"Intelligent Insight"
On day 3 of the current market gyrations, we made this short video blog discussing what we see as the main issues.
How come goodish job and wages growth news in the US led to a market fall, and what will happen ahead? Is it more than a “healthy correction”?
Note, these are just my views, and are in no way financial advice!
The volatility index (VIX) has roared back to life, having been asleep for months. This index gives an indication of market sentiment and is a popular measure of the stock market’s expectation of volatility implied by S&P 500 index options. This volatility is meant to be forward looking, is calculated from both calls and puts, and is a widely used measure of market risk, often referred to as the “investor fear gauge.”
On this basis, fear is stalking the halls, only 4 times since 1990 has the VIX index been higher.
National not-for-profit, Good Shepherd Microfinance, has made a bold move into online lending with the support of NAB to launch Speckle – a fast online cash-loan which offers a better alternative for people seeking small cash loans under $2,000.
They also cite our updated research on the Pay Day Loan market in Australia.
We think this is a significant move, and could tilt the lending landscape towards consumers, who according to our research are more likely to reach for short term credit, thanks to wages and costs of living pressures, and the greater availability on online finance. Speckle is a cheaper accessible alternative.
With an increasingly casual workforce, the rising cost of living and low wage growth, recent research has found that one in five households in Australia have used payday loans[1] in the past three years. To address this need, Good Shepherd Microfinance, backed by NAB, developed a product that is better for customers by keeping the fees and costs as low as possible.
Adam Mooney, CEO at Good Shepherd Microfinance, said for the first time people will be able to access a low cost alternative that is different to anything else in the market.
“In most cases, Speckle loans are up to 50 per cent cheaper than other small cash loans. Most lenders charge the maximum fees allowed by law. As a not-for-profit program, Speckle is significantly cheaper for customers.”
“Every day we see the negative impact of high cost loans on individuals and families. In addition, the latest research shows that the number of women using short term cash loans continues to increase and women tend to use these loans at an earlier age than men[2].
“It was clear that we needed a better solution for anyone who needs to use small cash loans. Speckle will enable people to access lower cost credit when they need it most,” said Mr Mooney.
Building on their long-term partnership, NAB and Good Shepherd Microfinance have joined forces to develop Speckle using leading edge technology and with the help of skilled volunteers from across the bank.
Andrew Thorburn, NAB CEO said the bank shares Good Shepherd Microfinance’s mission to create fair and affordable financial products that address the gaps in the market.
“We know there are many people who, because of their financial situation don’t typically qualify for mainstream finance, are having to turn to payday loans. We’ve worked with our long-term partner Good Shepherd Microfinance to develop Speckle as a better alternative.
“At NAB, we want to support people to improve their financial resilience so if times get tough they can bounce back better. It’s important that everyone can access appropriate credit.
Good Shepherd Microfinance also offers no interest or low interest loans and referrals to financial counselling and other services to ensure that people are able to get the financial support they need.
To be eligible for a Speckle loan, applicants must be over 18, earn more than $30,000 a year (not inclusive of government benefits), and can’t have had two or more small amount credit contracts in the past 90 days. Where applicants are deemed unsuitable they are referred to other financial support.
Background:
About Speckle:
About Good Shepherd Microfinance and NAB’s partnership:
About payday lending in Australia:
[1]2018, Digital Finance Analytics, ‘Women and Pay Day Lending – An Update 2018, page 2
[2]2018, Digital Finance Analytics, ‘Women and Pay Day Lending – An Update 2018, page 2 & 4
[3] 2018, Digital Finance Analytics, ‘Women and Pay Day Lending – An Update 2018,
[4] Financial Resilience in Australia 2016, Centre for Social Impact and NAB
As expected the RBA left the cash rate untouched again in today’s statement. For the seventeenth month in a row since August 2016.
At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.
There was a broad-based pick-up in the global economy in 2017. A number of advanced economies are growing at an above-trend rate and unemployment rates are low. Growth has also picked up in the Asian economies, partly supported by increased international trade. The Chinese economy continues to grow solidly, with the authorities paying increased attention to the risks in the financial sector and the sustainability of growth.
The pick-up in the global economy has contributed to a rise in oil and other commodity prices over recent months. Even so, Australia’s terms of trade are expected to decline over the next couple of years, but remain at a relatively high level.
Globally, inflation remains low, although higher commodity prices and tight labour markets are likely to see inflation increase over the next couple of years. Long-term bond yields have risen but are still low. As conditions have improved in the global economy, a number of central banks have withdrawn some monetary stimulus. Financial conditions remain expansionary, with credit spreads narrow.
The Bank’s central forecast for the Australian economy is for GDP growth to pick up, to average a bit above 3 per cent over the next couple of years. The data over the summer have been consistent with this outlook. Business conditions are positive and the outlook for non-mining business investment has improved. Increased public infrastructure investment is also supporting the economy. One continuing source of uncertainty is the outlook for household consumption. Household incomes are growing slowly and debt levels are high.
Employment grew strongly over 2017 and the unemployment rate declined. Employment has been rising in all states and has been accompanied by a significant rise in labour force participation. The various forward-looking indicators continue to point to solid growth in employment over the period ahead, with a further gradual reduction in the unemployment rate expected. Notwithstanding the improving labour market, wage growth remains low. This is likely to continue for a while yet, although the stronger economy should see some lift in wage growth over time. There are reports that some employers are finding it more difficult to hire workers with the necessary skills.
Inflation is low, with both CPI and underlying inflation running a little below 2 per cent. Inflation is likely to remain low for some time, reflecting low growth in labour costs and strong competition in retailing. A gradual pick-up in inflation is, however, expected as the economy strengthens. The central forecast is for CPI inflation to be a bit above 2 per cent in 2018.
On a trade-weighted basis, the Australian dollar remains within the range that it has been in over the past two years. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.
Nationwide measures of housing prices are little changed over the past six months, with prices having recorded falls in some areas. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. To address the medium-term risks associated with high and rising household indebtedness, APRA introduced a number of supervisory measures. Tighter credit standards have also been helpful in containing the build-up of risk in household balance sheets.
The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.
As reported in the AFR, UBS has continued their analysis of the Australian mortgage market, with a focus on disclosed incomes of applicants.
UBS said its work suggested 42 per cent of all households with income of more than $500,000, and 27 per cent of all households with income between $200,000 and $500,000, had taken out a mortgage in 2017, which Mr Mott said “did not appear logical and [is] highly improbable”. Borrowers could be “materially overstating their household income to secure a mortgage”, or the population could be consistently understating income across the census, ATO tax returns and ABS surveys, he suggested.
The extension of the terms of reference for the financial services royal commission to include mortgage brokers and intermediaries provides “a clear indication” it will focus on mortgage mis-selling, Mr Mott added.
“We believe that it is imperative that the Australian banks continue to focus on improving underwriting standards,” he said.
We have to agree with their analysis, as our surveys lead us to the same conclusion. Here is a plot of income bands and number of mortgaged households. On this data, around 15% of households would reside in the $200-500k zone, compared with the 27% from bank data.
We have been calling for tighter underwriting standards for some time. As UBS concludes:
We believe that responsible lending and mortgage mis-selling are material risks for the banks.
Australian retail turnover fell 0.5 per cent in December 2017, seasonally adjusted, according to the latest Australian Bureau of Statistics (ABS) Retail Trade figures. This follows a 1.3 per cent rise in November 2017.
This is the headline which will get all the coverage, but the trend estimate rose 0.2 per cent in December 2017 following a rise of 0.2 per cent in November 2017. Compared to December 2016 the trend estimate rose 2.0 per cent. This is in line with average income growth.
We will continue to focus on the trend data, as this gives a clearer indication of underlying performance. Retail remains in the doldrums, no surprise given the pressure on households, as we discussed yesterday.
Across the states, trend movements from the previous month was 0.1% in NSW, 0.5% in VIC, 0.1% in QLD, 0.6% in SA, 0.0% in WA, 0.2% in TAS, -0.2% in NT and no change in the ACT.
By category, in trend terms, food retailing rose 0.3%, household goods 0.2%, Clothing, footwear and personal accessories 0.5%, department stores 0.1%, other retailing -0.2% and cafes, restaurants and takeaway food 0.4%.
Online retail turnover contributed 4.8 per cent to total retail turnover in original terms in the December month 2017. In December 2016 online retail turnover contributed 3.8 per cent to total retail.
In seasonally adjusted volume terms, turnover rose 0.9 per cent in the December quarter 2017, following a rise of 0.1 per cent in the September quarter 2017. The rise in volumes was led by household goods (3.4 per cent), which benefitted from strong promotions and the release of the iPhone X in the November month.
ASIC says ClearView Life Assurance Limited (Clearview) will refund approximately $1.5 million to 16,000 consumers after ASIC raised concerns about its life insurance sales practices. It has also stopped selling life insurance direct to consumers.
An ASIC review of ClearView’s sales calls found it used unfair and high pressure sales practices when selling consumers life insurance policies by phone. These sales were made directly to consumers, without personal financial advice.
ASIC’s review raised concerns that between 1 January 2014 and 30 June 2017, when selling over 32,000 life insurance policies direct to consumers, 1,166 of which were to consumers residing in high Indigenous populated areas who were unlikely to have English as their first language, ClearView sales staff:
- made misleading statements about the cover, the premiums, and the effect of any of the consumer’s pre-existing medical conditions
- did not clearly obtain consumer consent to purchase the cover before processing the premium payments, and
- used pressure sales tactics to sell the policies.
In response to ASIC’s concerns, ClearView will:
- refund full premiums, all bank fees and interest to customers with high initial lapse rates
- refund 50 per cent of premiums and interest to customers with high ongoing lapse rates
- offer a sales call review to other eligible consumers and remediate if there is evidence of poor conduct
- engage an independent expert (EY) to provide independent assurance over the consumer remediation program; and
- cease selling life insurance directly to consumers (that is, without personal financial advice).
ASIC Deputy Chair Peter Kell said that pressure sales tactics are unacceptable.
‘Purchasing life insurance is a key financial decision for consumers, and all the information provided to them must be clear and balanced. Insurers should properly supervise their sales staff and ensure that no misconduct is occurring’, he said.
ClearView will contact eligible consumers.
ASIC is currently conducting an industry review of direct life insurance to identify whether there are concerns with sales practices and product design that may be driving poor consumer outcomes in this market. Where similar conduct is identified, insurers will need to undertake appropriate remediation. ASIC will publish the findings of this review in mid-2018.
Background
ClearView sales staff were selling ‘direct life insurance’ which is sold to individual consumers without personal advice. It can include cover for events including death, accidental death, specific injuries, serious illness, total and permanent disability, unemployment and funeral cover.
This outcome is the result of work by ASIC’s Indigenous Outreach Program (IOP), which is staffed by lawyers and analysts, the majority of whom are Indigenous.
Macquarie Group provided an update on business activity in the third quarter of the financial year ending 31 March 2018 (December 2017 quarter). It was pretty much in line with expectations.
They said the annuity-style businesses’ combined quarter net profit contribution was slightly up on the prior corresponding period, mainly due to strong performance fees in Macquarie Asset Management, timing of transactions in Corporate and Asset Finance Principal Finance and continued growth in Banking and Financial Services.
Their capital markets facing businesses’ combined quarter net profit contribution was down on the prior corresponding period primarily due to timing of income recognition associated with transportation and storage agreements within the Commodities and Global Markets business.
Macquarie expects the FY18 result for the Group to be up approximately 10% on FY17.
They maintain a strong financial position, with Bank CET1 ratio 10.7% (Harmonised: 13.0%); Leverage ratio 5.8% (Harmonised: 6.6%); LCR 153% NSFR 109%. They have a Group capital surplus of $A4.1 billion, above regulatory minimums. Although Macquarie’s share buyback program remains in place, no buying occurred during 3Q18.
Based on past performance, Macquarie estimates a reduction of approximately 3-4% in the Group’s historical effective tax rate from the US tax reform, but currently expects that there will be no material impact to FY18 NPAT.
Here are the business unit summaries.
As Bitcoin crashes below $8,000, more Financial Institutions are banning the use of credit cards to buy the cryptocurrency.
Lloyds Banking Group said on Monday that it was stopping people buying cryptocurrencies using credit cards, following moves last week from several major U.S. lenders.”Across Lloyds Bank, Bank of Scotland, Halifax and MBNA, we do not accept credit card transactions involving the purchase of cryptocurrencies,” the company told CNBC in a statement.
Concerns have been mounting that people buying digital currencies like bitcoin with credit cards could be getting into debt given wild price swings, particular recently given bitcoin fell below $8,000 for the first time in over two months.
U.K. Prime Minister Theresa May told Bloomberg in a recent interview that the government should consider looking at cryptocurrencies “very seriously.”
Other regulators around the world from China to South Korea have also bought in rules to try to regulate the space.
In seasonally adjusted terms, ANZ Job Advertisements jumped 6.2% m/m in January, more than reversing the 2.7% fall in the previous month. On an annual basis, job ads are up 13.8%, a step up from the 11.4% y/y rise in December.
In trend terms, job ads were up 0.7% m/m in January following a similar increase in the previous month. The annual trend rate slowed from 12.3% in December to 11.9% in January.
ANZ says:
It is encouraging to see a strong recovery in Job Ads last month after a slight retreat in December. The bounce in January is in line with ongoing strength in business conditions, capacity utilisation and other surveys of employment conditions. Taken together, there is some evidence that the slowdown in the trend we saw in H2 last year may reverse in the coming months. That said, given the seasonal volatility often associated with this time of year, it is perhaps too early to tell for sure.
In recent months the RBA has noted the strong gains in employment across states, as well as the increase in labour force participation. The RBA will likely see the Q4 CPI result as broadly positive, with clear signs that inflationary pressures have stabilised, albeit at a level below the policy band. All eyes now turn to the Q4 wage number out on 21 February. We see a rise of 0.5% q/q as being consistent with our view that the RBA will raise rates this year in an effort to bring the real cash rate back to zero.
