Digital Finance Analytics (DFA) Blog – Page 304

The Digital Destruction Of Banking

Google and Citigroup are teaming up to offer banking services. We discuss the upcoming revolution.

https://seekingalpha.com/article/4306955-google-moves-toward-banking-banking-moves-rapidly-towards-future

https://www.ft.com/content/ac22c4de-078b-11ea-a984-fbbacad9e7dd

Join Our Live Stream Tomorrow!

We will run our monthly live stream event tomorrow, Tuesday 19th November 2019 at 20:00 Sydney. You can ask questions live in the chat, or send them to me beforehand before event via this blog.

Big bank CEOs Deny ‘Loyalty Tax’ Accusations

The chief executives of the big four banks have doubled down in defence of their mortgage pricing decisions after being accused of profiting off a “loyalty tax” imposed on customers. Via The Adviser.

Appearing before the House of Representatives standing committee on economics on Friday (15 November), NAB chairman Philip Chronican and ANZ CEO Shayne Elliott denied that the banks have been “profiting from inertia” by charging existing mortgage customers higher rates in a lower rate environment.

Deputy chair of the committee and Labor MP Andrew Leigh accused the banks of imposing a “loyalty tax” on existing borrowers, which do not receive rate discounts offered to new customers.

In response, NAB chairman Philip Chronican said there were a range of factors influencing the bank’s pricing decisions, adding that the level of discounting on a particular loan was determined by the characteristics of the credit contract.

“On our variable rate mortgage products, we charge different rates for different products for a whole range of reasons,” he said.

“The overwhelming majority of our variable mortgage rate customers, in fact, 97 per cent, have discounts below the standard variable rate, and each of those discounts are set with reference to the riskiness of the loan, the size of the loan, and the combination of business that the customer brings in.

“The discount is for the life of the loan, unless of course the customer, at their discretion, comes back and wants to reunite with us or refinance with another organisation if they can get a better deal.”

Mr Chronican said that in light of cuts to the cash rate, the bank has offered existing customers reviews of their home loans.

“We offer all of our customers a review of their mortgage and have called all of our customers over the past 12 months, asking if they’d like a review of their mortgage,” he said.

“In the month of October alone, 15,000 customers took advantage of that and we increased the discount on those.”

However, deputy chair of the committee Andrew Leigh pressed Mr Chronican, asking: “Why is it that customers have to respond to a request for a review rather than simply receiving the same rate as a new customer would get? Aren’t you profiting from inertia?”

To which Mr Crhonican responded: “It doesn’t exactly feel like that. It’s a competitive market to get new business.

“We are accurately conscious that we want to retain our customers, but as I’ve explained, the differences are not as great as many people make them out to be.

“We compete at a point of time to get a customer, and we quote a discounted rate to get them and be competitive.”

He conceded: “We are conscious that overtime, those rates become uncompetitive, but [it’s] hard to have an individual negotiated rate if everybody has to get the same rate.”

Meanwhile, ANZ CEO Shayne Eliot flatly rejected claims that the bank has been charging a loyalty tax, also citing competitive pressures.

“I don’t accept the concept of loyalty tax. What we do is we competitively priced our products every day to offer the best price that we can for the services that we provide,” he said.

“Given the nature of our products, you will no doubt be referring to that there is a difference between what is known as the front book and the back of book; the pricing that we charge a new customer today versus the customer yesterday, or previously.

“But we don’t impose a tax. It’s an outcome of a highly competitive well-functioning market.”

When asked if it was “unusual” to charge customers different prices for the same product, Mr Elliott said: “Well, it’s not the same product, with respect. A mortgage today is not the same as a mortgage tomorrow or week ago.

“We price mortgages on the day based on the environment they’re in, the cost of funds on that day, the risk environment on that day and the competitive environment on that day, so I’m not sure that they are equivalent products.”

Scrutiny over the pricing behaviour of the big banks recently intensified following their failure to pass on the RBA’s full 25 basis point cuts to the cash rate.

This triggered Treasurer Josh Frydenberg to commission the Australian Competition and Consumer Commission (ACCC) to conduct a Home Loan Price Inquiry. The inquiry will review pricing behaviour from 1 January 2019 to examine:

the differences between advertised rates and the prices actually charged or paid;
the differences between rates paid by existing customers and those paid by new customers (front and back book pricing behaviour);
pricing decisions in response to changes to the official cash rate; and
factors preventing customers from switching to cheaper home loans.

In exploring these matters, the ACCC will consider consumer decision making and biases, information used by consumers, and the extent to which lenders may contribute to consumers paying more than they need to for home loans.

The Fishy Assassination Of Australia’s Property Price Debate

Economist John Adams and analyst Martin North continue our exploration of home price indices, and examine some of the latest claims.

ANZ CEO received remediation from bank

ANZ chief Shayne Elliott has revealed he was sent three remediation letters from the bank, insisting that the company will refund every single customer it has wronged, via Investor Daily.

Appearing before a parliamentary committee on Friday, Mr Elliott commented many customers receiving remediation wouldn’t have known there was an issue at the time, pointing to himself as an example.

The bank is in the process of working through 247 problem products and around 250 issues, assessing customers and determining whether they were charged the wrong interest or fees.

The majority of issues were revealed to be associated with the banking side, rather than the wealth segment and “fees for no service”.

“So the million customers that we’ve refunded today, most of them got a cheque in the mail and a nice little letter and they didn’t even realise it,” Mr Elliott said.

“I’ve had three. One was $30, one was $27 and one was $80. The average amount that’s being repaid out, you can do the maths.

“It’s important we get the money back; I’m not diminishing that. But we are remediating every single case. There’s nothing to do with complaints. This had to do with we have discovered a mistake, and we have gone and put it right.”

Mr Elliott predicted there are around 3.4 million customers in total who are owed refunds from the bank, with around one-third having received their remediation.

ANZ has set aside $1.6 billion in reserves for remediation, with the amount that has been refunded so far ($l67 million) being around a tenth of that.

Mr Elliott conceded the bank’s progress through returning customers’ money has been “modest”.

“We’ve taken provision of around $1.6 billion of that, maybe around $400 million has more to do with cost,” he said.

“That’s the cost of getting the money back.”

The bank now has 1,100 staff working sorely on remediation, with a further estimated 600-700 full-time employees lending a hand from other departments. ANZ has around 38,000 staff in total.

Mr Elliott said ANZ will give the remediation team all of the resources it needs.

“That team has no restriction on number of people they need to hire, none. They can hire as many people as they want,” Mr Elliott said.

“They have no budget restriction. Yeah, the restriction in a sense, the binding constraint, if you will, is not money or headcount, its expertise.

“We want to finish those [remediation programs] and find any other problems we have. We have a productive program where we are searching through every single product and process we have to see if there’s anything that needs remediating, big or small, we add it to the list and we get it done as fast as possible,” he said.

Despite the bank’s remediation process having had a gradual pace, as far as Mr Elliott is concerned, it is in the bank’s best interest to complete the refunds as fast as it can.

“My shareholders have already paid the $1.6 billion, it’s gone from their accounts, it’s gone,” he said.

“So when we take that provision, we’ve expensed it. So there is no benefit in delay. So now actually, there’s benefit in speed because the delay costs money because the longer [it is], the accrued interest keeps mounting up, and I have to pay more and more.

“There might be a perverse incentive to not discover issues, if that makes sense. But once you’ve discovered them, we have a legal obligation to provide and expense the money. The 1.6 billion, as far as we’re concerned is we’ve spent it – so now the sooner we get that money back to customers, the better.”

Why Sweden’s Central Bank Dumped Australian Bonds

Suddenly, at the level of central banks, Australia is regarded as an investment risk. Via The Conversation.

On Wednesday Martin Flodén, the deputy governor of Sweden’s central bank, announced that because Australia and Canada were “not known for good climate work”.

As a result the bank had sold its holdings of bonds issued by the Canadian province of Alberta and by the Australian states of Queensland and Western Australia.

Martin Flodén, deputy governor Sveriges Riksbank Central Bank of Sweden

Central banks normally make the news when they change their “cash rate” and households pay less (or more) on their mortgages.

But central banks such as Australia’s Reserve Bank and the European Central Bank, the People’s Bank of China and the US Federal Reserve have broader responsibilities.

They can see climate change affecting their ability to manage their economies and deliver financial stability.

There’s more to central banks than rates

As an example, the new managing director of the International Monetary Fund Kristalina Georgieva warned last month that the necessary transition away from fossil fuels would lead to significant amounts of “stranded assets”.

Those assets will be coal mines and oil fields that become worthless, endangering the banks that have lent to develop them. More frequent floods, storms and fires will pose risks for insurance companies. Climate change will make these and other shocks more frequent and more severe.

In a speech in March the deputy governor of Australia’s Reserve Bank Guy Debelle said we needed to stop thinking of extreme events as cyclical.

We need to think in terms of trend rather than cycles in the weather. Droughts have generally been regarded (at least economically) as cyclical events that recur every so often. In contrast, climate change is a trend change. The impact of a trend is ongoing, whereas a cycle is temporary.

And he said the changes that will be imposed on us and the changes we will need might be abrupt.

The transition path to a less carbon-intensive world is clearly quite different depending on whether it is managed as a gradual process or is abrupt. The trend changes aren’t likely to be smooth. There is likely to be volatility around the trend, with the potential for damaging outcomes from spikes above the trend.

Australia’s central bank and others are going further then just responding to the impacts of climate change. They are doing their part to moderate it.

No more watching from the sidelines

Over thirty central banks (including Australia’s), and a number of financial supervisory agencies, have created a Network for Greening the Financial System.

Its purpose is to enhance the role of the financial system in mobilising finance to support the transitions that will be needed. The US Federal Reserve has not joined yet but is considering how to participate.

One of its credos is that central banks should lead by example in their own investments.

They hold and manage over A$17 trillion. That makes them enormously large investors and a huge influence on global markets.

As part of their traditional focus on the liquidity, safety and returns from assets, they are taking into account climate change in deciding how to invest.

The are increasingly putting their money into “green bonds”, which are securities whose proceeds are used to finance projects that combat climate change or the depletion of biodiversity and natural resources.

Over A$300 billion worth of green bonds were issued in 2018, with the total stock now over A$1 trillion.

Central banks are investing, and setting standards

While large, that is still less than 1% of the stock of conventional securities. It means green bonds are less liquid and have higher buying and selling costs.

It also means smaller central banks lack the skills to deal with them.

These problems have been addressed by the Bank for International Settlements, a bank owned by 60 of the central banks.

In September it launched a green bond fund that will pool investments from 140 (mostly central bank) clients.

Its products will initially be denominated in US dollars but will later also be available in euros. It will be supported by an advisory committee of the world’s top central bankers.

It is alert to the risk of “greenwashing” and will only buy bonds that comply with the International Capital Market Association’s Green Bond Principles or the Climate Bond Initiative’s Climate Bond Standard.

Launching the fund in Basel, Switzerland, the bank’s head of banking Peter Zöllner said he was

confident that, by aggregating the investment power of central banks, we can influence the behaviour of market participants and have some impact on how green investment standards develop

It’s an important role. Traditionally focused on keeping the financial system safe, our central banks are increasingly turning to using their stewardship of the financial system to keep us, and our environment, safe.

Author: John Hawkins, Assistant professor, University of Canberra

Marked Slowdown In Dividends in Q3

A slowdown in global dividend growth is underway, according to the latest Janus Henderson Global Dividend Index (JHGDI). The trend began in the second quarter and continued in the third. Even at their slower pace, dividends are still growing comfortably, however.

Australia saw a big decline in dividends, with two fifths of companies in the index cutting dividends. The total dropped to $18.6bn, the lowest Q3 total since 2010 in US dollar terms, down 5.9% on an underlying basis. The biggest impact came from National Australia Bank, which made its first dividend cut in a decade, and Telstra. Australia already has the lowest dividend cover in the world among the bigger economies.

Globally, payouts rose 2.8% on a headline basis to reach a new third-quarter record of $355.3bn, equivalent to an underlying growth rate of 5.3% once the stronger dollar and minor technical factors were taken into account. This is exactly in line with the long-term trend, and Janus Henderson’s forecast. The Janus Henderson Global Dividend Index rose to 193.1, a new record.

Only US dividends reached an all-time record in Q3, up 8.0% on an underlying basis, well ahead of the global average. A slowdown in profit growth is however beginning to impact dividend payments. A rising proportion of US companies held their dividends flat – one in six companies in Q3, up from one in ten in Q1, though there remain few outright cutters. The largest dividend payer in the US this year will be AT&T, jumping ahead of Apple, Exxon Mobil and Microsoft. AT&T’s return to the top spot for the first time since 2012 is thanks to its acquisition of Time Warner in 2018; the combined company will distribute close to $14.9bn, though this will not be enough to dislodge Shell as the world’s largest payer for the fourth year in a row.

Allowing for seasonality Japan, Canada and the United Kingdom all saw third-quarter records, though in the UK’s case this was entirely due to very large special dividends from banks and miners. The underlying trend in the UK remains lacklustre with underlying growth of just 0.6%.

From a seasonal perspective, Q3 is especially important for Asia Pacific and China. Here there were distinct signs of weakness. Almost half the Chinese companies in the index reduced their payouts, and the modest growth that was achieved was dependent on big increases from one or two companies. Chinese dividends totalling $29.2bn crept ahead 3.7% year-on-year on an underlying basis and without Petrochina’s large increase, they would have been lower year-on-year. The slowdown in the Chinese economy is affecting the dividend-paying capacity of its companies, particularly since in the short-term dividends are more closely tied to profits in China than in other parts of the world such as the US and UK due to companies largely adopting a fixed payout-ratio policy.

Across Asia-Pacific, Australia and Taiwan led payouts lower, and only Hong Kong delivered strong growth. It was a difficult quarter in Australia with two fifths of companies in the index cutting dividends. The total dropped to $18.6bn, the lowest Q3 total since 2010 in US dollar terms, down 5.9% on an underlying basis. The biggest impact came from National Australia Bank, which made its first dividend cut in a decade. Australia already has the lowest dividend cover in the world among the bigger economies, so if the slowing domestic economy leads to a decline in corporate profitability, it will be bad news for income investors, highlighting the importance of taking a diversified global investment approach. Hong Kong’s payouts jumped 8.1% on an underlying basis, contrasting with the mainland trend. This was mainly due to dividends from oil company CNOOC and from the real estate sector.

Q3 marks the seasonal low point for European dividends. They rose 7.0% on an underlying basis, though the growth rate was flattered by positive developments at just a few companies, and the total will not be enough to affect the annual rate significantly.

The energy sector saw the strongest growth in Q3, with dividends up by just over a fifth on an underlying basis. Most of this came from Russian oil companies, but China and Hong Kong, Canada and the United States also made a significant contribution to the increase. Basic materials headline growth was boosted by special dividends, but telecoms companies around the world were dogged by cuts, with the biggest impact from Vodafone in the UK, China Mobile and Telstra in Australia. Only just over half of the telcos in the index increased their payouts year-on-year.

Janus Henderson has left its $1.43trillion forecast for global dividends unchanged for 2019. This represents a headline increase of 3.9%, equivalent to underlying growth of 5.4%. By contrast 2018 saw underlying growth of 8.5%. 2019 will mark the tenth consecutive year of underlying growth for dividends.