Home Loan Complaints Rocket By 20%

New data released today by the Australian Financial Complaints Authority (AFCA) has shown that complaints about home loans have increased by 20 per cent in the last six months of 2019.

The data shows that CBA and Westpac have the largest proportion of complaints, with the CBA Group at 890 and Westpac Group 639 of the complaints made.

This increase has been driven by financial firms failing to respond to requests for assistance, the conversion of loans from interest only to principal and interest and issues with responsible lending.

Credit card complaints were 2,750 in the same period.

The data, which has been made freely available to the public through AFCA’s Datacube shows that between July and December last year, the financial services ombudsman received 2,201 complaints about home loans, that’s 367 per month, on average.

AFCA Chief Operating Officer Justin Untersteiner said that it was disappointing to see the increase but making the data available to the public was an important step in increasing transparency.

“Every six months, AFCA releases data which allows Australians to see how many complaints their insurer, bank, financial adviser, superannuation fund or other financial firm has received and how they have responded to those complaints,” Mr Untersteiner said.

“Rebuilding trust in the Australian financial services will be a long journey and one that requires effort across the entire sector.

“Transparency is key in this transformation and we have made significant changes in the way we report our data and decisions to make them more accessible to the public.

“The data also shows that we are getting very few complaints about financial advice, just 30 per month, and complaints against debt buyers or collectors rose by just five per cent. “Our hope by releasing this data is that we see improvements and the industry takes action to reduce the number of complaints that end up at AFCA.”

Banks Recoup Costs of Home Loan Cuts

CBA cut interest rates by as much as 0.30% across its savings accounts yesterday, exemplifying the tactics many banks are using to help recoup the costs incurred from reducing home loan rates by the full 0.25% March cash rate reduction. Via Australian Broker.

Two weeks before the major’s home loan reductions come into effect, the ongoing bonus rates on its Goal Saver account have been reduced by 0.25%, its pensioner security account by up to 0.25% and its Youth Saver account by 0.30%; the NetBank Saver account was unchanged, with an ongoing rate of just 0.10%

“CBA is one of six banks so far to cut deposit rates since last week’s cash rate cut, with dozens more expected to follow,” said RateCity.com.au research director Sally Tindall.

“It’ll be interesting to see how far Westpac, NAB and ANZ shave their rates, seeing as they’ve already taken the knife to some of their savings rates this year.

“In this low rate environment, finding a savings rates above inflation can feel like finding a needle in a haystack, but they are out there.”

The highest rate currently on offer is 2.25%, which can be found at neobanks 86 400 and Xinja Bank.

However, they’re “unlikely to stick around”, according to Tindall.

Last week, Xinja announced no new Stash savings accounts will be able to be opened for an indefinite period, in order to take care of existing customers.

For now, the neobank will maintain its 2.25% rate, with no strings attached and interest paid from the first dollar up to $245,000, calculated daily and paid monthly.

“When faced with higher than expected deposit flows, and an RBA rate cut, most banks would just drop deposit interest rates, hurting existing customers while chasing new ones. That’s not what Xinja is about,” said CEO and founder, Eric Wilson.

“Xinja offers a different way of banking, and that extends beyond technology to how we treat our customers.”

However, Wilson did reiterate the Stash account has a variable rate which may go up or down in the future.

“Right now, in what are turbulent times, we want to stand by the rate we have offered,” he said.

“But there are three things we have to balance: the RBA rate cut makes it more expensive for Xinja to hold deposits at the same rate before the launch of our lending program; there has been an unprecedented uptake of Xinja Bank by Australians; and now, how we – as a new bank – manage the costs of those deposits. “

CDS Sees Huge Credit Moves And Outage

IHS Markit suffered a temporary outage on its intraday and same-day services for credit-default swap pricing on Monday amid a huge move wider in credit spreads. Via IFR.

The data provider’s European high-yield CDS index – the iTraxx Crossover – jumped about 120bp on Monday to nearly 500bp, its highest level since 2013 and on track for its sharpest one-day gain on record, according to Refinitiv data.

That came amid plunging oil prices on concerns over an escalating price war between Saudi Arabia and Russia. It adds further fuel to the prolonged sell-off in credit markets over the past two weeks, which was initially triggered by concerns over the economic impact of the spread of the coronavrius.

The massive move wider in credit spreads and enormous volatility in CDS prices led IHS Markit’s system to mark a lot of the pricing data it received from banks that trade these credit derivatives with a “low confidence score”, according to a person familiar with the matter.

Because of the volatility of prices “the system didn’t trust the data it received,” the person said.

“IHS Markit is experiencing technical difficulties with the Intraday and Sameday services for CDS Single Name and Credit Indices as of 9 March 2020,” IHS Markit said in an email to clients earlier on Monday.

“Our technical and infrastructure teams are working to resolve the issue and will have an update in the next 2 hours.”

A spokesperson for IHS Markit said the disruption was temporary.

IHS Markit is a central source for data in the CDS market, collating and aggregating pricing information from trading desks for single-name and index CDS.

It is a highly unusual occurrence for it to report a temporary outage and underlines the extraordinary volatility in financial markets at present.

Traders have said liquidity – or the ease of buying and selling debt in large size – has been deteriorating in recent sessions amid the prolonged selloff in credit markets. The iTraxx Crossover index leapt 56bp on Friday. It has now more than doubled in less than three weeks from just 219bp on Feb. 21.

US high-yield debt markets are particularly vulnerable to a large drop in oil prices as many of the issuers in that market are energy companies.

“The weekend oil market developments could barely have come at a worse time for the US HY market,” credit strategists at Deutsche Bank wrote in a note to clients. “Already starved of liquidity following the sell-off over the last two weeks, a near 20% plunge for oil overnight is likely to result in carnage in the market today.”

NZ Banking Sector Prepared For Responding to COVID-19

New Zealand banks are ready to respond to the impacts of coronavirus, the Reserve Bank of New Zealand and New Zealand Bankers’ Association say.

The COVID-19 outbreak has the potential to impact the operations of New Zealand’s banking sector by affecting banks’ staff, their funding and their customers.

The Reserve Bank has asked all banks about their risk management approaches and preparedness for COVID-19. Reserve Bank Governor Adrian Orr said the responses show the banks are prepared.

“Much of the banks’ focus has been on staff health and safety, and their ability to sustain their operations should the outbreak expand significantly. However, the banks are also well attuned to any impacts on their customers’ businesses, employment, and incomes,” Mr Orr says.

New Zealand Bankers’ Association chief executive Roger Beaumont says customers financially affected by COVID-19, particularly small to medium sized businesses, are encouraged to contact their bank.

Depending on the customers’ individual circumstances potential options for support include:

  • Reducing or suspending principal payments on loans and temporarily moving to interest-only repayments
  • Helping with restructuring business loans
  • Consolidating loans to help make repayments more manageable
  • Providing access to short-term funding
  • Referring individual customers to budgeting services.

“Each bank will have their own credit policies and approach to providing assistance. It’s important for affected customers to talk to their bank as soon as possible. That gives banks the best chance of offering assistance. Helping customers through any financial stress depends on good two-way communication,” Mr Beaumont says.

The Reserve Bank team are in regular dialogue with bank executives and are watching for signs of funding market pressures or emerging signs of credit stress.

“While we have not seen any significant pressures at this stage, we remain in regular contact with stakeholders across the financial sector. At the Reserve Bank we are prepared in our business continuity role to ensure a well-functioning financial system, including enabling access to cash, ensuring sufficient liquidity in the banking system, and managing a stable payments and settlements system,” Mr Orr says.

“All businesses should be preparing for possible disruptions from COVID-19. Think about how best to operate if staff are temporarily unavailable, or if suppliers have restricted stock, cash-flows are interrupted, and sales decline in some sectors,” Mr Orr says.

Household Financial Confidence Balks

The latest data from our household surveys to the end of February 2020 shows that the impact of Covid-19 are hitting home. The index dropped again, into uncharted territory, to an all time low of 80.2. I even had to change the scale of the chart to accommodate the fall!

We ask households to compare their levels of confidence today compared with a year back across a number of dimensions, from job security, income, costs of living, debt, savings and overall net wealth (assets less debts). This gives us a comparative series from the 52,000 households in the rolling sample.

Households are reacting to the uncertainty about the future trajectory of the economy, and recent survey results (we run a rolling series to the 5th March), have captured recent stock market falls. The falls are broad based, though households with a property remain relatively more positive, believing that property remains largely immune – we will see.

Within the property segmentation, property investors are on the mat now, as rentals continue to grind down, and property values especially among units have not recovered as much as the generic indices may suggest. Households renting are finding more choice, and lower rents in a number of centres (Hobart excepted). Supply is quite strong.

Most states moved lower, with NSW and VIC taking quite a hit this past month. NSW at 84.9 is the lowest scored state now, thanks to the higher debt leverage there where large mortgages predominate. WA, QLD and SA are bunched higher at around 90.

Across the age bands, we see falls across the board. The financial pressures on younger households of 20-30 and 30-40 are piling up as they continue to feel the issues most severely, older households are buttressed a little more by share portfolios (which are falling) and savings (where rates are falling). But all ages bands fell this month.

Within the index we can look at the elements which drive the scores. Job security slid 1.66% compared with last month with just 4.3% saying they feel more secure than a year ago. 38% feel less secure, an increase of 1.1% from last month, and 47% about the same. The full potential impact on jobs has yet to be absorbed by the community, but around 3 million are working in gig type “flexible” roles. And others will be “encouraged” to take leave to try to stem cash flow issues among businesses.

Households are taking a beating on savings at the bank, with rate cuts eroding returns to the point many households are not getting enough income to cover the basics. And the stock market is off (and falling as I write), with the supply side shock of the virus now translating to a potential liquidity crisis. Safe havens are hard to find for the fortunate few who have savings. Many of course have none and live from pay credit to pay credit.

The cost of debt is falling, so many are seeking to refinance (again) to grab the lower rates available to some. However, only 4.2% are more comfortable with their level of debt compared with a year back, and of course if income from employment falls, paying the mortgage becomes a nightmare. 42.5% are less comfortable than a year ago. Those who recently obtained new mortgage finance appear to be in for the biggest shock thanks to looser underwriting standards of late.

Pressures on incomes remain centre stage with just 1.7% of households saying their real incomes have risen in the past year. More than half of households have seen their incomes fall in real terms over this period, and 40% see no change. Incomes will evaporate for many should the supply side shocks continue.

Costs of living on the other hand continue to bite, with more than 95% of households reporting rising costs over the past year. 5% reported no change, almost no households reported they had fallen. Categories of costs which are impacting including the usual suspects, from energy, fuel, child care and health case costs, plus council rates. But the most insidious are those relating to everyday expense at the supermarket, where drought related hikes abound. The falling exchange rate is also hitting some imports and making them more expensive. Around 25% of households have less than 1 months cash available to meet their commitments if they income seized up.

Yet, overall, the net worth of households improved slightly, with property values higher in a number of locations, though recent stock market falls are dragging wealth down for some.

The big strategic question now is whether the Government understands the true significance of what is happening. Whilst they are talking up a $10 billion package, it appears to be shaping towards investment allowances and other tactical measures. In fact, the level of confidence we are recording in our surveys suggests that households will not be able spend (consumption being a significant share of the economy) and many small businesses will struggle to employ, yet alone survive. The quantum they are discussing is too little too late. I expect confidence to erode even more as things play out and the true horror the economic predicament we are in hits home. And then the following financial crisis also strikes.

Coronavirus to slug APAC with $319bn loss: S&P

The coronavirus outbreak could result in a $319 billion loss for economies in the Asia Pacific, S&P Global Ratings has estimated, with Australia left vulnerable. Via InvestorDaily.

A report from S&P has forecast growth in the APAC will slow to 4 per cent in 2020, the lowest since the global financial crisis, as a result of the virus.

The multinational believes a U-shaped recovery will start later in the year, but by then, economic damage in the region will reach US$211 billion ($319 billion). 

Shaun Roache, Asia-Pacific chief economist at S&P Global Ratings has said the loss will be distributed across the household, non-financial corporate, financial and sovereign sectors, with the burden to be on governments to soften the blow with public resources. 

“Some economic activities will be lost forever, especially for the service sector,” Mr Roache said.

The hardest hit economies have been Hong Kong, Singapore and Thailand, where people flows and supply chain channels are large. 

Australia is also exposed, with S&P forecasting its growth for the year to touch 1.2 per cent, more than half of what it was in 2019 at 2.7 per cent.

“Australia’s most disrupted sectors employ a large share of workers which will weaken both the labour market and consumer confidence,” Mr Roache said.

Services in Australia account for a large slice of employment, the reported noted, with accommodation and catering being sensitive to tourism and discretionary consumer spending. 

Along with other economic experts, AMP Capital senior economist Diana Mousina signalled she expects Australian GPD growth to be negative in the March quarter, dragged by the bushfires and the virus.

Last week’s rate cut to 0.5 per cent will assist households with mortgages and businesses with debt, she wrote, but more stimulus is needed. AMP Capital, as well as UBS have called the RBA will enact another cut in April. 

Ms Mousina anticipates fiscal stimulus from government, starting with support for businesses hit by COVID-19, followed by a broader boost to help investment and consumer spending. 

“However if government stimulus does not prove to be enough (or come early enough) to support the economy then the RBA is expected to start an asset purchase program to further reduce the cost of borrowing,” she said.

As at Friday morning, there were 59 confirmed cases of COVID-19 in Australia, with two deaths.

APRA monitoring hits to financial system 

The prudential regulator has indicated it is assessing how the coronavirus outbreak will affect the operation of financial institutions, with chairman Wayne Byres saying the system is positioned to handle volatility, but it will need considerable vigilance.

Speaking to the standing committee of economics last week, Mr Byres said the regulator has also been examining broader economic impacts from the virus. 

The financial system has already copped hits from the extreme weather events over the summer. Current estimates for total insured losses as a result of the bushfires, storms, hail and floods across Australia are projected to be in the order of $5 billion. The Australian cyclone system is still yet to end.

APRA has reported the financial position of the insurance sector means it is well placed to cover the claims, however, Mr Byres stated: “The summer’s events will undoubtedly have an impact on the price and in some cases, availability of insurance in the future.”

Cuts to Fuel Refinancing Rush

Sharp fixed and variable rate home loan reductions are set to trigger a spike in refinancing applications through the broker channel, according to Aussie CEO James Symond. Via The Adviser.

Last week, the Reserve Bank of Australia (RBA) lowered the official cash rate by 25 bps from 0.75 per cent to 0.5 per cent – marking the fourth cut since June 2019 when the easing cycle commenced.

This followed a sharp turnaround in sentiment ahead of the RBA’s monetary policy board meeting, with analysts initially expecting the central bank to keep rates on hold.

Developments in the domestic and global economy are likely to have altered the RBA’s tone, with weak local market indicators and the coronavirus (COVID-19) outbreak rattling market confidence.

A host of lenders, including the big four banks announced variable home loan rate reductions in response to the cut.

Bendigo and Adelaide Bank is the latest lender to announce variable rate reductions, passing on the full 25 bps to new and existing customers, effective 27 March.

Bendigo Bank has also cut small business and overdraft variable rates by the full 25 bps, also effective 27 March.

“In an environment experiencing historically low rates, we have carefully evaluated our responsibility to borrowers and communities with the impact lower rates have on depositors, our business performance and all other stakeholders,” Bendigo Bank’s managing director, Marnie Baker said.

“At the same time, many customer and communities are facing a long recovery from bushfires and drought and coupled with the still largely unknown economic impacts from COVID-19, this decision aims to further support our home loan and business customers and our many communities nationwide.”

Adelaide Bank’s head of third-party banking, Darren Kasehagen, added: “These changes will have a direct and positive impact [on] what is a most uncertain time for our home loan customers.”

“The decision allows customers to take advantage of the lowest variable home loan rates that have been available for some time.

“As always, we carefully considered the impact on all stakeholders and the overall cost of funding in arriving at this decision.”

Macquarie Bank and ING, which were among the lenders to drop variable rates by the full 25 bps, have also announced sharp reductions to their fixed rate home loans.

Macquarie has dropped two and three-year fixed rates to as low as 2.64 per cent for owner-occupied borrowers paying principal and interest (P&I) and with a loan-to-value ratio (LVR) of less than 70 per cent.

Owner-occupied P&I rates have also been reduced to 2.74 per cent for four and five-year fixed rates for borrowers with an LVR of less than 70 per cent.

Meanwhile, ING has slashed its fixed rates to as low as 2.49 per cent for owner-occupied P&I borrowers with the Orange Advantage product (3.89 per cent comparison rate).

ING’s investor fixed rates have dropped to as low as 2.74 per cent (4.44 per cent comparison rate).

In light of record-low mortgage rates, Aussie Home Loans CEO Mr Symond has called on borrowers to consider refinancing to save on their repayments.

“I expect many fixed and variable mortgage rates will fall below 3 per cent over the next month,” he said.

“Borrowers should be exploring the market for competitive rates and speaking with a reputable mortgage broker.

“A decision to see a mortgage broker could save borrowers thousands of dollars and years off their repayments over the life of the mortgage.”

Mr Symond added that he is expecting refinance rates to spike beyond 30 per cent of new flows – as currently experienced by Aussie’s broker network.

“Now is a great time to refinance and exploit the strong competition amongst lenders, but borrowers need to get sound, well-researched advice from a credible broker or lender before taking this step,” he concluded.

Fed’s final stress capital buffer is credit negative for US banks

On 4 March, the Federal Reserve Board (Fed) finalized changes to its capital rules for US banks with assets greater than $100 billion. Via Moody’s.

The final changes increase the flexibility banks have to payout capital more aggressively and will likely give bank management greater leeway to reduce the size of their management buffers and operate with capital ratios closer to the minimum levels required.

The final version establishes a stress capital buffer (SCB) that incorporates the Fed’s stress test results into its regulatory Pillar 1 capital requirements for these banks. Originally proposed in April 2018, the final rule includes a number of changes that weaken the original, making it credit negative for all US banks covered by the rule.

The Fed’s impact analysis of the final rule suggests that in aggregate the Common Equity Tier 1 (CET1) capital requirements at the affected US banks could decline up to $59 billion: $6 billion at the eight US global systemically important banks (G-SIBs) and $35 billion at the rest. Since most banks currently hold a management buffer above existing requirements, the affected banks could actually cut their CET1 capital by twice this amount and still comply with the final rule. The CET1 capital reduction could be $40 billion (a 5% decline) at the G-SIBs, $50 billion (a 21% decline) at other banks with $250 billion or more in assets, and $35 billion (a 16% decline) at
banks with assets between $100 and $250 billion.

Consistent with the proposal, the final rule integrates stress testing into the Fed’s regulatory capital requirements by replacing the capital conservation buffer, which is currently 2.5%, with the SCB. The SCB will be the higher of either 2.5%, or the difference between the starting and minimum projected CET1 capital ratio under the severely adverse scenario of the Fed’s Dodd-Frank Act Stress Test (DFAST) plus four quarters of planned common stock dividends.

Starting in October 2020, if a bank’s risk-based capital ratios fall below the aggregate of the minimum capital requirement plus the SCB, the relevant G-SIB surcharge, and the countercyclical capital buffer (if any), restrictions would apply to capital payouts and certain discretionary bonus payments.
As in the proposal, the final rule changes the current annual Comprehensive Capital Analysis and Review (CCAR) and DFAST process.

The final rule eliminates the assumption that a bank’s balance sheet and risk-weighted assets will grow under the stress scenarios, eliminates the Fed ability to object on quantitative grounds to a bank’s capital plan, and removes the 30% dividend payout ratio as a threshold for heightened scrutiny of a bank’s capital plan. Both the flat balance sheet assumption and the requirement that banks hold capital for only four quarters of dividends rather than for the full amount of planned payouts over the stress test horizon lower capital requirements versus the current stress testing regime.

The decrease is only partially offset for G-SIBs by the first-time inclusion of the G-SIB surcharge within the Fed’s stress test.

The final rule is weaker than the original proposal for several reasons. Under the proposal, banks would not have been allowed to pay out capital in excess of their approved capital plans without Fed prior approval. In the final rule, banks can in most cases make payouts in excess of amounts in their capital plan, provided the payout is otherwise consistent with the payout limitations in the final rule.

Additionally, the final rule modifies payout limitations to allow firms with an SCB in excess of 2.5% to pay a greater portion of their dividends and management bonuses and to repurchase shares for a period of time after capital ratios fall below the requirement. And in the final rule, the SCB, unlike the DFAST capital requirements, will not incorporate material business plan changes, such as those resulting from a merger or acquisition. As a result, such actions will only affect a bank’s capital ratio once the action has occurred.

The final rule also excludes the originally proposed stress leverage buffer requirement, which would not have been a binding constraint for most banks. Its elimination from the final rule removes this requirement as a potential backstop. And without the stress leverage buffer, the still pending proposal to modify the supplementary leverage ratio for the eight G-SIBs by tying it more closely to the G-SIB surcharge could further weaken the ability of the leverage ratio to serve as a backstop requirement and would also be credit negative.

Negative Interest Rates Are Coming – Watch Your Cash!

We look at the latest trends on Australian Bonds, Credit Markets and the recent IMF paper on negative interest rates – which they link to the need to restrict cash. This will not end well.

https://www.imf.org/external/pubs/ft/fandd/2020/03/what-are-negative-interest-rates-basics.htm

https://www.bloomberg.com/news/articles/2020-03-08/jpmorgan-sees-early-signs-of-stress-on-credit-and-funding