APRA remains in a low risk bubble, according to their paper today, which keeps the counter-cyclical buffer at 0. However they flag that may change ahead. I have to say this seems perverse, given the high debt levels and low economic performance and increased risks. Plain weird, and a million miles off the Reserve Bank NZ’s approach.
The Australian Prudential Regulation Authority (APRA) has decided to keep the countercyclical capital buffer (CCyB) for authorised deposit-taking institutions (ADIs) on hold at zero per cent, but has flagged the likelihood of a non-zero default level in the future.
The CCyB is an additional amount of capital that APRA can require ADIs to hold at certain points in the economic cycle to bolster the resilience of the banking sector during periods of heightened systemic risk. It has been set at zero per cent of risk-weighted assets since it was introduced in 2016.
In its annual information paper on the CCyB, APRA today confirmed it considers that a zero per cent CCyB remains appropriate at this point in time based on an assessment of the systemic risk environment for ADIs.
Among the factors APRA considered in making its decision were:
low credit growth;
minimal change in the risk profile of new housing lending;
movements in residential property prices, particularly recent growth; and
increased entity costs due to operational risk events and misconduct.
After carefully examining
these dynamics, APRA concluded that the current policy setting remains
appropriate.
In conjunction with the other agencies on the Council of Financial Regulators,
APRA will continue to closely monitor financial and economic conditions. APRA
reviews the buffer quarterly, and may adjust it if future circumstances warrant
this.
However, the information paper notes that APRA is also giving consideration to
introducing a non-zero default level for the CCyB as part of its broader
reforms to the ADI capital framework.
APRA Chair Wayne Byres said: “Given current conditions, and the financial strength
built up within the banking sector, a zero counter-cyclical buffer remains
appropriate.
“However, setting the countercyclical capital buffer’s default position at a
non-zero level as part of the ‘unquestionably strong’ framework would not only
preserve the resilience of the banking sector, but also provide more
flexibility to adjust the buffer in response to material changes in financial
stability risks. This is something APRA will consult on as part of the next
stage of the capital reforms currently underway.
“Importantly, this would be considered within the capital targets previously
announced – it does not reflect any intention to further raise minimum capital
requirements.”
APRA expects to commence the next stage of its ADI capital consultation in the
first half of next year. APRA’s revised capital framework is currently
scheduled to come into effect from 1 January 2022.
With Westpac shares trading at a seven-year low following the alleged breach of anti-money laundering laws and three of the four big banks recently cutting dividends or franking credits, investors should consider cutting their exposure to the big banks to avoid the erosion of their wealth and income. Via InvestorDaily.
Early
in November, even before AUSTRAC claimed Westpac did not comply with
anti-money laundering laws 23 million times, the company shocked
investors when it announced that it was cutting dividends for the first
time since 2008 after its full-year 2019 cash profit fell 15 per cent to
$6.85 billion. The bank slashed its final dividend to 80 cents from 94
cents a share. ANZ too recently cut the level of franking of its
dividends to 70 per cent from 100 per cent while NAB cut its final and
interim dividends to 83 cents a share from 99 cents for 2019.
The
big banks will most probably find it difficult to maintain existing
payouts to shareholders given the economic climate of historically low
interest rates and lacklustre economic growth. The graph below
highlights that the big banks are much less profitable now than they
were 10 years ago. The return on equity to shareholders has fallen from
around 20 per cent in 2008 to close to 10 per cent at current levels.
This is sounding alarm bells for investors looking for reliable income
and capital growth. As the banks’ profitability falls, the risk is that
shareholders will see more dividend cuts and even more capital losses on
top of those they have already sustained.
The
chart below highlights that the big banks’ net interest margins (NIM)
have also dropped to their lowest level of around 2 per cent, which is
putting downward pressure on their profits. Falling NIMs and a rising
regulatory spend in the aftermath of the Hayne royal commission are
combining to reduce banks’ profits.
The
outlook for profitability is not good. Low interest rates are likely to
persist for a long time in Australia and abroad. High levels of
household debt in Australia will inevitably hamper future growth in
earnings from mortgages and households save more. Household debt sits at
around 190 per cent of household income, higher than in most other
countries. While most households are comfortably making their debt
repayments now, any shocks to the economy such as significant rise in
unemployment could push some households over the edge.
Added
to this are remediation costs for the banks associated with poor
customer outcomes and regulatory non-compliance, which, according to
Reserve Bank figures, have amounted to $7.5 billion across the financial
sector over the past two years and are still rising. That figure does
not count Westpac’s likely escalation in remediation costs, law suits
and potentially record-breaking fine following AUSTRAC’S prosecution of
its alleged 23 million breaches of anti-money laundering laws. APRA has
also imposed additional capital requirements on the major banks to
account for poor risk management practices. All of these are weighing on
banks’ ability to make money.
This is
sobering news for shareholders. Dividend cuts and falling share prices
and profits are alarming outcomes for the many Australian investors
whose portfolios have significant exposure to the big four, which
represent around one-quarter of the S&P/ASX 200. In other words, if
you hold a blue-chip portfolio or are invested in an active or passively
managed Australian equity fund that tracks or is benchmarked to the
S&P/ASX 200, $1 out of every $4 is likely to be invested in banks
and therefore vulnerable to the risks they face. In the last month alone
(to 4 December), Westpac shares are down 10 per cent and over five
years, they have fallen 25 per cent. NAB shares are down 16 per cent and
ANZ 23 per cent. Commonwealth Bank has lost a relatively modest 0.6 per
cent. But these are dire financial outcomes for shareholders.
Governor Lowe spoke at the Australian Payments Network Summityesterday. He discussed the rise of electronic transactions, especially though the New Payments Platform, the high relative costs of international retail payments, and the need for, and potential of a Strong Digital Identity System. He also highlighted the decline in cash transactions which now accounts for just around a quarter of day-to-day payments.
A recurring theme across these summits has been the need to improve customer outcomes. I am very pleased to see that this focus has been continued at this year’s summit. The focus on customer outcomes aligns very closely with the focus of the Payments System Board. The Board wants to see a payments system that is innovative, dynamic, secure, competitive, and that serves the needs of all Australians.
Increasingly, this means that the payments system needs to support Australia’s digital economy.
With the digital economy being an important key to Australia’s future economic prosperity, we need
a payments system that is fit for purpose. We will only fully capitalise on the fantastic opportunities
out there if we have a payments system that works for the digital economy. The positive news is that we
have made some substantial progress in this direction over recent years and in some areas,
Australia’s payments system is world class. However, in the fast-moving world of payments, things
don’t stand still and there are some important areas we need to work on.
In my remarks today, I would like to do three things.
The first is to talk about some of the progress that has been made over recent years.
The second is to highlight a few areas where we would like to see more progress, particularly around
payments and the digital economy.
And third, I will highlight some of the questions we will explore in next year’s review of retail
payments regulation in Australia.
Progress Is Being Made
Over recent years there have been significant changes in the way that we make payments. We now have
greater choice than ever before and payments are faster and more flexible than they used to be.
The launch of the New Payments Platform – the NPP – in early 2018 has been an important
part of this journey. This new payments infrastructure allows consumers and businesses to make
real-time, 24/7 payments with richer data and simple addressing using
PayIDs.
After the NPP was launched, it got off to a slow start, but it is now hitting its stride. Monthly
transaction values and volumes have both tripled over the past year (Graph 1). In November, the
platform processed an average of 1.1 million payments each day, worth about $1.1 billion. The
rate of take-up of fast retail payments in Australia is a little quicker than that in most other
countries that have also introduced fast payments (Graph 2).
Graph 1
Graph 2
I expect that we will see a further pickup in usage once the CBA has delivered on core NPP
functionality for all its customers. The slow implementation has been disappointing and we expect the
required functionality to be available soon.
There are now 86 entities connected to the NPP, including 74 that are indirectly connected
via a direct NPP participant. There are at least six non-ADI fintechs that are using the NPP’s
capabilities to innovate and provide new services to customers. All up, approximately 66 million
Australian bank accounts are now able to make and receive NPP payments.
Use of the PayID service has also been growing, with around 3.8 million PayIDs having been
registered to date. If you have not already got a PayID, I encourage you to get one. I also encourage
you to ask for other people’s PayIDs when making payments, as an alternative to asking for their
BSB and account number. It is much easier and faster.
One specific example of where the NPP is bringing direct benefits to people is its use by the
Australian Government, supported by the banking arm of the RBA, to make emergency payments. During the
current bushfires, the government has been able to use the NPP to make immediate payments to people at a
time when they are most in need, whether that be on the weekend or after their bank has shut for the
night.
One other area of the payments system where we have seen significant change is the take-up of
‘tap-and-go’ payments. Around 80 per cent of point-of-sale transactions are now
‘tap-and-go’, which is a much higher share than in most other countries. This growth has
been made possible by the acquirers rolling out new technology in their terminals and by the willingness
of Australians to try something different. There has also been rapid take-up of mobile payments,
including through wearable devices.
Progress has also been made on improving the safety of electronic payments, particularly in relation to
fraud in card-not-present transactions. The rate of fraud is still too high, but it has come down
recently (Graph 3). I would like to acknowledge the work that AusPayNet has done here to develop a
new framework to tackle fraud. This framework strengthens the authentication requirements for certain
types of transactions, including through the use of multi-factor authentication.[1] This will
help reduce card-not-present fraud and support the continued growth in online commerce.
Graph 3
As our electronic payments system continues to improve, we are seeing a further shift away from cash
and cheques. The RBA recently undertook the latest wave of our three-yearly consumer payments survey. We
are still processing the results, but ahead of publishing them early next year, I thought I would show
you the latest estimate on the use of cash (Graph 4). As expected, there has been a further trend
decline in the use of cash, with cash now accounting for just around a quarter of day-to-day
transactions, and most of these are for small-value payments. Given the other innovations that I just
spoke about, I expect that this trend will continue.
Graph 4
Further Progress Needed
The progress across these various fronts means that there is a positive story to be told about
innovation in Australia’s payments system.
At the same time, though, there are still some significant gaps and areas in our payments system that
need addressing and where progress would support the digital economy in Australia. I would like to talk
about four of these.
NPP
The first of these is further industry work to realise the full potential of the NPP, including its
data-rich capabilities.
The NPP infrastructure can help make electronic invoicing commonplace and help invoices be paid on
time. It can also support significant improvement in business processes, as more data moves with the
payment. Real-time settlement and posting of funds also enables some types of delivery-versus-payment,
so that the seller can confirm receipt of funds and be confident in delivering goods or services to the
buyer.
The layered architecture of the system was designed to promote competition and innovation in the
development of new overlay services. Notwithstanding this, one of the consequences of the
slower-than-promised rollout of the NPP by some of the major banks is that there has been less effort
than expected on developing innovative functionality. Payment systems are networks, and participants
need to know that others will be ready to receive payments and use the network. Some banks have been
reluctant to commit time and funding to support the development of new functionality given that others
have been slow to roll out their ‘day 1’ functionality. The slow rollout has also reduced
the incentive for fintechs and others to develop new ideas. So we have not yet benefited from the full
network effects.
The Payments System Board considered this issue as part of its industry consultation on NPP access and
functionality, conducted with the ACCC earlier this year. As part of that review we recommended that
NPPA – the industry-owned company formed to establish and operate the NPP – publish a
roadmap and timeline for the additional functionality that it has agreed to develop. The inaugural
roadmap was published in October and NPPA also introduced a ‘mandatory compliance
framework’. Under this compliance framework, NPPA can designate core capabilities that NPP
participants must support within a specified period of time, with penalties for non-compliance. This is
a welcome development.
One important element of the roadmap is the development of a ‘mandated payments service’
to support recurring and ‘debit-like’ payments. This new service will allow
account-holders to establish and manage standing authorisations (or consents) for payments to be
initiated from their account by third parties. This will provide convenience, transparency and security
for recurring or subscription-type payments and a range of other payments.
Another element of the roadmap that has the potential to promote the digital economy is the development
of NPP message standards for payroll, tax, superannuation and e-invoicing payments. The standards will
define the specific data elements that must be included with these payment types, which will support
automation and straight-through processing. We would expect financial institutions to be competing with
each other to enable their customers to make and receive these data-rich payments.
Less positively, there is still uncertainty about the future of the two remaining services that were
expected to be part of the initial suite of Osko overlay services. These are the
‘request-to-pay’ and ‘payment with document’ services. We understand there
are still challenges in securing committed project funding and priority from NPP participants to move
ahead, even though BPAY has indicated it is ready to complete the rollout. The RBA strongly supports the
development of these additional NPP capabilities, which are likely to deliver significant value for
businesses and the broader community.
Digital identity
A second area where the Payments System Board would like to see further progress is the provision of
portable digital identity services that allow Australians to securely prove who they are in the digital
environment.
Today, our digital identity system is fragmented and siloed, which has resulted in a proliferation of
identity credentials and passwords. This gives rise to security vulnerabilities and creates significant
inconvenience and inefficiencies, which can undermine development of the digital economy. These generate
compliance risks and other costs for financial institutions, so it is strongly in their interests to
make progress here. It is fair to say that a number of other countries are well ahead of us in this
area.
The Australian Payments Council has recognised the importance of this issue and has developed the
‘TrustID’ framework. The Government’s Digital Transformation Agency has also been
working on a complementary framework (the Trusted Digital Identity Framework), which specifies how
digital identity services will be used to access online government services. The challenge now is to
build on these frameworks and develop a strong digital identity ecosystem in Australia with competing
but interoperable digital identity services.
The rollout of open banking and the consumer data right should bring additional competition among
financial services providers, and digital identity is likely to reduce the scope for identity fraud,
while providing convenient authentication, as part of an open banking regime.
A strong digital identity system would also open up new areas of digital commerce and help reduce
online payments fraud. It will also help build trust in a wide range of online interactions. Building
this trust is increasingly important as people spend more of their time and money online. So we would
like to see some concrete solutions developed and adopted here.
Cross-border retail payments
A third area where we would like to see more progress is on reducing the cost of cross-border
payments.
For many people, the costs here are still too high and the payments are still too hard to make. It is
important that we address this. It is an issue not just for Australians, but for our neighbours as well.
I recently chaired a meeting of the Governors from the South Pacific central banks, where I heard
first-hand about the problems caused by the high cost of cross-border payments.
Analysis by the World Bank indicates that the price of sending money from Australia has been
consistently higher than the average price across the G20 countries (Graph 5). And a recent
ACCC inquiry found that prices for cross-border retail payment services are opaque. Customers are not
always aware of how the ‘retail’ exchange rate they are being quoted compares with the
wholesale exchange rate they see on the news, or of the final amount that will be received in foreign
currency.[2] There are also sometimes add-on fees.[3]
Graph 5
As part of the RBA’s monitoring of the marketplace, our staff recently conducted a form of online
shadow shopping exercise, exploring the pricing of international money transfer services by both banks
and some of the new non-bank digital money transfer operators (MTOs).
This exercise showed that there is a very wide range of prices across providers and highlighted the
importance of shopping around.
The main results are summarised in this graph (Graph 6). In nearly every case, the major banks are
more expensive than the digital MTOs. For the major banks, the average mark-up over the wholesale
exchange rate is around 5½ per cent, versus about 1 per cent for the digital
MTOs.
Graph 6
The graph illustrates why the cost of cross-border payments is such an issue for the South Pacific
countries. These costs are noticeably higher than for payments to most other countries. This is a
particular problem as many people in the South Pacific rely on receiving remittances from family and
friends in Australia and New Zealand. In many cases, low-income people are paying very high fees and it
is important that we address this where we can. As is evident from the graph, most digital MTOs do not
service the smaller South Pacific economies, which limits customers’ choice of providers.
In part, the high costs – and slow speed – of international money transfers is the result
of inefficiencies in the traditional correspondent banking process. It is understandable why some large
tech firms operating across borders see an opportunity here. Where people are being served poorly by
existing arrangements, new solutions are likely to emerge with new technologies. This represents a
challenge to the traditional financial institutions to offer better service at a lower cost to their
customers, while still meeting their AML/CTF requirements.
Central banks have a role to play here too, and there is an increased focus globally on what we can do
to reduce the cost of cross-border payments. One example of this is the promotion of standardised and
richer payment messaging globally through the adoption of the ISO20022 standard. The RBA is also working
closely with the Reserve Bank of New Zealand, AUSTRAC and other South Pacific central banks to develop a
regional framework to address the Know-Your-Customer concerns that have limited competition and kept
prices high.
Operational resilience
A fourth area where we would like to see more progress is improving the operational resilience of the
electronic payments system.[4]
Disruptions to retail payments hurt both consumers and businesses. Given that many people now carry
little or no cash, the reliability of electronic payment services has become critical to the smooth
functioning of our economy.
We understand that, given the complexity of IT systems, some level of payments incidents and outages to
services is inevitable. But it is apparent from the data we have that the frequency and duration of
retail payments outages have risen sharply in recent years. In response, the RBA has begun working with
APRA and the industry to enhance the data on retail payment service outages and to introduce a suitable
disclosure framework for these data. These measures will provide greater transparency around the
reliability of services and allow institutions to better benchmark their operational performance.
The 2020 Review of Retail Payments Regulation
The third and final issue I would like to touch on is the Payments System Board’s review of retail
payments regulation next year.
The review is intended to be wide-ranging and to cover all aspects of the retail payments landscape,
not just the RBA’s existing cards regulation. As the first step in the process, we released an
Issues Paper a couple of weeks ago and have asked for submissions by 31 January.[5] There will
also be opportunities to meet with RBA staff conducting the review.
The review will cover a lot of ground, including hopefully some of the issues that I just mentioned.
There are, though, a few other questions I would like to highlight.
The first is what can be done to reduce further the cost of electronic payments?
Both the Productivity Commission and the Black Economy Taskforce have called for us to examine this
question. It is understandable why. As we move to a predominantly electronic world, the cost of
electronic payments becomes a bigger issue. The Payments System Board’s regulation of interchange
fees and the surcharging framework, as well as its efforts to promote competition and encourage
least-cost routing, have all helped lower payment costs.
At issue is how we make further progress: what combination of regulation and market forces will best
deliver this? Relevant questions here include: whether interchange fees should be lowered further; how
best to ensure that merchants can choose the payment rails that give them the best value for money; and
whether restrictions relating to no-surcharge rules should be applied to other arrangements, including
the buy-now-pay-later schemes.
A second issue is what is the future of the cheque system?
Cheque use in Australia has been in sharp decline for some time. Over the past year, the number of
cheques written has fallen by another 19 per cent and the value of cheques written has fallen
by more than 30 per cent, as the real estate industry has continued to shift to electronic
property settlements (Graph 7). At some point it will be appropriate to wind up the cheque system,
and that point is getting closer. Before this happens, though, it is important that alternative payment
methods are available for those who rely on cheques. Using the NPP infrastructure for new payment
solutions is likely to help here.
Graph 7
Third, is there a case for some rationalisation of Australia’s three domestically focused payment
schemes, namely BPAY, eftpos and NPPA? A number of industry participants have indicated to us that they
face significant and sometimes conflicting investment demands from the three different entities. This
raises the question of whether some consolidation or some form of coordination of investment priorities
might be in the public interest.
Fourth, and finally, what are the implications for the regulatory framework of technology changes, new
entrants and new business models?
The world of payments is moving quickly, with new technologies and new players offering solutions to
longstanding problems. At the same time, expectations regarding security, resilience, functionality and
privacy are continually rising. Meeting these expectations can be challenging, but doing so is critical
to building and maintaining the trust that lies at the heart of effective payment systems. The entry of
non-financial firms into the payments market also raises new regulatory issues. As part of the review,
it would be good to hear how the regulatory system can best encourage a dynamic and innovative payments
system in Australia that fully serves the needs of its customers.
From the excellent James Mitchell, at The Adviser. If the prudential regulator was hoping to provide clarity on MySuper products it has failed miserably.
Call me ignorant, but when APRA announced the launch of its MySuper heatmap, I didn’t envision downloading an Excel spreadsheet and navigating multiple tabs in order to decipher what the hell I was looking at. If this monstrosity is intended to be fit for public consumption then the average Australian better have a financial adviser by their side, if for no other reason than to decode the thing.
Fortunately, the team who put the spreadsheet together included a “user guide” on tab 4 (see below). Crikey!
There
is also a colour legend and a glossary of definitions for terms such as
“strategic asset allocation” and “net investment return”.
My
fear is that the average Australian super member looking to compare
funds will struggle to comprehend what APRA’s heatmap actually means.
Particularly when you consider what the financial literacy of an average
Australian actually looks like.
Back
in August, Compare the Market and Deloitte Access Economics released the
second edition of The Financial Consciousness Index, which measures the
extent to which Aussies are conscious or aware of their ability to
affect and change their own financial outcomes, encompassing their
willingness to act, and the extent to which they are able to participate
in financial matters.
Australians
scored 48 per cent on average on the index, which means they are just
into the “conscious” band and out of the “it’s a blur” band.
Meanwhile,
ASIC’s 2018 Financial Capability initiative noted that two in three
Australians don’t understand the investment concept of diversification
and only 35 per cent know what their super balance is.
With
this in mind, it’s difficult to fathom how APRA’s overly complex Excel
spreadsheet is going to translate, let alone be used as a guide, to
everyday Australians.
FSC CEO Sally Loane warned against the misuse of the thing and said it should not be used to rank superannuation products.
“It
is really important to understand that the heatmaps are a point-in-time
analysis, which is a useful tool for APRA in its supervision
activities, but it doesn’t tell the whole story when it comes to
members’ retirement outcomes,” Ms Loane said.
“Particularly
for life cycle products, which adjust investment strategies over a
person’s lifetime, the headline numbers in the heatmap don’t reflect the
actual experience of a member in that fund, and could be misleading if
viewed in isolation.”
The FSC noted
that the heatmap may tell you that other funds have had higher returns
over five years, but if you’re close to retirement you might be far more
concerned with how your fund is managing the risks of a market downturn
to safeguard your retirement savings.
Some
of the heatmap’s other failings are that it doesn’t tell you how your
super has performed over your lifetime, it can’t tell you whether your
fund invests in accordance with your ethical and philosophical beliefs,
and it doesn’t tell you what additional services they offer to help you
manage your savings.
“If you have
concerns about whether your super fund is right for you, talk to your
fund or speak to a financial adviser,” Ms Loane said.
Ms
Loane said that while the FSC hoped APRA would continue to refine its
MySuper heatmap methodology, the proposal to extend the exercise to
choice products was highly problematic.
“The
broad variety of choice products in the market, the complexity and
bespoke nature of platforms and wraps where individuals choose their
investment strategies, and the lack of direct comparable data, [make] it
extremely difficult to translate heatmapping beyond MySuper and we urge
APRA to not only be cautious in proceeding with this exercise but to
engage deeply with industry,” she said.
Residential property prices rose 2.4 per cent in the September quarter 2019, the strongest quarterly growth since the December quarter 2016, according to figures released today by the Australian Bureau of Statistics (ABS).
Sydney and Melbourne residential property prices recorded strong growth in the September quarter 2019. Property prices rose in Sydney (+3.6 per cent), Melbourne (+3.6 per cent), Brisbane (+0.7 per cent) and Hobart (+1.3 per cent).
House prices rose 4.0 per cent in Sydney and 3.7 per cent in Melbourne while attached dwelling prices rose 2.8 per cent in Sydney and 3.6 per cent in Melbourne.
ABS Chief Economist Bruce Hockman said, “The increase in property prices is in line with housing market indicators, particularly in Sydney and Melbourne. New lending commitments to households, auction clearance rates and sales transactions all improved during the September quarter.”
Residential property prices fell 3.7 per cent in the year to the September quarter 2019, with all capital cities except Hobart recording falls. This is a noticeable improvement on the 7.4 per cent annual fall in the June quarter 2019.
The total value of Australia’s 10.4 million residential dwellings rose by $189.9 billion to $6,869.4 billion in the September quarter 2019. The mean price of residential dwellings in Australia is now $660,800.
Ironic really, that on the day ASIC released its updated lending guidance, BOQ have lowered their interest rate floors for home loan serviceability assessments.
BOQ has reduced its floor rate for mortgage serviceability assessments from 5.65 per cent to 5.35 per cent, with the changes also applicable to its subsidiary Virgin Money. Via The Adviser.
The changes will apply for all new home loan applications submitted from Monday, 9 December.
The interest rate buffer will remain unchanged at 2.50 per cent.
BOQ noted that serviceability rates will
vary depending on the credit product under assessment, with the interest
rate applicable determined as follows:
For variable principal and interest home loans, the actual rate will be applied as the interest rate for serviceability.
For interest-only and fixed rate home loans, the revert rate will be applied as the interest rate for serviceability.
BOQ added that applications submitted
prior to Monday, 9 December, that have not been approved will be
assessed using the new serviceability rates.
In early July, the prudential regulator
scrapped its requirement for a 7 per cent interest rate floor and raised
its recommended buffer rate from a minimum of 2 per cent to 2.5 per
cent.
APRA chair Wayne Byres said the
regulator’s amendments were “appropriately calibrated”, stating that a
serviceability floor of more than 7 per cent was “higher than necessary
for ADIs to maintain sound lending standards”.
Analysts have partly attributed the rebound in home lending activity over the past few months to APRA’s changes.
According to the latest data released
by the Australian Bureau of Statistics, the value of new home lending
commitments rose 1.1 per cent (in seasonally adjusted terms) in
September, following on from a 3.8 per cent rise in August.
New lending commitments are now up 5.6 per
cent (seasonally adjusted) when compared with September 2018, the first
positive year-on-year result seen since mid-2018.
Something is late, very late this month. After the stock loans data from the RBA and APRA, both of which arrived for October on the last day of November, we would have expected to see the credit flow data from the ABS, about a week or so later.
Yet, digging into the upcoming releases, it looks like something will land on the 17th December. In addition, we are expecting significant revisions and changes as they continue to tweak the new reports.
They said:
From December 2019, this publication will be based on a new, improved data collection, called the Economic and Financial Statistics (EFS) collection. To better reflect the new content, the publication will be renamed Lending Indicators, Australia (cat. no. 5601.0). The first issue of the new publication will contain October 2019 data and will be released on 17 December 2019.
We know the October loan stock growth slowed to the lowest in many years, so the current theory doing the rounds is that households are repaying existing loans, and significant volumes of new loans are being written. Industry sources suggest to me that the refinance sector is buoyant thanks to the lower rates, but that is a net sum game. It is the new loans which we need to watch (after all if home prices are really taking off, per some of the indices, we would expect to see this trend), something which was pretty anemic last month.
And they also warn:
The changes to the concepts and classifications are significant. There is a high likelihood of revisions in future reporting periods as APRA, the ABS and the RBA continue to work with ADIs and other reporting institutions to ensure consistent reporting that aligns with instructions and definitions, and the impacts on seasonality can be measured. It is expected data quality will continue to improve over time.
We look at insights from the latest BIS Quarterly Report, and examine the U.S. Repo issue. They reveal it was structural – an insight which is significant.
Following our recent update on household mortgage stress, it’s important to broaden our scope into other areas of household financial stress. Just as mortgage defaults rise, power disconnections rise too.
In this report Mitch Grande examines the evidence. Mitchell is a recent Graduate of Politics, Philosophy, Economics (Honours) at the University of Wollongong and is concerned with Australian public policy, and especially energy policy.
Disconnections:
The ABC recently published an article on Western Australia’s record number of
households having their power shut off. For measure, WA’s mortgage stress has
reached 34.3% (145,000), as local economic conditions continue to deteriorate. We
suspect mortgage stress is well correlated with households being disconnected
from their power supply and compounding cost of living pressures through power
bills.
The
article spoke of one 1 in 60 WA households being cut off following unpaid
bills. WA’s state-corporations and largest retailers, Synergy and Horizon
Power, stated that over 22,000 customers had their power shut off in the past
year. This is a two-fold increase in state disconnections in the last three
years. The article cites year-on-year increases to the average WA electricity
bill of +11% (2017), +7% (2018), and +1.75% (2019); while salaries at best
increased +1%. It is important to note that WA is not included in National
Energy Market operations and trading, and as such, the government regulates
Synergy and Horizon Power’s prices of residential and larger customers, setting
the fees and charges annually in the budget. Most recent changes are as follows:
Other research on household energy stress by Alviss consulting with St Vincent de Paul, which does not include Western Australia, examined disconnection data for Victoria, New South Wales, Queensland, and South Australia. In short, their research found many regional and rural hubs at risk, as these postcodes, especially in the last three years, have experienced the most disconnections. The reason behind the regional cost profile is burgeoning network costs, with polls and wires being old, inconsistent, and ‘gold-plated’ over much longer distances than metro customers.
The
Alviss report categorises two types of disconnections: raised disconnections
and completed disconnections. However, the ABC report on WA only speaks to
“power being shut off”, so it is hard to compare the data uniformly. Nevertheless
both reveal the same story of financial hardship in small rural postcodes, perhaps
struggling with the agrarian shift and general economic stressors of poor
revenue poor wages, high costs, and burdens. Both the ABC article and Alviss
report speak to these at-risk households entering stress spirals, in which
regional folk are ‘too proud to seek help’ in either welfare or drug and alcohol
abuse.
The
average postcode profile consisted of lower local incomes, higher unemployment
rates, and relatively more housing affordability issues. A such, the average at
risk household was demographically older, had less economic opportunities, and
lower incomes.
State-by-state
the Alviss report found that:
Victoria had 43.8% of reported customers face
raised and/or completed disconnections.
Werribee (3030) topped the table with 10,424
raised and 5,097 completed.
NSW had 36.7% of its customers face raised
and/or completed disconnections.
Orange
(2800) had the most with 17,902 raised and 6,435 completed.
South East QLD had 30.3% of its customers face
raised and/or completed disconnections.
Caboolture (4510) had 7,587 raised and 2,541
completed.
But Logan (4114) had the highest completed with
2,552 of 7,152 raised.
SA had 30.2% of its customers face raised
and/or completed disconnections.
Salisbury (5108) had 3,956 raised and 952
completed.
But Elizabeth North (5113) had highest
completed with 1,524 of 3,953 raised.
This points to larger lingering issues in SA in
which more than 10 of the top 30 disconnected postcodes are middle suburbs
(5085, 5112, 5113, and 5114).
The
higher completion of disconnection rates reflects far greater then understood
financial hardship, retailers more readily disconnecting households, and
networks being more readily and efficiently able to disconnect consumers. Here
at DFA we have the data available to investigate this financial hardship,
through the survey data on mortgage stress.
DFA survey data breakdown:
From our
most recent DFA survey data, those most affected by power costs include:
the Battling Urban (34.3% surveyed);
the Disadvantaged Fringe (35.6%);
Rural Families (23.7%);
Stressed Seniors tied between power costs
(35.8%) and healthcare costs (35.8%); and
Young Growing Families (35.8%).
This
comes, largely, as we might expect, with young families in growing urban areas,
seniors and those in regional areas struggling with cash flow, and pockets of
disadvantaged and battling segments overburdened by power costs. The
distribution of these segments is largely consistent with the Alviss data,
particularly in Rural New South Wales and the Battling Urban of South
Australia.
All of
these segments (except rural families) whose power costs were the largest
stressor had mortgage/rent stress as their next most outstanding strain with:
Battling Urban (18.3%);
Disadvantaged Fringe (24.7%);
Stressed Seniors (sans healthcare cost (35.8%))
with (11.8%); and
Young Growing Families (21.9%); while
21.7% of Rural Families had fuel and transport
costs as their next highest stressor, whereas mortgage/rent costs affected
19.1%.
In the
other segments, which surveyed a higher cost than power costs, the distinction
is clear:
40.2% of Exclusive Professionals had higher
mortgage/rent cost stress than power costs (8.5%) with the next highest portion
reporting school fees/childcare (21.8%);
Mature Stable Families surveyed higher stress
from mortgage/rent costs (38.8%) than power costs (15.3%) which was their next
highest;
Multicultural Establishments had higher
mortgage/rent stress (30.4%) which was higher than power costs (21.9%), the
next highest result;
the Suburban Mainstream surveyed 24.4%
mortgage/rent costs compared to power costs (17.6%), where their next highest stressor
is school fees/childcare (17.8%);
Wealthy Seniors with (34.3%) mortgage/rent
costs, followed by healthcare (21.4%); and finally
Young Affluent in mortgage/rent costs (46.2%)
followed by their next highest, power costs (12.9%).
These
segments, too, largely come as no surprise with Mature Stable Families not
facing disadvantage, unlike the inner-city postcodes of South-East Queensland.
Or, Wealthy Seniors facing some degree of housing affordability in Rural or
Regional Victoria.
AEMC, AER, and Canstar:
A 2018 Australian Energy Market Commission (AEMC)
report modelled that in the next
two years emerging wind and solar capacity will drive down residential
wholesale prices by $55, offsetting marginal increases in the supply chain like
coal plant retirements, burgeoning network costs, and minor environmental
costs. The 2019 national weighted average consumption level for
residential consumers was estimated at 4,596 kWh per year. And at this
consumption level, the national average annual residential bill in 2017-18 was
$1,384 exclusive of good and services tax (GST) and $1,522 inclusive of GST.
However,
the lived reality for many households, on average, far exceeds these averages. One
way we can be certain of this is the Australian Energy Regulator’s own data on
disconnections: for NSW, SA, QLD, the ACT, and Tasmania 70,000 residential
customers had their supply disconnected between 2017 and 2018. These
disconnections are seasonally dependent, however more uniformly than we might
expect: there are slightly more disconnections raised in autumn (27.8%) and
summer (26.6%) than in spring (23.0%) and winter (22.6%). And then from the
more recent Alvis report and ABC WA article, we find that renewables easing the
wholesale price is not being felt – especially by regional and rural
households. To be clear, the private development of renewables is making enormous
strides in the alleviation of power costs, however, the rather incongruent
policy leadership in a number of other spaces is directly counteracting this.
By
taking a quick glance at Canstar, average annual bills are anywhere from $80 to
$370 greater than the AEMC’S estimates for the same average consumption – and
have increased.
Despite
the AEMC claiming observable declines in average household prices, postcodes
and households across the National Energy Market experience higher real bills
due to sluggish wages and are themselves burdened by inconsistent policy
frameworks that fail to implement meaningful market-based solutions or improve
the cost of living. The fact of the matter is that household disconnections in
all states is increasing.
Recently, the AEMC published their annual report for 2018-2019, which showed that consumers who are willing and able, have engaged in consumer-side uptake of solar PV and batteries. This is causing a positive decentralisation of energy grids (e.g. microgrids, peer-to-peer, virtual powerplants) and alleviation of power prices. In short:
“The technology revolution offers opportunities
and benefits for customers to take control of how they buy, sell and use
energy. Over time, this should allow for greater utilisation of the existing
stock of generation and network capacity, lowering average costs for all
consumers.”
However,
this is not without its challenges. The AEMC signal to a more complicated shape
of daily consumer demand and daily generator supply due to the decentralised
frequency and voltage; the necessity of a new power system management in
replacing old and inadequate capacity; getting proper connectivity to new
remote wind and solar projects; and the ever-elusive unpredictability of
weather patterns on day-to-day demand. As well, those households who are unable
to purchase household solar and/or batteries are beginning to be left behind,
worsening bad market conditions.
In all,
these challenges can be adequately met with coordinated and purposeful
investment in solar/battery integration and security. For instance, improving
grid access to those least-cost sources; fixing security challenges present in
the system, like network infrastructure; or maintaining incentives vis-à-vis
the needs of the system, like decentralised control of household’s bills with
smart technologies all will alleviate prices.
The Federal Governments’ Policy Angle
Going
into the election, the Coalition alluded to three policy options in order to
lower power prices: removing standing offers (dubbed a loyalty tax);
underwriting new reliable investment (painstakingly trying not to call it
subsidies); and ‘big stick’ divestment policies aimed at big gen/retailers who
either ‘price game’ or stray from Angus Taylor’s ‘reliable’ mantra. Rather
critically:
“The Coalition’s
fixation on energy prices is no doubt politically effective, as it both appeals
to people’s hip pockets and works as a scare campaign against taking action on
climate change. But it also obscures another significant, and not unrelated,
economic reality.”
Coming
from an ACCC report that “the standing offer is no longer working as it was
intended and [that it] is causing financial harm to consumers…” the government claimed that: “On 1 July 2019, 800,000 Australian families
and small businesses will benefit from lower electricity prices by moving to
default market offer electricity contracts saving households up to $481 in
South Australia and up to $663 in NSW and South East Queensland. Households changing to default market offers
from standing offer tariffs will save up to $481 in South Australia and $663 in
NSW and South-East Queensland…”
Not only
is this marginal in the grand scheme of energy consumers, it has required an
equalisation across the entire NEM. That is, people on “confusing discounts”
will have those reduced in order to maintain retail profits, stating: “customers
on standing offers and market offers that were above the default offer would be
better off, customers on lower priced market offers would be worse off”. The
AEMC and ACCC’s own data showed that the percentage of consumers on standing
offers was declining rapidly and organically.
“All
jurisdictions are likely to have less than 10 per cent of residential customers
on standing offers within the next two years. The Commission also notes that
there exists a segment of the market (approximately two to four per cent of all
residential customers) who are on standing offers for only a short period when
they move house or create a new connection and have not yet selected a market
offer.”
The
Government signalled to “savings built on price cuts of up to 15 per cent
secured by the Morrison Government for more than 500,000 families and small
businesses from 1 January 2019 – and our ban on sneaky late payment fees that
will save some customers up to $1,000 a year…” in that “small Businesses
changing to default market offers from standing offers will save up to $457 in
South-East Queensland, $878 in NSW and $896 in South Australia.” Despite this,
disconnections and household power costs stress have uniformly risen.
The
government and the ACCC urged consumers to still shop around for market offers
that are almost always cheaper than these default market offers.
“In particular, higher proportions of rural and small
business customers remain on standing offers. In contrast, the percentage of
hardship customers on standing offers is approximately half that of all other
residential customers.”
This is
coupled with underwriting new “reliable” generation, expected to reduce NEM
wholesale prices by a quarter by 2021 – however, whether the government is
subsidising the right wholesale generation capacities is another question
entirely (they’re not). As well, the government has introduced the Energy
Assistance payments to welfare recipients which emphasises a price safety net:
“banning retailers from offering confusing discounts, protecting customers in
financial hardship and requiring energy retailers to notify customers when
their discounts are about to finish or change.”
The
government appears more concerned with tinkering with peoples’ demand (a la the
first home buyers’ scheme). In doing so they are inflating average demand
profiles, not managing the market-wide issues in supply.
Being
seven months after the election, and five months since the default market
offers were introduced, the AEMC optimistically signalled to wholesale price
easing countered by burgeoning costs in the network and retail profiting – whereas,
on average, the consumers’ bill has increased in the eyes of financial
comparison cites and segments of the population surveyed by DFA report higher power
cost stress.
The
optimism is not lost in the media: with David Crowe, just in September, writing a piece stating that bills are falling
$130 a year thanks to the Morrison governments’ “industry crackdown.” Crowe
writes: “The price rules came into effect on July 1 and have already cut the
standard offers for electricity customers, with some NSW households saving $130
a year. Some Victorian customers have seen their offers fall by medians of $310
to $430 depending on the retailer.” But immediately, Crowe states that not all
customers are going to have reduced bills, just those that were on existing standing
offers – meaning that those on existing discounted retail rates have since had
their bills increased to equalise the burden. Whether this is observable in the
mass of disconnection figures or household stress is uncertain.
In the face of this optimism is the reality that power costs continue to burden
a majority of segments in Australia and average bills continue to rise, as ad
hoc policies have all but decreased the average bill. This is mainly because of
the new policy directions under Taylor and Morrison, which deal more in threats
and subsidies than they do in proper market-based or evidence-based
policymaking. The governments new direction fails to address the largest
inflators of household power costs, which are the overinvested gold-plated
regulated asset base, burgeoning wholesale costs from aging coal-fired power,
and extraordinary retail costs/profits – the latter of which the ACCC and AEMC reject, simply because ‘the market is competitive’. In
that same report, the ACCC and AEMC flag the long-term risks due to legislating
default market offers, including:
increased risk to retailers driving higher
financing and overall costs
lower levels of innovation leading to less
available products and services
higher barriers to entry and changes to
consumer behaviour resulting in decreased competition.
AEMC
were happy with retail competition (2019), for the market’s improved
simplicity, stable price deals, and removing confusing offers creating “a more
engaged market that is responding positively to greater product innovation and
bundling – and producing positive outcomes.”
5. Final Remarks
As a
portion of average household expenditure, electricity costs have risen to 50%
from 2006 to 2016. The ABS found 10% of those surveyed reported difficulty in
paying bills in 2015-2016. In 2013, ABS also found 10% “chose” to restrict
heating and cooling. These figures alone reaffirm the DFA thesis that Australia
is experiencing poor wage growth, underemployment, low productivity, record
levels of private debt. And when this is applied to poor innovation in the
energy sector, a maintenance of minerals-based growth, and a reluctance to
properly do what is needed
Across
all household types, less are able to pay electricity/gas. There is a negative
association between net wealth and indicators of energy-related financial
stress 1st quintile ‘chose’ to restrict heating / cooling. Renters
and mortgage holders are at observably greater risk of energy-related financial
stress, ‘choosing’ to forgo consumption. Solar panels substantially reduce their
difficulties, however, it is only available to those who can afford it, while
those who can’t are left to the market.
As the
DFA data shows, the surveyed segments are divided along two key groups: those
with Young Families in growing urban areas, Seniors and those in regional areas
struggling with cash flow, and pockets of disadvantaged and battling segments who
are overburdened by power costs. And on the other hand, those Exclusive
Professionals, Mature Stable Families, Multicultural Establishment, Suburban
Mainstream, Wealthy Seniors and the Young Affluent who are more burdened by
mortgage/rent costs.
In summary,
summer bodes very poorly, with shocks from old coal-fired power very likely spiking
prices unpredictably along outdated yet gold-plated interconnectors. Any price
movements across states, such as a brown out, through the NEM will be
infectious, as interconnectors deteriorate and fail to distribute new renewable
projects of higher efficiency. Existing coal generation is increasingly
unreliable and expensive, as the fleet continues to retire, and governments
fail to make investment into sufficient new generation or systems reliability. The
policy void in wholesale and gas markets will mean that higher prices and
system risk will continue, as the market and industry signals for proper
investment and legislative certainty.
