and

consumer protection measures, including reforms introduced following the global financial crisis,

transaction costs, including interchange fees, on the payments industry;

the costs to consumers, including those related to:

how and when interest is applied,

minimum monthly payment levels,

various credit card loyalty programs of other users, and

card fees, including ATM and POS fees;

what impact competition and price signals have on the credit card market;

how the enforcement of responsible lending laws and the national consumer credit regime affect consumer costs;

how consumer choice of credit card products can be improved, with reference to practices in other jurisdictions; and

any other related matters.

The RBA has also made a number of comments on the cards industry in its recent paper. Now, here are today’s opening comments.

I know the Committee is interested in a number of different aspects of credit card pricing and regulation, and we’ve tried to address those aspects that come within our field of expertise and responsibility in our submission.

As we explain in the submission, credit cards have both a payment and a credit function. The regulatory powers and mandate of the Reserve Bank Payments System Board relate to the payment function. The Board has a mandate to use its powers to promote efficiency and competition in payment systems, consistent with overall stability of the financial system. To that end, the Board has for a number of years regulated card payment systems by setting standards in relation to such matters as interchange fees, surcharging and access.

As you know, the Board is currently undertaking a comprehensive review of those aspects of card payments regulation. I’ll be happy to answer any questions you might have today about how that review is proceeding.

I know the Committee is also very interested in the credit function, and particularly the interest rates on credit cards. That is not something that we regulate, but we have set out in our submission an overview of some of the key facts.

If I may, I’ll just make a few high-level observations about that before we go to questions.

Credit card products vary a lot in the interest rates that they charge. Some of those rates are very high. They’re higher than I think can be easily explained.

Interest rates of the order of 20 per cent on credit cards are not uncommon. The average rate for borrowers who incur interest on credit cards is currently about 17 per cent. After deducting banks’ cost of funds and the cost of credit losses, that would equate to an interest rate margin of more than 10 percentage points.

My advice if you’re in that situation is to shop around. Despite the prevalence of high-rate cards, this is a market where there is some significant competition. There are a lot of card products that offer lower rates and special deals for balance transfers. In many cases, card holders should be able to lower their interest rates by taking advantage of those offers, if they are willing to shop around.

That of course raises questions about why more cardholders don’t take advantage of the lower rates that are on offer, whether there are obstacles to competition and whether there might be some role for regulatory action.

Some cardholders might be unable to switch, for example if they have poor credit histories. That is something that can be looked into, along with the related question of whether there are unreasonable obstacles to switching. Other cardholders might not be aware of the options available, or might have other reasons for not pursuing them. We discuss some of those issues in our submission.

The answers to these questions are not necessarily straightforward, and I think these are areas where the financial regulators can usefully do further work. When I appeared at this Committee in June I indicated that the Bank would consult with other regulators in this area, and we have begun doing that. We will be continuing those discussions at a more senior level at the next meeting of the Council of Financial Regulators next month.

I don’t want to pre-empt what might come out of those discussions, but some of the questions that might be considered are: whether there is a case for improved disclosure in this area; whether there is a need for stronger risk assessment requirements for credit card lending; and to what extent any actions in these areas would fall within the regulators’ existing powers and mandates.

DFA last year highlighted the flows of value within the credit card system, and our analysis suggested that card interest rates ARE too high. Actually the credit card business relies on those who continue to revolve to maintain the value of business. We think that unbundling the payment mechanism from the credit mechanism, and the loyalty element is critical to get to grips with what is going on. We also hope the inquiry considers alternative payment mechanisms as part of the review.

Booming Housing Market Shields Sydney Mortgage Arrears – Fitch

Fitch Ratings says that Sydney’s mortgage performance has benefitted the most from the rise in house prices. Metropolitan regions, including those historically worst performing ones in western Sydney, have not experienced the usual deterioration in mortgage delinquency rates caused by Christmas spending.

Budgewoi (2262), on New South Wales’ (NSW) Central Coast, has topped the list for the second time as Australia’s worst performing postcode in terms of missing housing loan repayments. With a 30+ days delinquency rate of 3.2%, Budgewoi has appeared 11 out of 14 times in Fitch’s previous mortgage delinquency reports.

This year, Tasmania replaced Queensland (QLD) as the worst performing state in Australia for mortgage repayments with a delinquency rate of 1.33%. This figure reflects Tasmania’s high unemployment rate and low house appreciation over the past three years.

On average, the delinquency rate across Australia increased 9bp to 0.99% at end-March 2015, up from 0.90% at end-September 2014. The strong house-price appreciation and lower interest rates slightly offset the negative impact of seasonal Christmas overspending, as arrears are 36bp lower than 12 months ago.

Over the past two years, local unemployment and the housing market have been the major drivers in regional mortgage performance, particularly in the current low-interest rate environment.

Most of the 20 worst-performing postcodes were in metropolitan regions, with the only exception being Laidley and Mount Isa in QLD. However, metropolitan regions overall performed better than non-metropolitan areas, especially in Western Australia, Queensland and Northern Territory where the slowdown and job cuts in the mining industry have been detrimental to mortgage performance.

Christmas spending and the general cost-of-living affected the mortgage performance of regions in states that showed strong sensitivity to mortgage rates – such as the north-west of Melbourne and south-west of Brisbane – due to socio-economic factors like high unemployment.

For the first time, Mackay (QLD) became the worst-performing region in Australia by dollar value, replacing Hume City (Victoria, VIC), following a 59bp worsening in 30+days arrears. Mackay’s performance deteriorated the most in the six months to end-March 2015.

The best performing regions in their respective states by value are: Lower Northern Sydney (New South Wales, NSW); Inner Melbourne (VIC); Inner Brisbane (QLD); and Central Metropolitan Perth (West Australia, WA).

Fitch continues to monitor regional mortgage performance as there is still a clear distinction between best- and worst-performing regions in a given time frame, and trends vary with local economic cycles.

Investment Property Loans ARE More Risky – Fitch

Fitch Ratings says that the investment loan reclassification process announced by National Australia Bank Limited will not result in a withdrawal or downgrade of Fitch’s ratings on the National RMBS Trust notes and outstanding issuance under NAB’s mortgage covered bond programme. The reclassification process has been initiated following a review of NAB’s housing loan purpose data which found misclassifications between ‘owner occupied’ and ‘investment’. The full list of ratings follows at the end of this commentary.

Fitch believes that investment-property loans will have a higher probability of default in an economic downturn, as borrowers will fight harder to protect their primary residence. The agency applies a 25% higher base default probability in the case of a mortgage collateralised by an investment property, compared with an owner-occupied property.

However, Fitch has tested the sensitivity of the ratings to an increase in the proportion of loans collateralised by investment properties. The analysis found that the RMBS notes’ and mortgage covered bond ratings are not impacted by an increase in expected foreclosure frequency following the increase of loans classified as investment loans in each of the rated transactions. The levels of credit enhancement (CE) available to each rated note issued under the National RMBS transactions would still be above Fitch’s adjusted break-even CE levels. The transactions are performing within expectations with low levels of arrears and losses.

The change of the proportion of investment loans in the cover pool would not impact Fitch’s ‘AAA’ break-even asset percentage (AP) of 89.5% on NAB’s mortgage covered bond programme. The ‘AAA’ break-even AP calculated by Fitch is mainly driven by the programme’s refinancing needs as a result of significant maturity mismatches and the agency’s refinancing assumptions.

NAB has stated that new procedures are being implemented and that identified gaps in data capturing have been rectified. This work forms part of an ongoing review to improve its statistical reporting process. Fitch has and will adjust its analysis assumptions on the National RMBS transactions and the NAB mortgage covered bond programme to reflect the ongoing work.

The affected RMBS transactions are securitisations of first-ranking Australian residential mortgages originated by Advantedge Financial Services Pty Limited and Challenger Mortgage Management Pty Limited: National 2011-1, National 2012-1 and National 2012-2; and National Australia Bank Limited: National 2011-2 and National 2015-1.