Superfund-owned bank ME has shelved plans to launch new credit cards after witnessing the success of “buy now, pay later” players like Afterpay and Zip, via Investor Daily.
The
bank posted its full-year results this week, which showed that
statutory net profit after tax fell by nearly 25 per cent to $67.1
million, down from $89.1 million the previous year. The lender recorded
$14.4 million of impairment losses in its credit card business.
ME
CEO Jamie McPhee said the bank halted its work in bringing more credit
cards to market after recognising a structural shift away from cards and
was therefore focusing its work on digital wallets.
He
explained: “Our work on digital wallets is progressing. We wanted to
bring that forward, and we’ve taken the opportunity to relook at the
credit card market, and what we’ve been seeing is that the number of
credit cards are in decline, while we’ve seen a significant increase in
the buy now, pay later entrants Afterpay, Zip, Flexi,” he said.
“We
think that the credit card market is being structurally disrupted, so
we’ve decided that we don’t think that is the right environment for the
bank to go forward in.”
Mr McPhee added that while the bank will
continue to have its low-rate credit card, it has revised its strategy
regarding a wider product range.
“We were thinking of coming to
market with a broader range of credit cards, including reward cards,
etc. but having had a look at the market, we don’t think that is the
right thing to do, strategically, going forward,” he said.
“So, that has obviously impacted the statutory earnings this time around.
“There
is no way we will be diverting our attention away from building out the
customer digital ecosystem like the digital wallets, NPP (national
payments platform), until we get that right up to a very, very market
competitive offerings.
“That will be our focus for the foreseeable focus. Anything else would be a distraction.”
It is expected that ME will be releasing its “digital ecosystem” progressively from 2020.
We look at today’s data, the Fed cut, the repo issue, and locally the
engineered balanced budget and higher unemployment. Many echos of a
decade back, is history repeating?
Latest on the cash ban, which was presented in Parliament today, with Robbie Barwick from the CEC.
On 19 September 2019, the Senate referred the provisions of
the Currency (Restrictions on the Use of Cash) Bill 2019 [Provisions] to the Economics Legislation Committee for inquiry and report by 7 February 2020.
If you’d like to be part of a delegation to visit your local MP, call the CEC on 1-800 636 432 to be put in touch with others in your area.
Use and share these links for finding MPs and Senators. Click the link, and find the heading State/Territory in the box titled Refine Search on the right hand side of the page. Click on your state and call as many MPs and Senators as you can, on their Parliament House numbers, starting with 02-6.
Australia’s trend unemployment rate increased in August 2019 to 5.3 per cent, from a revised July 2019 figure, according to the latest information released by the Australian Bureau of Statistics (ABS).
ABS Chief Economist Bruce Hockman said: “Australia’s trend unemployment rate increased to 5.3 per cent in August 2019. The trend participation rate increased further to 66.2 per cent, while employment continued to grow above the 20 year annual average.”
Employment and hours
In August 2019, trend monthly employment increased by around 22,000 people. Full-time employment increased by just over 7,000 people and part-time employment increased by an estimated 15,000 people.
Over the past year, trend employment increased by 0.3 million people (2.5 per cent) which was above the average annual growth over the past 20 years (2.0 per cent). Full-time employment increased by 2.4 per cent and part-time employment increased by 2.8 per cent over the past year.
The trend monthly hours worked increased by 0.1 per cent in August 2019 and by 1.7 per cent over the past year. This is in line with the 20 year average year-on-year growth of 1.7 per cent.
Underemployment and underutilisation
The trend monthly underemployment rate remained steady at 8.5 per cent in August, an increase of 0.1 percentage points over the past year. The trend underutilisation rate increased by 0.2 percentage points over the past year.
States and territories trend unemployment rate
The trend unemployment rate remained steady in most states and territories, except for South Australia (up 0.2 percentage points), Queensland and the Northern Territory (up 0.1 percentage points) and Western Australia (down 0.1 percentage points).
Over the year, unemployment rates fell in New South Wales, Western Australia and the Australian Capital Territory, and increased in Victoria, Queensland, South Australia, Tasmania and the Northern Territory. Seasonally adjusted data
The seasonally adjusted unemployment rate increased by less than 0.1 percentage points to 5.3 per cent in August 2019, while the underemployment rate increased by 0.1 percentage points to 8.6 per cent. The seasonally adjusted participation rate increased by 0.1 percentage points to 66.2 per cent, and the number of people employed increased by an estimated 35,000.
The net movement of employed in both trend and seasonally adjusted terms is underpinned by around 350,000 people entering and leaving employment in the month.
Note that in original terms, the incoming rotation group in August 2019 had a higher employment to population ratio than the group it replaced (62.4% in August 2019, compared to 61.9% in July 2019), and higher than the sample as a whole (62.3%). The incoming rotation group had a lower full-time employment to population ratio than the group it replaced (41.2% in August 2019, compared to 42.3% in July 2019), and was lower than the sample as a whole (42.4%).
If today’s second consecutive repo was supposed to calm the stress in the secured lending market and ease the funding shortfall in the interbank market, it appears to have failed says Zerohedge.
As the WSJ said on Tuesday:
For the first time in more than a decade, the Federal Reserve injected cash into money markets Tuesday to pull down interest rates and said it would do so again Wednesday after technical factors led to a sudden shortfall of cash.
The pressures relate to shortages of funds banks face resulting from an increase in federal borrowing and the central bank’s decision to shrink the size of its securities holdings in recent years. It reduced these holdings by not buying new ones when they matured, effectively taking money out of the financial system.
Bloomberg said while the spike wasn’t evidence of any sort of imminent financial crisis, it highlighted how the Fed was losing control over short-term lending, one of its key tools for implementing monetary policy. It also indicated Wall Street is struggling to absorb record sales of Treasury debt to fund a swelling U.S. budget deficit. What’s more, many dealers have curtailed trading because of safeguards implemented after the 2008 crisis, making these markets more prone to volatility.
The Federal Reserve made crystal clear that it doesn’t want U.S. money market rates to spike again like they did early this week, announcing it will — for the third day in a row — inject cash into this vital corner of finance.
On Thursday, the New York Fed will offer up to $75 billion in a so-called overnight repurchase agreement operation, adding another dose of temporary liquidity to restore order in the banking system. It made the same offer Tuesday and Wednesday, deploying a tool it hadn’t used in a decade. This latest action follows the Fed’s reduction in the interest rate on excess reserves, or IOER, another attempt to quell money-market stresses.
The prior operations have calmed markets, with repo rates declining Wednesday to more normal levels after jumping to 10% on Tuesday, four times where it was last week.
In addition, as Credit Swiss points out, Basel changed the rules:
The longer term issue is that the definition of “excess reserves” has changed in a Basel III environment. Previously excess reserves were defined by the Fed’s standard. If banks held more in the Federal Reserve accounts than they needed to settle transactions with one another, they had excess reserves. Now, under Basel III, excess reserves are defined by a global standard. Banks not only need enough reserves to settle accounts with one another at the end of each day – they also need to hold enough reserves for liquidity and capital buffer purposes. Indeed, reserves are better “high quality liquid assets” (HQLA) than even US Treasuries. In this context, at the beginning of 2017 (when Basel III really kicked in), banks found themselves with excess reserves by Fed standards, but deficient reserves by Basel III standards. Making matters worse for a little while were the Fed’s balance sheet reduction efforts, draining reserves from the system
This could be a signal of a potential liquidity crisis (echoes of 2007?).
Zerohedge says not only did O/N general collateral print at 2.25-2.60% after the repo operation, confirming that repo rates remain inexplicably elevated even though everyone who had funding needs supposedly met them thanks to the Fed, but in a more troubling development, the Effective Fed Funds rate printed at 2.30% at 9am this morning, breaching the Fed’s target range of 2.00%-2.25% for the first time.
Source: Bloomberg, Zerohedge
And yes, it is quite ironic that on the day the Fed is cutting rates,
the Fed Funds was just “pushed” above the top end of the target range
for the first time ever.
This also means that the EFF-IOER spread has now blown out to an
unprecedented 20bps, yet another indication that the Fed has lost
control of the rates corridor.
Source: Bloomberg, Zerohedge
But in what may be the most concerning move, today’s print for the
Secured Overnight Financing Index (SOFR), which is widely expected to be
Libor’s replacement, exploded higher by 282bps to a record 5.25%.
Source: Bloomberg, Zerohedge
Commenting on the blow out in the SOFR, Goldman had this to say on
the “extremely volatile” price action in the key funding index:
The SOFR market saw extremely volatile price action over the course
of the day…. Almost 20k in SERU9 blocks printed from 11:15am through
the afternoon, pushing SERFFU9 from -10 to -21.5. Shortly after 4pm the
market was given another jolt of adrenaline as news of a second Fed
operation to be conducted tomorrow morning at 8:15am caused the spot-6mo
curve to go bid into the close.
The problem here is that since SOFR is expected to replace LIBOR as
the reference rate for several hundred trillions in fixed income
securities, a spike such as this one would be perfectly sufficient to
wreak havoc across market if indeed it had been the key reference rate.
Finally, courtesy of BMO’s Jon Hill, here is some commentary on today’s oversubscribed, and clearly insufficient, repo operation by the Fed:
Today’s emergency repo operation was oversubscribed with $51.6 bn in
Treasury and $22.8 bn in MBS collateral accepted. The weighted average
in USTs was 2.215%, with a high rate of 2.36% and a low of 2.10%. This
should help alleviate some stress in USD funding markets, and the fact
that it’s occurring earlier in the morning than Tuesday should help keep
daily averages more subdued than yesterday – SOFR printed at a
remarkable 5.25% (a stunning 282 bp spike) with fed funds still unknown
but scheduled to be released at 9:00 AM ET and likely to print outside
of the target range.
If Powell is successful at guiding the market toward assuming a
mid-cycle adjustment, one specific repricing that will occur is in 2020
forwards, which are still factoring in one and a half 25 bp cuts next
year as shown in the attached (admittedly, precision here is difficult
due to the illiquidity of the Jan ’21 contract). This contrasts with the
FOMC’s desire to execute a more modest drop in overnight rates and the
price response here will be a focal point in determining how markets are
responding to the impending Fed communication. If Powell is effective,
look for that area of the curve to steepen sharply.
The Fed chair Jerome Powell said after the decision ” We don’t see a recession, we’re not expecting a recession, but are are making monetary policy more accommodative”, saying it is a mistake to hold onto your firepower until a downturn has gathered moment. This was seen by the market as “hawkish”, much to Trump’s annoyance! The US dollar was stronger after the announcement.
Information received since the Federal Open Market Committee met in July indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending has been rising at a strong pace, business fixed investment and exports have weakened. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 1-3/4 to 2 percent. This action supports the Committee’s view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain. As the Committee contemplates the future path of the target range for the federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.
In determining the timing and size of future adjustments to the
target range for the federal funds rate, the Committee will assess
realized and expected economic conditions relative to its maximum
employment objective and its symmetric 2 percent inflation objective.
This assessment will take into account a wide range of information,
including measures of labor market conditions, indicators of inflation
pressures and inflation expectations, and readings on financial and
international developments.
Voting for the monetary policy action were Jerome H. Powell, Chair, John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Charles L. Evans; and Randal K. Quarles. Voting against the action were James Bullard, who preferred at this meeting to lower the target range for the federal funds rate to 1-1/2 to 1-3/4 percent; and Esther L. George and Eric S. Rosengren, who preferred to maintain the target range at 2 percent to 2-1/4 percent.
A former Macquarie banker says hazy guidelines around lending will cause problems for the next six months following the Westpac case, predicting the big four banks will corner ASIC and demand clearer standards, according to an exclusive in InvestorDaily today.
During
a panel discussion at The REAL Future of Advice Conference in Vietnam
this week, former Macquarie head of sales and distribution for
mortgages, Tim Brown, noted the recent Federal Court decision ruling in
the favour of Westpac.
ASIC
had taken Westpac to court over allegations it breached lending laws
between 2011 and 2015 by using the household expenditure measure to
estimate potential borrowers’ living expenses.
ASIC had argued the benchmark was too frugal and that customers’ expenses were higher.
Mr
Brown, who is currently the chief executive of Ezifin Financial
Services, called the current lending landscape a “minefield” where
lenders “can’t get clarification from ASIC” over standards for
evaluating consumers’ eligibility for mortgages.
“I
think the problem with this whole expense discussion, as I was pointed
out earlier on is that a lot of the assessors put their own personal
assessment on what someone else spends money on, which is where the
problem lies,” Mr Brown said.
“It needs to be much more factual.
“I
think it is going to be a problem for at least another six months until
some of the banks get together with ASIC and say look we need to get
some clear guidelines around this. Because they’re basically saying HEM
isn’t acceptable anymore.”
Mr
Brown noted when he first started lending, brokers would sit with
clients, go through their expenses and make sure they had enough
capacity to meet any future increases and interest rates, by using HEM
and allowing up to two and a half per cent above the current rate.
Reflecting on his expenses when buying his first house, said he did not think he would have passed current standards.
“But
within the first six months of buying a home, and we know this
factually and we’ve recently seen ASIC having these discussions, that
most people will reduce their discretionary spending by 20 per cent.
“Now,
most assessors in the past could make that decision without any
concern. But in the current environment, they are afraid to make those
decisions now because there’s a way around it and ASIC might review
that. And this comes back to this personal assessment of someone else’s
opinion on what someone should have a discretionary not a discretion.
“Because
ASIC just goes ‘well you know best endeavors, you know, whatever you
think is reasonable.’ And then they’ll charge you if they don’t think
it’s reasonable.”
‘We want some direction’
Talking
about missing clarity from ASIC, Mr Brown said: “The banks are sick of
this game that they’re playing with ASIC at the moment and eventually
the four of them will get together and say look, you need to give us
some clear guidelines.”
“At
the moment, I think the industry bodies are trying to come together
with something they can take to ASIC both from a vendor’s perspective
and also from a MFAA (Mortgage and Finance Association of Australia) and
FBAA (Finance Brokers Association of Australia).”
Mr Brown noted every time he had been on a panel, he had been asked about the Westpac decision.
“There’s obviously a real concern among the number of people at the moment,” he said.
Fitch Ratings says residential mortgage loans in Scandinavia, the Netherlands and Switzerland have seen exceptionally strong performance despite high loan-to-value (LTV) ratios and significant household debt. This reflects generous social security systems and large household wealth, which are a common denominator of these ‘AAA’ rated jurisdictions with strong public finances.
The growth of housing
debt in Scandinavia, the Netherlands and Switzerland can be explained
by a combination of tax deductibility, low interest rates, and unique
features of each respective mortgage market. These include long
contractual tenors and interest-only periods. Limited repayment has made
borrowers more sensitive to house price decreases. However,
macro-prudential requirements in each country are helping to address the
risk that high household debt could jeopardise financial stability.
Macro-prudential
measures were originally focused on maximum LTV and stressed
affordability at origination, but lower mortgage rates continued to
stimulate mortgage growth. Banking authorities therefore imposed minimum
mortgage loan amortisation as well as maximum loan-to-income (LTI) or
debt-to-income ratios. Such restrictions have contributed to the recent
adjustment in Norwegian and Swedish house prices and limited lending
growth in Denmark. Swiss regulators have tightened capital requirements
for banks and promoted self-regulation, which established minimum
amortisation for mortgages above 66% LTV. Gradual changes to tax
incentives and underwriting standards were introduced by the Dutch
authorities, especially since 2013, which have made the mortgage market
more resilient.
The latest discussion with Chris Bates, mortgage broker and financial planner, as we dissect the latest trends. Property prices higher, maybe in some places, but there are other more critical trends in play, and prospective buyers need to be careful!
Chris can be found at www.wealthful.com.au & www.theelephantintheroom.com.au plus via LinkedIn: https://www.linkedin.com/in/christopherbates
Australia’s customer owned
banking sector welcomes reports that the Australian Competition and Consumer
Commission (ACCC) is requesting to conduct an inquiry into the banking
industry’s competitiveness.
Customer Owned Banking Association CEO Michael Lawrence
says the request from the ACCC and the comments from Tim Wilson MP were
encouraging for credit unions, building societies and mutual banks who have
been leading the charge for a more competitive retail banking market.
“The enduring solution to concerns about the banking
market is action to promote competition.
“We don’t have sustainable banking competition at
the moment. A lack of competition can contribute to inappropriate conduct
by firms, and insufficient choice, limited access and poor-quality products for
consumers.
“We strongly support the ACCC’s calls for an
inquiry to examine the banking industry’s competitiveness. It’s encouraging to
see that the ACCC and Tim Wilson MP share our sector’s concerns about
competition and what an uncompetitive banking market means for consumers.
“Last year’s Productivity Commission’s report on
competition in banking sent strong messages to regulators and policymakers that
regulation is hurting competition and consumers are paying the price.
“The regulatory framework over time has
entrenched the dominant position of the largest banks.
“The PC report shone a light on a problem that is not
well enough recognised – that more and more regulation can be harmful to
consumers because it weakens competition.
“The Productivity Commission found that competition
drives innovation and overall value for customers.
“The Financial Services Royal Commission
looked into misconduct, now is the time to look into competition.”
