Fitch Affirms Australia at ‘AAA’; Outlook Stable

Fitch says Australia’s ‘AAA’ rating is underpinned by an effective and flexible policy framework that has, in combination with strong net migration, supported 28 consecutive years of positive GDP growth in the face of substantial external, financial, and commodity-price shocks. A credible commitment to fiscal consolidation from a debt level that is already broadly in line with the ‘AAA’ median also supports the rating.

The federal government’s fiscal position continued to strengthen over the past year, bolstered by a cyclical upswing in revenue, largely from higher iron ore prices, and sustained spending restraint as part of the government’s consolidation efforts. On a Government Finance Statistics basis, Fitch estimates a federal government surplus in the fiscal year ending-June 2019 (FY19) of 0.1% of GDP; the first surplus since FY08. We forecast the federal surplus to trend slightly upward, reaching 0.3% by FY21. Fitch forecasts the general government deficit to decline to 0.5% of GDP by FY21, from 1.0% in FY19.

The government appears committed to continued fiscal consolidation, focusing on reaching an underlying cash surplus in FY20 (from a balance in FY19) and over the medium-term. Strong revenue growth allowed the government to pass additional personal income tax cuts in July, while remaining on track to achieve its fiscal targets. However, the fiscal trajectory remains sensitive to commodity-price developments. Iron ore prices have receded sharply from their mid-2019 highs, but remain above the assumptions incorporated into Fitch’s April 2019 budget outlook.

We estimate that general government gross debt remained stable at 41.0% of GDP in FY19, just below the ‘AAA’ median of 44%, and expect the debt ratio to fall gradually on improved fiscal performance.

Fitch forecasts GDP growth to slow sharply to 1.7% in 2019, from 2.7% in 2018, due to domestic factors triggered by a protracted housing-market downturn. We expect economic growth to rise to 2.3% in 2020, as the housing market stabilises and consumption is supported by recent monetary policy-rate cuts, tax cuts, and public-infrastructure spending. Risks are tilted to the downside given US-China trade frictions and slowing growth in China, as China is the destination of roughly 30% of goods exports.

The Reserve Bank of Australia (RBA) has cut its policy rate by a cumulative 75bp since June to a historic low of 0.75%, a considerable change in the interest-rate environment. Fitch now expects the RBA to remain on hold through 2021 to support economic growth and employment, and does not anticipate the use of quantitative easing. Inflation fell in 1H19 to 1.4% and Fitch forecasts it to remain below the RBA’s 2%-3% target band until 2021. The unemployment rate has edged up to 5.2% since April, but employment growth remains resilient and the participation rate has increased to historic highs.

Policy rate cuts and a relaxation of macroprudential policies have helped stabilise house prices after an 8.4% fall in the national house price index between the October 2017 peak and June 2019. Fitch expects an acceleration in house price growth in 2020, although housing turnover is still subdued and mortgage credit growth remains low, in part due to the tightening of underwriting standards. However, housing-loan approvals have increased in recent months and sustained low interest rates, along with continued strong net migration, will put upward pressure on house prices and household debt over the medium-term.

Household debt, at 191.1% of disposable income in 2Q19, is among the highest of ‘AAA’ rated sovereigns and poses an economic and financial stability risk in the event of a shock. Under current conditions, households appear well positioned to service their debts, with non-performing loans at just under 1% of total loans. However, a labour market or interest rate shock could impair households’ ability to service their debts. Mitigating these risks is that some households have prepaid their mortgages or maintain mortgage offset accounts that can be used to service debt in the event of a shock, though newer borrowers and financially weaker households could be vulnerable.

Australia’s banking system, which scores ‘aa’ on Fitch’s Banking System Indicator, is well positioned to manage potential shocks. Sound prudential regulation and ongoing strengthening of underwriting standards have improved the resilience of bank balance sheets and limited their exposure to riskier mortgage products.

Improved terms of trade caused by high commodity prices led to Australia’s first current-account surplus since 1975 in 2Q19. We forecast the surplus to be short-lived, as iron ore prices have declined from their mid-year highs, and expect the current account for the full year to be roughly in balance, against a deficit of 2.1% of GDP last year. Fitch forecasts the current-account deficit to widen to 1.5% of GDP by 2021, below its 4.1% average since 1990.

Net external debt remains among the highest within the ‘AAA’ category and we project it to reach 56.4% of GDP in 2019. Heavy reliance on external funding leaves Australia exposed to shifts in capital flows. Most external liabilities are denominated in local currency or are hedged to reduce currency and maturity mismatches. This helps to mitigate risks.

ASIC wins appeal against Westpac companies

In a fresh blow to Westpac, the Federal Court this morning delivered the corporate regulator a win in its appeal against a previous ruling on Westpac’s telephone campaigns. Via Financial Standard.

The full court this morning said ASIC’s appeal will be allowed with costs, while Westpac-related companies’ cross-appeal will be dismissed.

The matter relates to whether or not Westpac’s telephone sales campaigns amounted to advice and if that advice was personal or general in nature.

In 2014 and 2015, Westpac ran telephone and snail-mail campaigns to encourage customers to roll over external superannuation accounts into their existing accounts with Westpac Securities Administration Limited and BT Funds Management.

ASIC was primarily concerned with the telephone calls.

The corporate regulator claimed that the two Westpac companies had breached their FoFA-stipulated best interest duty by advising rollovers to Westpac-related super funds without  a proper comparison of options, as required by law.

And so, it initially launched civil penalty proceedings against the two Westpac subsidiaries in December, 2016.

The Federal Court handed down its judgment in January this year, with a mixed outcome. It decided that ASIC had failed to demonstrate that the two Westpac companies had provided personal financial product advice to 15 customers in regards to the consolidation of superannuation accounts.

However, the judge added the Westpac subsidiaries contravened the Corporations Act in 14 of 15 customer phone calls by implying the rollover of super funds into a BT account was recommended. This came about through a “quality monitoring framework” where BT staff were coached in sales technique.

ASIC appealed the January judgment. Westpac also made a counter appeal.

The Fall Of Pay Day?

There have been some interesting developments in the short-term lending market in the UK recently.  The Financial Conduct Authority in the UK recently published data on the so called high-cost short-term credit (HCSTC) market.  HCSTC loans are unsecured loans with an annual percentage interest rate (APR) of 100% or more and where the credit is due to be repaid, or substantially repaid, within 12 months. In January 2015, The FCA introduced rules capping charges for HCSTC loans.

Just over 5.4 million loans originated in the year to 30 June 2018, and that lending volumes have been on an upward trend over the last 2 years. Despite some recovery, current lending volumes remain well down on the previous peak for this market. Lending volumes in 2013, before FCA regulation, were estimated at around 10 million per year.

These data reflect the aggregate number of loans made in a period but not the number of borrowers, as a borrower may take out more than one loan. They estimate that for the year to 30 June 2018 there were around 1.7 million borrowers (taking out 5.4 million loans).

The market is concentrated with 10 firms accounting for around 85% of new loans. Many of the remaining firms carry out a small amount of business – two thirds of the firms reported making fewer than 1,000 loans each in Q2 2018.

For the year to 30 June 2018, the total value of loans originated was just under £1.3 billion and the total amount payable was £2.1 billion. Figure 2 shows that the Q2 2018 loan value and amount payable mirrored the jump in the volume of loans with loan value up by 12% and amount payable 13% on Q1 2018.

The average loan value in the year to 30 June 2018 was £250. The average amount payable was £413 which is 1.65 times the average amount borrowed. This ratio has been fairly stable over the past 2 years. A price cap introduced in 2015 stipulates that the amount repaid by the borrower (including all charges) should not exceed twice the amount borrowed. 

Over the past 2 years the average Annual Percentage Rate (APR) charged for HCSTC has been consistent, hovering around 1,250% (mean value). The median APR value is slightly higher at around 1,300%. Within this there will be variations of APR depending on the features of the loan. For example, the loans repayable by installments over a longer period may typically have lower APRs than single installment payday loans.

In the UK, the North West has the largest number of loans originated per 1,000 adult population (125 loans), followed by the North East (118 loans). In contrast, Northern Ireland has the lowest (74 loans).

Borrowers between 25 to 34 years old holding HCSTC loans (33.4%) were particularly over-represented compared to the UK adults within that age range (17.5%). Similarly, borrowers over 55 years old were significantly less likely to have HCSTC loans (12.2%) compared to the UK population within that age group (34.8%). The survey also found that 60% of payday loan borrowers and 45% for short-term installment loans were female, compared with 51% of the UK population being female.   

61% of consumers with a payday loan and 41% of borrowers with a short-term installment loan have low confidence in managing their money, compared with 24% of all UK adults. In addition, 56% of consumers with a payday loan and 48% of borrowers with a short-term installment loan rated themselves as having low levels of knowledge about financial matters. These compare with 46% of all UK adults reporting similar levels of knowledge about financial matters.

But now the top PayDay lenders are out of business. In August 2018, Wonga, once the biggest payday lender in the UK collapsed and now administrators for the lender have revealed that 389,621 eligible claims have been made since Wonga’s demise. Despite being vilified for its high-cost, short-term loans, seen as targeting the vulnerable, it became a household name and was enormously successful until stricter regulation curtailed its, and other payday loan companies’, lending.

It collapsed in the UK following a surge in compensation claims from claims management companies acting on behalf of people who felt they should never have been given these loans. So far, the compensation bill is £460m, with the average claim £1,181.

Another lender, The Money shop closed earlier this year.

Now QuickQuid, UK’s largest payday lending firm is to close with thousands of complaints about its lending still unresolved. QuickQuid’s owner, US-based Enova, says it will leave the UK market “due to regulatory uncertainty”.

QuickQuid is one of the brand names of CashEuroNet UK, which also runs On Stride – a provider of longer-term, larger loans and previously known as Pounds to Pocket. The UK’s Financial Ombudsman Service said that it had received 3,165 cases against CashEuroNet in the first half of the year. It was the second most-complained about company in the banking and credit sector during that six months.

Back in 2015, CashEuroNet UK LLC, trading as QuickQuid and Pounds to Pocket, agreed to redress almost 4,000 customers to the tune of £1.7m after the regulator raised concerns about the firm’s lending criteria.

More than 2,500 customers had their existing loan balance written off and more almost 460 also received a cash refund. (The regulator had said at the time that the firm had also made changes to its lending criteria.)

“Over the past several months, we worked with our UK regulator to agree upon a sustainable solution to the elevated complaints to the UK Financial Ombudsman, which would enable us to continue providing access to credit,” said Enova boss David Fisher.

“While we are disappointed that we could not ultimately find a path forward, the decision to exit the UK market is the right one for Enova and our shareholders.”

So this could be the twilight of the PayDay industry in the UK, as better education, and other lending options, plus tighter regulation bite.

Meantime in Australia its worth reflecting that proposed changes to SACC loans here (Small Amount Credit Contracts) have not progressed despite an earlier investigation, and we will be talking about the impact of this inaction in a later post.

Given the pressures on households here, we are concerned that more will reach for short term loans to tide them over, despite the high costs and risks from repeat borrowing, all made easier still via the proliferation of online portals. The debt burden on households is high and rising.

APRA Loosens Capital For FHLDS Loans

APRA is proposing to adjust its capital requirements for authorised deposit-taking institutions (ADIs) to support the Government’s First Home Loan Deposit Scheme (FHLDS). The scheme aims to improve home ownership by first home buyers, through a Government guarantee of eligible mortgage loans for up to 15 per cent of the property purchase price.

Recognising that the Government guarantee is a valuable form of credit risk mitigation, APRA is proposing to reflect this in the capital framework by applying a lower capital requirement to eligible FHLDS loans.

APRA intends to give effect to this lower capital requirement by adjusting the mortgage capital requirements set out in Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk (APS 112).

Specifically, recognising both the minimum 5 per cent deposit required of borrowers and the Government guarantee of 15 per cent of the property purchase price, APRA proposes to allow ADIs to treat eligible FHLDS loans in a comparable manner to mortgages with a loan-to-valuation ratio of 80 per cent.

This would allow eligible FHLDS loans to be risk-weighted at 35 per cent under APRA’s current capital requirements. Once the Government guarantee ceases to apply to eligible loans, (this could be because the borrower pays down the loan to below 80 per cent of the property purchase price, refinances or uses the property for a purpose that is not within the scope of the guarantee.) ADIs would revert to applying the relevant risk weights as set out in APS 112. 

APRA invites feedback on this proposal, which will be subject to a two-week public consultation. APRA intends to release its response, including additional information on implementation for participating ADIs, as soon as practicable after the consultation period. 

Written submissions on the proposal should be sent to ADIpolicy@apra.gov.au by 11 November 2019

ASIC Imposes Additional Licence Conditions on IOOF

ASIC has imposed additional licence conditions on the Australian financial services (AFS) licence of IOOF Investment Services Ltd (IISL) as part of an application by IISL to vary its licence.

IISL sought a variation to its licence to facilitate the transfer of managed investment scheme, investor directed portfolio services (IDPS) and advice activities from IOOF Investment Management Ltd (IIML) to IISL. The transfer is part of a reorganisation of the broader corporate group (IOOF Group).

In granting the licence variation, ASIC has decided to impose additional conditions relating to the governance, structure and compliance arrangements of IISL.

ASIC’s decision to impose additional licence conditions took into account concerns highlighted by the Financial Services Royal Commission about the real and continuing possibility of conflicts of interests in IOOF Group’s business structure, ASIC’s past supervisory experience of these entities and material supplied by IISL as part of its licence variation application. IISL agreed to the imposition of the additional licence conditions.

In summary, the additional conditions specifically cover:

  • governance – by requiring that IISL has a majority of independent directors with a breadth of skills and background relevant to the operation of managed investment schemes and IDPS platforms;
  • the establishment of an Office of the Responsible Entity (ORE) – that is adequately resourced and reports directly to the IISL board, with responsibility for:
    • oversight of IISL’s compliance with its AFS licence obligations;
    • ensuring IISL’s managed investment schemes are operated in the best interests of their members; and
    • overseeing the quality and pricing of services provided to IISL by all service providers (including related companies),
  • the appointment of an independent expert, approved by ASIC, to report on their assessment of the implementation of the additional licence conditions.

ASIC Commissioner Danielle Press said, ‘ASIC is serious about improving the quality of governance and conflicts management across the funds management sector and ensuring that investors’ best interests are the highest priority of fund managers.

‘ASIC will use its licensing power, including through the imposition of tailored licence conditions to address governance weaknesses, the risk of poor conduct or vulnerabilities to conflicts of interest in a licensee’s business model.’

Super funds ‘heavily exposed’ to volatile equities

Former Liberal Party leader John Hewson has questioned the management of superannuation funds and called out Australia’s sovereign wealth fund for ignoring climate risks. Via InvestorDaily.

Speaking on a panel at the Crescent Think Tank in Sydney on Thursday (24 October), Mr Hewson noted that most of the $2.9 trillion of superannuation money is invested in stock markets, primarily in the US and Australia. 

“You are heavily exposed when those markets are as overvalued as they are. By any measure the US stock market is way overvalued. There is going to be a correction. It’s just a matter of when and how far. Super funds are taking a risk by staying in those markets,” the former Liberal Party leader said. 

“Some have rebalanced portfolios and put a bit more into cash, but you don’t earn anything on cash. Fixed-interest gives you a very low return.”

Mr Hewson noted the low interest rate environment globally, highlighting that around 25 per cent of sovereign bonds have negative rates. 

“These are uncharted waters for those in the financial sector. Everyone is chasing yield but the only place you get a return is a stock market. The big question is how sustainable is that return? You can see how volatile equities markets are just based on a tweet from Trump.  This is a very volatile and dangerous world for superannuation funds to be so exposed,” he said. 

Mr Hewson was one of the key figures behind The Climate Institute’s Asset Owners Disclosure Project (AODP), which has since been taken over by ShareAction. Over the years the AODP index and report has repeatedly called out Australia’s sovereign wealth fund, the Future Fund, for lagging behind its international peers on climate change. 

Last week Future Fund CEO David Neal stated that Australia’s sovereign wealth fund does not invest for social concerns and will continue to invest in fossil fuels. 

“Our job is very clear. Our job is to generate a financial return for the nation,” Mr Neal told a committee in Canberra last week. 

Commenting on the Future Fund’s stance, Mr Hewson said: “This is a fund that was buying British American Tobacco flat out when both sides of government were running anti-smoking campaigns.”

“They are not interested in climate risk. The fund is not transparent enough to satisfy a lot of people. They are taking big risks,” he said.

Auction Results 26 Oct 2019

Domain released their preliminary results for today.

Clearance rates are still high compared with last year, though volumes are lower.

Canberra listed 39 auctions, reported 31 and sold 16 with 3 withdrawn and 15 passed in, giving a Domain clearance of 47%.

Brisbane listed 95 auctions, reported 49 and sold 18 with 5 withdrawn and 31 passed in, giving a Domain clearance of 55%.

Adelaide listed 83 auctions, reported 33 and sold 25, with 1 withdrawn and 8 passed giving a Domain clearance of 74%

QE Ahoy! – The Property Imperative Weekly 26th Oct 2019

The latest edition of our weekly finance and property news digest with a distinctively Australian flavour.

Contents:

0:24 Introduction
0:58 US Markets
3:10 The Feds “Non-QE” QE
5:40 Brexit and UK Markets
6:50 Metro Bank
8:06 ECB

10:20 Australian Segment
10:30 Economic Data
12:30 Cash Transaction Ban
14:20 Property Sales and Prices
16:45 Foreign Buyers
18:45 WA First Time Buyer Incentives
19:40 Bank Profitability
20:30 Interest Only Lending
21:25 Local QE Is Coming
25:30 Local Market Summary