Economics and Banking – Page 464 – Digital Finance Analytics (DFA) Blog

Investment Lending Burns Bright

APRA released their monthly banking statistics for October 2014 today. The total value of housing lending rose to $1.298 trillion, from $1.288 in September, up 0.81%. Of this however, Investment lending rose 1.03% by $4.59 billion and Owner Occupied Lending rose 0.69% by $5.79 billion. This data relates the the banks (ADI’s) excluding the non-bank sector. This is normally about $110 billion.

Looking in detail at the bank by banks analysis, we see a familiar set of trends.

Westpac leads the pack on investment mortgage lending, with a 31.8% share, whilst CBA leads with owner occupied lending with 27.1% share.

Looking at the movements, only ING Bank recorded a fall in value in their portfolio. Macquarie grew the strongest. This relates to the $1.5 billion portfolio of non-branded mortgages they purchased from ING in September.

Looking in percentage terms, we see that Macquarie and AMP grew well above system, and ING below in October.

Turning to deposits, they fell by 0.06% in the month, to a value of $1.76 trillion. There was little movement between players, though given the growth in loans above, it is clear that wholesale funding is being accessed now, and this explains the continued fall in deposit interest rates.

CBA maintains its position as the largest deposit holder, with 24.5% of the market.

Looking at movements, we see Rabobank growing their deposits in percentage terms the strongest in the month, a reversal from previous recent months. Other than ANZ, the majors all lost a little share. Suncorp grew its book also.

In cards, balances rose by about $50 million, to $40.4 billion.

CBA continues to hold the largest cards share with 27.8% of the market.

Banks And Their Capital

APRA today published the quarterly ADI performance statistics to September 2014.

Over the year ending 30 September 2014, ADIs recorded net profit after tax of $33.5 billion. This is an increase of $3.6 billion (12.0 per cent) on the year ending 30 September 2013.

As at 30 September 2014, the total assets of ADIs were $4.2 trillion, an increase of $345.0 billion (9.1 per cent) over the year. The total capital base of ADIs was $210.4 billion at 30 September 2014 and risk-weighted assets were $1.7 trillion at that date. The capital adequacy ratio for all ADIs was 12.4 per cent.

Impaired assets and past due items were $29.1 billion, a decrease of $7.4 billion (20.3 per cent) over the year. Total provisions were $16.6 billion, a decrease of $6.1 billion (26.9 per cent) over the year.

We have been looking at the relative capital positions of the banks, highly relevant in the current climate where we expect the FSI inquiry report to be commenting on this, as well as the current regulatory reviews, globally and locally.

So we have taken the All Bank data and compared the Tier 1 capital ratio (the yellow line) with a plot of the ratio of lending to capital held. Because the mix of loans has changed, with a greater proportion relating to lending for housing, and the fact that these loans have lower capital weighting, the reported Tier 1 capital is significantly better than the true, unweighted position. In fact, banks are holding relatively less capital against their loan books now compared with before the GFC. This is one reason why capital ratios are under review.

Now, if we look only at the APRA data for the big four banks, we see an even wider divergence, enabled by the advanced capital calculations which enable these banks to hold even less capital against certain housing loan categories. This places the major banks at a competitive pricing advantage.

Almost certainly, the majors will be required, in due course to hold more capital, and this may tilt the playing field towards some of the smaller players. It may also mean lower returns of deposit accounts, and and reduced loan discounting. Overall profitability for some players will also be tested, though we believe there is plenty of slack in the system currently.

Quarterly MySuper Performance For September

APRA just released their statistics for the September 2014 quarter on the MySyper products which were part of the suite of superannuation reforms. The data must be treated with care, as some fees are not charged every quarter, but it does give a cross industry member view of performance returns. What is interesting is the apparent disconnect between the relative fees taken, risk profile, and returns. The interim Quarterly MySuper Statistics report contains data for all MySuper products. The report contains information on the product profile; product dashboard information reported to APRA on return target, investment risk and fees and costs; asset allocation targets and ranges; and net investment return and net return for each MySuper product, or where relevant, for the lifecycle stages underlying a MySuper product with a lifecycle investment strategy.

We have been looking at the MySuper products with single investment strategy data, and pulled out three measures, relative return to members in the quarters, relative fees paid, and relative risk profile. As there are more than 80 funds, we have not included all in the table labels in the chart below. APRA defines a Representative member as a member who is fully invested in the given investment option, who does not incur any activity fees during a year and who has an account balance of $50,000 throughout that year. Excludes: investment gains/losses on the $50,000 balance. The risk rating is based on the level of investment risk which represents the estimated number of years in each 20 years that the RSE licensee estimates that negative net investment returns will be incurred.

It would be possible, for the same level of fees to get a return of well over 2%, or below 1%. The relative risk does not correlate to returns at all. Fees are not correlated with performance. This provides an important window on the superannuation industry, but the data needs to be presented in ways which are clearer for people to interpret. Hopefully it will help to lift understanding amongst investors, and more proactively consider the performance of superannuation.

Finally, total assets in MySuper products was $378.1 billion at the end of the September 2014 quarter. Over the 12 months to September 2014 this represents a 128.2 per cent increase.

Enhanced Financal Adviser Register Necessary, But Not Sufficient

The Treasury has released their proposals for an enhanced Financial Adviser Register for consultation. On 17 July 2014, the Government announced that it would establish an enhanced register of financial advisers, and on 24 October 2014, the Government announced details of the register’s content. Whilst the register is sound (we do not know how many advisers are operating in Australia), and the enhancements are appropriate given the issue of trust with respect to financial advice, DFA is of the view there are still significant gaps in relation to remuneration of advisers and potential conflicts. You can read our recent comments. In addition, further consideration needs to be given to how someone would find a suitable adviser. The MoneySmart Government website refers people to the professional associations, advice from friends and you can check the adviser or licensee’s name on ASIC Connect’s Professional Registers. However, currently advisers who are ’employee representatives’ will not appear on the register as their employer holds the AFSL. This is a muddled processes, and leaves consumers in the dark. More fundamental consideration needs to be given to this from a consumer perspective.

Turning to the current Exposure Draft, the Regulation proposes to make a number of amendments to the Corporations Regulation 2014 to:

enable ASIC to establish and maintain a public register of financial advisers; and
for Australian Financial Service licensees to collect and provide information to ASIC concerning financial advisers that operate under their licence.

A Consultation Note has also been developed to invite feedback from stakeholders on the key drafting issues, to ensure that the Regulation will implement the Government’s policy intent. This Consultation Note also includes: information on timing to enable the Register to be implemented by March 2015; and detail on the form lodgement fee increases necessary to fund the register. Submissions can be made to 17th December 2014.

Picking up on the background in the supporting papers, currently, a person who carries on financial services businesses must obtain and maintain an Australian Financial Services Licence (licence) with the Australian Securities and Investments Commission (ASIC). This person is referred to as a financial services licensee (licensee). Among other things, a person carries on a financial service business if they provide financial product advice. Currently, financial advice is classified under two categories. ‘Personal advice’ is financial product advice which takes into account the personal financial circumstances of the client. Any other financial product advice that does not take into account the client’s personal circumstances is termed ‘general advice.’ Individuals may provide financial product advice in a range of circumstances. They may be licensees themselves; or directors or employees of licensees. They may be non-director/non-employee representatives of licensees – these individuals are referred to as ‘authorised representatives’. In certain circumstances, an authorised representative can ‘sub-authorise’ another authorised representative to act on behalf of the licensee.

‘Representative’ is the overarching term used to describe authorised representatives, director representatives and employee representatives (including those that operate under a related body corporate of the licensee) and any other person acting on behalf of the licensee, that provide financial services under a licence. Responsibility for day-to-day supervision of representatives operating under a licence is devolved to licensees. Financial services licensees are not required to provide ASIC with certain information on director or employee representatives that operate under their licence. This may be contrasted with the requirements imposed on a licensee when it authorises a non-employee or non-director representative to act on its behalf. For these authorised representatives, licensees must lodge certain information with ASIC, and then ASIC must maintain a register of these individuals. Consequentially, there is no register that provides information to consumers, the financial advice industry, or ASIC regarding employee and director representatives of licensees. ASIC is currently only required to maintain public registers of licensees and authorised representatives of licensees. These registers provide information on a licensee or authorised representatives’:

registration/licence number;
licensee name/authorised representative name;
address;
start date of registration/licence;
history of previous licensees (for authorised representatives only);
status (whether the licensee/authorised representative is currently authorised); and
details of any conditions or restrictions about the registration.

As ASIC currently maintains registers of licensees and authorised representatives, but not other representatives of licensees, the total number of financial advisers operating in Australia is not known. There is also limited information available about financial advisers who are director or employee representatives. This transparency gap means consumers cannot easily check whether a particular individual is authorised to give them financial advice, or look up other information that would be valuable to them when verifying the credentials and status of an individual adviser. This gap also means that ASIC has limited visibility of the natural persons providing personal advice on more complex products to retail clients, and is restricted in its ability to identify, track and monitor these individuals who move from licensee to licensee as employees or directors. As a result, this limits ASIC’s ability to take action against individual advisers over and above action that relates to the relevant licensee.

The proposed new law will require a register of all individuals who provide personal advice on more complex products to retail clients under a financial services licence will enable consumers to verify that their individual adviser is appropriately authorised to provide advice and find out more information about the adviser before receiving financial advice. A comprehensive register will also assist ASIC to a regulate advisers who move between licensees as well as enabling the financial advice industry to better protect itself from rogue financial advisers. The new register will be limited to those providing personal advice on more complex products to retail clients – focussing on the area where rogue advisers or ‘bad apples’ present the greatest risk to consumers. The new register will build from the existing registers, and also contain information informing consumers of an adviser’s experience, their recent work history, the eventual owner of licensee they work on behalf, as well as information about whether ASIC has banned, disqualified or obtained enforceable undertakings in relation to them. It is intended that the register will, in time, also contain educational qualifications and professional association membership information. This would require further amendments to the Principal Regulations. The benefits of the enhanced public register include:

providing an easily accessible central record of the competency, employment history and misconduct of individual advisers;
assisting ASIC in its compliance activities and ability to respond to problem advisers;
assisting the industry itself to address risk where ‘bad apples’ are concerned; and
providing broad support for industry efforts to improve professionalism of the industry.

High LVR Lending More Risky – RBA

The RBA today published a paper on “Mortgage-related Financial Difficulties: Evidence from Australian Micro-level Data.” Although default rates in Australia are lower than in many other countries,

their research paper delved into the different types of mortgage lending, using loan-level pool data provided by MARQ Services and concluded that higher LVR lending, and interest only loans were more risky than average.

Our loan-level analysis suggests that loans with high loan-to-valuation ratios (above 90 per cent) are more likely to enter arrears, while loans that are repaid relatively quickly are less likely to enter arrears. Together, these results reinforce the importance of supervisors carefully monitoring changes in lending standards that affect the loan-to-valuation ratio of loans at origination and rates of principal repayment thereafter. Although interest-only and fixed-rate loans appear less likely to enter arrears, the fact that these loans tend to be repaid relatively slowly (particularly interest-only loans) means that increases in these types of lending can represent an increase in risk. Additionally, low-doc loans appear more likely to enter arrears than other types of loans, even after controlling for whether the borrower was self-employed. This suggests that lenders should maintain sound income documentation and verification policies, and that supervisors should continue to monitor developments in the low-doc lending space.

Borrowers with relatively high mortgage interest rates have a higher probability of entering arrears, even after controlling for the estimated minimum mortgage repayment, which is consistent with riskier borrowers being charged higher interest rates to compensate for their higher risk. We caution, however, that the loan-level results are affected by data limitations, such as a lack of information on borrower income, wealth and labour force status, and a relatively small sample of banks.

Complementary analysis using household-level data suggests that having a high debt-servicing ratio (above 50 per cent) significantly increases the probability of missing a mortgage payment. This highlights the importance of borrowers not overextending themselves by taking out loans of a size that will be difficult to comfortably service. Additionally, it reinforces the importance of lenders maintaining sound debt-serviceability and income-verification policies.
Having previously missed a mortgage payment is also found to be a significant predictor of subsequently missing another mortgage payment. This highlights the heightened risk associated with lending to borrowers with a history of missing payments, and supports the practice of lenders using information on previous debt payment behaviour (such as credit scores) in their credit assessment processes.

Overall, our results reinforce the importance of supervisors carefully monitoring changes in lending standards, as well as the importance of borrowers exercising prudence when taking on mortgage debt.

This is a significant and important contribution to the current debate about how risky the mortgage loan portfolio are. It also chimes with DFA mortgage stress analysis. Today we highlighted the APRA data which showed that both high LVR loans and interest only loans made up a significant element in the current new business mix. This research paper adds further weight to the argument that capital rules needs to be changed to reflect the true risks of mortgage lending.

ADI Residential Property Exposures Up Again

APRA published their quarterly ADI property statistics today to September 2014. ADIs’ total domestic housing loans were $1.3 trillion, an increase of $103.4 billion (9.0 per cent) over the year. There were 5.2 million housing loans outstanding with an average balance of $239,000. The proportion of investment loans moved higher again to 34% of all loans on book. DFA survey data shows a correlation between interest only and investment loans, (thanks to the benefits of negative equity), but APRA does not provide any linked data on this.

Looking at total loan stock, we see a continued rise in interest only mortgages, and loans with offset facilities. Reverse mortgages, low documentation loans and other non-standard mortgages are relatively controlled by comparison.

Turning to the flow data (loans written each month), ADIs with greater than $1 billion of residential term loans approved $85.4 billion of new loans, an increase of $9.1 billion (11.9 per cent) over the year. Of these new loan approvals, $53.5 billion (62.6 per cent) were owner-occupied loans and $31.9 billion (37.4 per cent) were investment loans. Thus we see that overall monthly totals continue to rise, and investment loans are growing faster than owner occupied loans. The 37.4% of investment loans September is understated because the owner-occupied lending data includes refinances, which should be removed from the analysis, to give a true picture of new lending.

Looking in more detail, we see the value of interest only loans rising in recent months, and also a small rise in the number of loans approved outside serviceability. Low documentation loans remain controlled.

Looking at lending by LVR bands we see about 40% of loans being written are above 80% loan to value, and of these around 10% are above 90%. No data is provided on the proportion of loans covered by lender mortgage insurance. This should be.

Brokers are having a field day at the moment, with commissions being increased, and values written rising. The APRA data shows 43.2% of all loans by value were originated via third party channels.

So, the RBA’s plan that the property sector should take up some of the slack left by the evaporating mining sector is still playing out. However, lending for investment property, and interest only lending have higher risks attached, and we think changes to capital rules are still likely to emerge to try and address some of the implicit risks.

Finally, ADIs’ commercial property exposures were $225.5 billion, an increase of $13.5 billion (6.4 per cent) over the year. Commercial property exposures within Australia were $187.4 billion, equivalent to 83.1 per cent of all commercial property exposures.

APRA Extends Basel III Consultation

APRA today extended the consultation period on the changes to Basel III disclosure requirements.

On 18 September 2014, APRA released for consultation a discussion paper and draft amendments to Prudential Standard APS 110 Capital Adequacy and Prudential Standard APS 330 Public Disclosure, which outlined APRA’s proposed implementation of new disclosure requirements for authorised deposit-taking institutions (ADIs).

The disclosures are in relation to:

the leverage ratio;

the liquidity coverage ratio; and

the identification of potential globally systemically important banks.

This consultation package also proposed minor amendments to rectify minor deviations from APRA’s implementation of the Basel Committee’s Basel III framework.

APRA’s intention was that, subject to the outcome of the consultation, these amendments would come into effect from 1 January 2015. A number of matters remain to be addressed before APRA is able to finalise the new standards. Accordingly, given the limited period of time remaining before the scheduled implementation date, APRA is advising affected ADIs that any new requirements will not take effect until 1 April 2015 at the earliest.

Securitisation Update

The ABS published their data on Assets and Liabilities of Securitisers in Australia. At 30 September 2014, total assets of Australian securitisers were $131.7b, up $0.1b (0.1%) on 30 June 2014. This continues the flat trend, despite growth in house prices and lending for property purchase.

During the September quarter 2014, the rise in total assets was due to an increase in other loans (up $0.8b, 5.1%) and cash and deposits (up $0.2b, 4.1%). This was partially offset by decreases in residential mortgage assets (down $0.9b, 0.8%). Residential and non-residential mortgage assets, which accounted for 82.1% of total assets, were $108.1b at 30 September 2014, a decrease of $0.9b (0.8%) during the quarter.

At 30 September 2014, total liabilities of Australian securitisers were $131.7b, up $0.1b (0.1%) on 30 June 2014. The rise in total liabilities was due to the increase in long term asset backed securities issued in Australia (up $1.7b, 1.8%) and loans and placements (up $0.5b, 3.1%). This was partially offset by a decrease in asset backed securities issued overseas (down $1.5b, 12.0%).

At 30 September 2014, asset backed securities issued overseas as a proportion of total liabilities decreased to 8.3%, down 1.1% on the June quarter 2014 percentage of 9.4%. Asset backed securities issued in Australia as a proportion of total liabilities increased to 78.2%, up 1.4% on the June quarter 2014 percentage of 76.8%.

Finally, looking at loans to households and private non-financial corporations, we see the proportion which are residential mortgages falling to 85%.

Court Approves Application Paving Path To Bank Fees Settlement

According to a media release from Maurice Blackburn, the Federal Court has today approved orders to help facilitate settlement negotiations in the bank fees class action against the National Australia Bank.

NAB has publicly indicated its commitment to exploring settlement opportunities, and law firm, Maurice Blackburn Lawyers, worked with the bank in agreeing on today’s orders.

Today, in the Federal Court in Sydney, Justice Jacobson approved orders that will give all NAB customers a further opportunity to participate in this class action, and potentially to recover millions of dollars charged in exception fees.

Between 25 November this year and 27 January 2015, NAB customers who haven’t already registered their interest in joining the class action, will be able to do so.

Bendigo, Credit Unions Launch New Banking Alliance

Bendigo and Adelaide Bank and an Alliance of Australian credit unions today co-launched a new banking model that secures the independence and identities of the participating credit unions.

The Alliance model was developed by Bendigo and four credit unions – AWA, BDCU, Circle and Service One.

Under the Alliance model:

The loans and deposits of the participating credit unions will be transferred to Bendigo Bank, while reserves remain 100 per cent member-owned.
Alliance members continue to be serviced by their local branch staff.
In time, they willhave access to new products and technology from Bendigo, with theAlliance credit unions retaining pricing and loan approval discretions.
Bendigo will become the approved deposit-taking institution and will assumer esponsibility for compliance, systems and balance sheet management, with thisdelivering improved economies and cost savings.

The Agreement with Bendigo requires approval from 75 per cent of members voting at the respective credit union AGMs on 10 December 2014 and final approvals from APRA and the Federal Treasurer. The four credit unions combined have 39,000 members, $640 million in assets and $550 million in deposits.

The results from the recent DFA channel usage surveys highlights that players need to be able to move faster to take advantage of the emergence of the digital channels. Many smaller players, especially Credit Unions are hamstrung by their current technology portfolios, so this new model may offer new growth and service paths to the sector.