Genworth 2017 Results Down 26.5%

Genworth Mortgage Insurance Australia Limited reported its 2017 full year (FY17) financial results.  As a major player in the LMI sector, we get an insight into the overall market. Today’s Productivity Commission report of course highlights that LMI’s should refund unused premiums. This could impact the market further, but for now, as LVR’s fall, LMI’s need to tweak their business models. Meantime, new business is falling, though claims also eased a little.

Statutory  net profit after tax (NPAT) for the year ended 31 December 2017 was $149.2 million compared with $203.1 last year, down 26.5% and underlying NPAT was $171.1 million down 19.4%. This was in line with guidance.

The Genworth Board declared a fully franked final ordinary dividend of 12 cents per share payable on 16 March 2018 to shareholders registered on 2 March 2018. The total ordinary dividend for 2017 was 24 cents per share and represents a payout ratio of 70.3%, up from 67.2% in 2016.

New business volume, as measured by New Insurance Written (NIW), of $23.9 billion in 2017, decreased 10.2% compared with $26.6 billion in the prior year.

The mix of business is aligned to owner occupied borrowers, with 19% of loans in 2017 for investment purposes.

Gross Written Premium (GWP) decreased 3.4% to $369.0 million in 2017. This decline was partially offset by the impact of the premium rate actions taken in 2016 and reflects changes in the customer portfolio and changes in business mix during the year.

Net Earned Premium (NEP) of $370.5 million in 2017 decreased 18.2% compared with $452.9 million in the prior year reflecting the $37.3 million impact of the 2017 Earnings Curve Review and lower earned premium from current and prior book years. Without the 2017 Earnings Curve Review adjustment, NEP would have declined 10.0%.

New delinquencies decreased in both mining and non-mining areas. The proportion of new mining delinquencies has been increasing in Western Australia while Queensland mining experience has been quite stable. Cures increased, particularly in non-mining areas. The number of claims paid in FY17 was higher than FY16, mainly driven by a higher proportion of claims in mining areas.

Net Claims incurred fell 10.7% from $158.8 million in FY16 to $141.8 million in FY17. The loss ratio in FY17 was 38.3%, up from 35.1% in FY16 reflecting the impact of lower NEP due to the 2017 Earnings Curve Review. Without this adjustment the FY17 loss ratio would have been 34.8%.

The expense ratio in FY17 was 29.3% compared with 25.7% in the prior year, reflecting the lower NEP and expenditure on the Strategic Program of Work. This is in line with the expected target range of between 28% and 30%.
Investment income in FY17 was $103.3 million and included a pre-tax realised gain of $36.4 million ($25.5 million after tax) and a mark-to-market loss of $31.3 million ($21.9 million after-tax). After adjusting for the mark-to-market movements, the FY17 investment return was 2.82% per annum, down from 3.41% per annum in FY16.

As at 31 December 2017, the value of Genworth’s investment portfolio was $3.4 billion, more than 86% of which continues to be held in cash and highly rated fixed interest securities. The Company had invested $237.4 million in Australian equities as at year-end in line with the previously stated strategy to improve investment returns on the portfolio within acceptable risk tolerances. In 2017, the Board approved a strategy to diversify the Company’s assets by investing in non-AUD fixed income securities. This will be implemented in 2018.

As at 31 December 2017 Genworth’s regulatory solvency ratio was 1.93 times the Prescribed Capital Amount (PCA) which is above the Board’s target capital range of 1.32 to 1.44 times.

Throughout the year the Company embarked on a number of capital management initiatives designed to bring Genworth’s solvency ratio more in line with the Board’s target range. A fully franked special dividend of 2 cents per share and fully franked ordinary dividends totalling 24 cents per share were declared by the Board. This equates to a yield of 8.7% based on the share price of $3.00 as at 31 December 2017.

In 2017 the Company also commenced an on-market share buy-back up to a maximum value of $100 million. As at 31 December 2017, $51 million of shares had been acquired as part of this initiative. Genworth intends to continue the buy-back of shares in 2018, up to a maximum total value of $100 million, subject to business and market conditions, the prevailing share price, market volumes and other considerations.

The Company will continue to actively manage its capital position and proactively evaluate potential uses for its excess capital.

Genworth has commercial relationships with over 100 lender customers across Australia and Supply and Service Contracts with 10 of its key customers. Our top three customers accounted for approximately 60% of our total NIW and 72.7% of GWP in 2017. We estimate that we had approximately 25% of the Australian LMI market by NIW in 2017.

On 10 March 2017 Genworth announced that the exclusivity agreement for the provision of LMI with its then second largest customer would terminate in April 2017. The Company has been successful in entering into new business with this customer that assists them in managing mortgage default risk through alternative insurance arrangements.

On 20 September 2017 Genworth announced that it had extended its Supply and Service Contract with National Australia Bank (NAB) for the provision of LMI for NAB’s broker business. The term of the contract has been extended for one year to 20 November 2018.

The Company’s Strategic Program of Work is designed to address evolving lender and consumer expectations (resulting from technological and regulatory change) by leveraging Genworth’s existing core competencies in managing mortgage credit default risk.

As part of this work program a number of initiatives have been identified that focus on improving the Company’s underwriting efficiency, enhancing its product offerings and, where appropriate, leveraging its data and mortgage partnerships along the mortgage value chain.

One such initiative has involved the establishment of an offshore insurance entity based in Bermuda, which provides Genworth with the capability to structure bespoke risk management solutions for portfolio cover across both high and low loan to value ratios (LVR). By leveraging its strong relationships in the global reinsurance market, Genworth has created a consortium and entered into an agreement with a customer to utilise the new structure to manage mortgage default risk. This bespoke solution is a complementary risk management tool to traditional LMI cover.

The second half of 2017 also saw the culmination of work undertaken by Genworth to create and implement risk management solutions for borrower-paid LMI in the less than 80% LVR segment on a micro market basis (Micro Market LMI).

 

CBA 1H18 Results – A Mixed Bag

The Commonwealth bank has released their 1H18 results today. Overall a mixed bag, but the contribution from home loan repricing was significant, as were the various adjustments relating to AUSTRAC and other reviews. The impact of the reduction in ATM fees, the bank levy and changes to interchange fees all hit home.  Institutional Banking is under some pressure, so they rely on the retail bank to support the overall result.  This is a essay in complexity!

On a ‘continuing operations’ basis, the Group’s statutory net profit after tax (NPAT) for the half year ended 31 December 2017 was $4,895 million, which represents a 1 percent increase on the prior comparative period. This is below expectations.

Cash NPAT was $4,735 million, a decrease of 2 percent. Return on equity (cash basis) was 14.5 percent. Discontinued operations include the Group’s life insurance businesses in Australia and New Zealand.

Underlying operating income increased 4.9%, due mainly to higher net interest income which was up 6.2%. Lending volumes were up 3.5% . Other banking income was flat. Higher structured asset finance income and lending fees were offset by lower trading income in the institutional business reflecting reduced market volatility and by lower interchange rates and ATM fees in the retail bank.. Strong investment markets drove funds management income. This was partly offset by lower general insurance income which was impacted by higher claims due to weather events. Underlying operating expenses increased 4.7% to $5,318m, driven by a $200m expense provision for expected regulatory, compliance and remediation program costs.

The underlying cost-to-income ratio reduced a further 10 basis points to 40.8%.

CBA has been selective in its home loan growth, with more new loans via proprietary channels, and lower volumes of investor loans than the market.

There was a 6 basis point uplift in net interest margin to 2.16% (and a lift of more than 10 basis points in Australian Retail Banking, thanks to the mortgage book repricing).

Consumer arrears look contained, though WA home loans still above the average.

The Board determined an interim dividend of $2.00 per share, a 1 cent increase on the 2017 interim dividend.

The interim dividend, which will be fully franked, will be paid on 28 March 2018 with the ex-dividend date being 14 February 2018.

The CET1 ratio is 10.4%, lower than some expected, thanks to provisions, and CBA also flagged that by adopting the AASB9 standard CET1 will fall by around 25 basis points.

Some interesting commentary on the outlook:

Global growth trends are positive overall, as are Australia’s GDP outlook and employment trends. However, we remain wary of the risks of market volatility, particularly as expansionist monetary policy unwinds and interest rates rise. Similarly, low wage growth undermines families’ sense of confidence and wellbeing. As we have been for many years, we remain very much aware of the inevitability of intensified competition in the financial services sector.

But the results are quite a bit more complex given a number of one off adjustments.

CBA’s net profit after tax is disclosed on both a statutory and cash basis. A number of items have been included “above the line”.

  • The Group has provided for a civil penalty in the amount of $375 million (not deductible for tax) re AUSTRAC.
  • A $200 million expense provision was taken for expected costs relating to currently known regulatory, compliance and remediation program costs, including the Financial Services Royal Commission.
  • the sale of 100% of its life insurance businesses in Australia
    (“CommInsure Life”) and New Zealand (“Sovereign”) to AIA Group Limited (“AIA”) for $3.8 billion.

They also made adjustments to underlying performance.

  • 1H17 has been adjusted to exclude a $397 million gain on sale of the Group’s remaining investment in Visa Inc. and a $393 million one-off expense for acceleration of amortisation on certain software assets.
  • the impact of consolidation and equity accounted profits of AHL Holdings Pty Ltd (trading as Aussie Home Loans) has been excluded
  • 1H18 is adjusted to exclude an expense provision which the Group believes to be a reliable estimate of the level of penalty that a Court may impose in the AUSTRAC proceedings.

On this basis, the underlying cost-to-income ratio is 40.8% compared to the reported cash NPAT (continuing operations, including AUSTRAC penalty provision) cost-to-income ratio of 43.9%.

Looking at the divisional performance,  Retail Banking Services has more than 10 million personal and small business customers, a network of ~1,000 branches and more than 3,000 ATMs. More than 6 million customers now use digital channels with a quarter of new accounts opened online, and more than 50% of transactions by value completed digitally. Retail Banking Services cash net profit after tax for the half year ended 31 December 2017 was $2,653 million, an increase of 8% on the prior comparative period. Since 2006, Retail Banking Services have improved customer satisfaction by more than 25%, and has been number one in Roy Morgan Retail MFI customer satisfaction for 45 out of the past 54 months. Net interest income was $4,949 million, an increase of 8% on the prior comparative period. This reflected a higher net interest margin, solid balance growth in home lending and strong growth in transaction deposits. Net interest margin increased 11 basis points, reflecting: Higher home lending margin from repricing of interest only and investor loans, and lower cash basis risk, partly offset by unfavourable portfolio mix, with a shift to fixed home loans, and switching from interest only to principal and interest home loans; and higher deposit margin resulting from repricing and favourable portfolio mix, partly offset by lower cash basis risk; partly offset by the impact of the major bank levy. Other banking income was $955 million, a decrease of 5% on the prior comparative period, thanks to lower interchange rates and lower deposit fee income and removal of ATM withdrawal fees. FTE were 11,555, a decrease of 2% on the prior comparative period, yet operating expenses were $1,775 million, an increase of 2% on the prior comparative period. The operating expense to total banking income ratio was 30.1%, an improvement of 90 basis points on the prior comparative period. Net interest income increased 7% on the prior half, reflecting higher net interest margin, balance growth in home lending and deposits, and three additional calendar days than the prior half. Net interest margin increased 10 basis points, reflecting: higher home lending margin with repricing of interest only and investor loans to manage regulatory limits, and lower cash basis risk; partly offset by unfavourable portfolio mix, with a shift to fixed home loans, and switching from interest only to principal and interest home loans; lower deposit margin resulting from lower cash basis risk, partly offset by repricing; and the impact of the major bank levy. Loan impairment expense was $356 million, an increase of 1% on the prior comparative period. The result was mainly driven by increased home loan and personal loan collective provisions, which include the impact of slightly higher home loan arrears, predominately in Western Australia. Home loan growth up 5% driven by strong growth in the proprietary channel leading to an increase in the proprietary flows mix from 57% to 64%; Total deposit growth of 4%, driven by strong growth in Transaction accounts; and  Consumer finance balance decrease of 1%, broadly in line with system.

Business and Private Banking cash net profit after tax for the half year ended 31 December 2017 was $960 million, an increase of 9% on the prior comparative period. Net interest income was $1,694 million, an increase of 5% on the prior comparative period. This was driven by strong deposit balances growth, subdued growth in lending balances and an increase in net interest margin. Net interest margin increased six basis points. Other banking income was $517 million, an increase of 6%. Operating expenses were $789 million, flat on the prior comparative period. FTE were 3,557 up 1% primarily due to an increase in frontline bankers and project resources supporting the Bankwest east coast business banking transition. The operating expense to total banking income ratio was 35.7%, an improvement of 180 basis points on the prior comparative period. Loan impairment expense was $49 million, a decrease of 11% on the prior comparative period. Deposit growth of 6%, driven by strong demand for transaction deposits; home loan growth of 2%, driven by growth in owner occupied loans; and business lending growth of 1% driven by growth in target industries partly offset by decline in residential property development. Loan impairment expense was $49 million, an increase of $42 million on the prior half reflecting higher collective provisions, partly offset by lower individual provisions.

Institutional Banking and Markets cash net profit after tax for the half year ended 31 December 2017 was $591 million, a decrease of 13% on the prior comparative period. Net interest income was $737 million, a decrease of 4% on the prior comparative period. Other banking income was $679 million, a decrease of 6% on the prior comparative period. Operating expenses were $542 million, a decrease of 2% on the prior comparative period. The decrease was driven by the ongoing realisation of productivity benefits, partly offset by higher project, risk and compliance costs. The operating expense to total banking income ratio was 38.3%, an increase of 130 basis points on the prior comparative period. FTE were 1,510, an increase of 4% primarily due to growth in project related FTE and increased risk and compliance resourcing. Loan impairment expense was $105 million, an increase of $61 million on the prior comparative period. Asset quality of the portfolio has remained stable with the percentage of the book rated as investment grade increasing slightly by 40 basis points to 86.0%. Net interest income decreased 2% on the prior half, driven by lower margins, partly offset by average deposit balance growth. Net interest margin decreased seven basis points. Other banking income increased 8% on the prior half. Loan impairment expense increased $85 million on the prior half reflecting higher individual and collective provisions, partly offset by higher write-backs.

Wealth Management cash net profit after tax for the half year ended 31 December 2017 was $375 million, a 51% increase on the prior comparative period. Excluding the contribution from the CommInsure Life Business (discontinued operations), cash net profit after tax was $281 million, a 33% increase on the prior comparative period. The result was driven by strong growth in funds management income and lower operating expenses partly offset by lower insurance income. Funds management income was $987 million, an increase of 10% on the prior comparative period. Average Assets Under Management (AUM) increased 9% to $220 billion reflecting higher investment markets partly offset by higher net outflows in the emerging market equities and fixed income businesses. AUM margins declined reflecting investment mix shift to lower margin products. General insurance income was $82 million, a decrease of 24% on the prior comparative period due to higher weather event claims, partly offset by growth in premiums driven by pricing initiatives. Operating expenses were $707 million, a decrease of 3% on the prior comparative period. This was driven by ongoing realisation of productivity benefits partly offset by continued investment in business capabilities. FTEs were 3,534, a decrease of 11% on the prior comparative period. The operating expenses to total operating income ratio was 66.1%, an improvement of 610 basis points on the prior comparative period.

New Zealand cash net profit after tax for the half year ended 31 December 2017 was NZD589 million, an increase of 15% on the prior comparative period, driven by strong volume growth, improved lending margins, lower loan impairment expense and 20% increase in Sovereign’s profit. ASB cash net profit after tax for the half year ended 31 December 2017 was NZD575 million, an increase of 15% on the prior comparative period. The result was driven by operating income growth and a lower loan impairment expense, partly offset by higher operating expenses. Net interest income was NZD984 million, an increase of 8% on the prior comparative period, driven by strong volume growth and improved net interest margin. Net interest margin increased, reflecting an increase in lending margins, partly offset by an unfavourable retail deposit mix shift to lower margin investment deposit accounts. Other banking income was NZD212 million, an increase of 5% on the prior comparative period, primarily driven by higher card income and insurance commissions, partly offset by lower service fees as customers leverage digital channels. Funds management income was NZD55 million, an increase of 17% on the prior comparative period, due to strong net flows and market performance. Operating expenses were NZD427 million, an increase of 3% on the prior comparative period. This increase was driven by higher staff costs, continued investment in technology capabilities and higher regulatory compliance costs, partly offset by lower property costs and lower depreciation. FTE were 4,826, up 3% primarily due to an increase in frontline and compliance staff, partly offset by productivity initiatives. The operating expense to total operating income ratio for ASB was 34.1%, an improvement of 160 basis points, reflecting improved operating leverage supported by cost control and a continued focus on productivity.
Loan impairment expense was NZD26 million, a decrease of 47% on the prior comparative period, primarily due to lower provisions in the dairy portfolio. Home loan and consumer finance arrears rates continue to remain low at 12 basis points and 50 basis points respectively. This is despite a 12 basis point increase in consumer finance arrears on the prior comparative period primarily driven by the timing of write-offs. Balance Sheet growth included: home loan growth of 5%, marginally below system; strong business and rural loan growth of 8%, remaining above system, with the long-term strategic focus on this segment continuing to deliver strong results; and strong customer deposit growth of 7% in a competitive retail funding environment. Risk weighted assets increased 1%, primarily driven by lending volume growth, partly offset by improved credit quality in the business and rural portfolios.

Bankwest cash net profit after tax for the half year ended 31 December 2017 was $339 million, an increase of 17% on the prior comparative period. The result was primarily driven by strong growth in total banking income, lower loan impairment expense and flat operating expenses. Net interest income was $778 million, an increase of 6% on the prior comparative period. The result was driven by strong balance growth in home lending and deposits, and a higher net interest margin. Other banking income was $107 million, an increase of 7% on the prior comparative period, reflecting an increase in fee based package offerings, partly offset by lower business lending fees. Operating expenses were $368 million, flat on the prior comparative period, reflecting a continued focus on productivity and disciplined expense  management. FTE were 2,866, up 2% on the prior comparative period as a result of increased investment in customer facing technology platforms. The operating expense to total banking income ratio was 41.6%, an improvement of 250 basis points compared to the prior comparative period. Loan impairment expense was $30 million, a decrease of 40% on the prior comparative period. This was driven by reduced home loan impairments and lower business loan collective provisions. Home loan arrears increased in line with the softening Western Australian economy. Balance sheet growth included: home loan growth of 6%, slightly lower than system reflecting the Western Australian economy lagging national growth rates; total deposit growth of 11% resulting from strong growth in Investment and Transaction deposits, reflecting a continued focus on deepening customer relationships; and core business lending growth of 6%. Risk weighted assets increased by 18% on the prior comparative period driven by regulatory changes to the home loan risk weighting. The underlying increase excluding regulatory changes was 10% driven by volume growth in business and home loans and an increase in Operational Risk.

Financial Services Competition Reform Needed – Productivity Commission

The Productivity Commission, Australian Government’s independent research and advisory body has released its draft report into Competition in the Australian Financial System. It’s a Doozy, and if the final report, after consultation takes a similar track it could fundamentally change the landscape in Australia. They leave no stone upturned, and yes, customers are at a significant disadvantage. Big Banks, Regulators and Government all cop it, and rightly so.

Australia’s financial system is without a champion among the existing regulators — no agency is tasked with overseeing and promoting competition in the financial system. The Commission’s draft report into Competition in the Australian Financial System recognises that both competition and financial stability are important to the Australian financial system, and are an uncomfortable mix at times. It has also found that competition is weakest in markets for small business credit, lenders’ mortgage insurance, consumer credit insurance and pet insurance.

Here are some of the key findings.

Whilst there has been significant innovation (enabled by technology), the financial system is highly profitable and concentrated.  It lacks strong pricing rivalry – and evidence that it exploits loyal customers.

It questions whether the four pillars policy is still relevant.  It is an ad hoc policy that, at best, is now redundant, as it simply duplicates competition and governance protections in other laws. At worst, in this consolidation era it protects some institutions from takeover, the most direct form of market discipline for inefficiency and management failure. All new entrants to the banking system over the past decade have been foreign bank branches, usually targeting important but niche markets (and these entrants have evidenced only limited growth in market share).

Australia’s financial system is dominated by large players — four major banks dominate retail banking, four major insurers dominate general insurance, and some of these same institutions feature prominently in funds and wealth management. A tail of smaller providers operate alongside these institutions, varying by market in length and strength.

Across the financial system, there is a continual flow of new products and a re-packaging of existing products to appeal to specific groups of consumers. As a consequence, there is a very large number of products in financial markets, with sometimes only marginal differences between them: nearly 4000 different residential property loans and 250 different credit cards are on offer, for example. The same situation is apparent in insurance markets: the largest 4 general insurers hold more than 30 brands between them. In the pet insurance market this is particularly pronounced — 20 of the 22 products (with varying premiums) on offer are underwritten by the same insurer.

Banks can price as they want. Little switching occurs — one in two people still bank with their first-ever bank, only one in three have considered switching banks in the past two years, with switching least likely among those who have a home loan with a major bank. ‘Too much hassle’ and a desire to keep most accounts with the same institution are the main reasons given for the lack of switching, with home loans being a particularly difficult product for consumers to switch.

Although financial institutions generally have high customer satisfaction levels, customer loyalty is often unrewarded with existing customers kept on high margin products that boost institution profits. For this to persist, channels for provision of information and advice (such as mortgage brokers) must be failing.

Scope for price rivalry in principal loan products is constrained by a number of external factors: price setting by the Reserve Bank facilitating price coordination by banks; expectations of ratings agencies that large banks are too big to fail; and some prudential regulation (particularly in risk weighting) that favours large institutions over smaller ones.

The growth in mortgage brokers and other advisers does not appear to have increased price competition. The revolution is now part of the establishment. Non-transparent fees and trailing commissions, and clear conflicts of interest created by ownership are inherent. Lender-owned aggregators and brokers working under them should have a clear best interest duty to their clients.

There is also variation between larger and smaller institutions in funding costs (with a large regulatory-determined component). Not all ADIs face the same regulatory arrangements and regulatory effects on their pricing capacity. A source of differential funding costs to banks is a series of regulatory measures and levies that apply (both positively and negatively) to the major Australian-owned banks but not to smaller Australian-owned ADIs or foreign banks operating in Australia.

The net result of these regulatory measures is a funding advantage for the major banks over smaller Australian banks that rises in times of heightened instability. RBA estimated this advantage to have averaged around 20 to 40 basis points from 2000 to 2013 (worth around $1.9 billion annually to the major banks). More recently, the funding cost advantage of major banks has been estimated to have declined to about 10 basis points, due in part to prudential reforms. But it nevertheless persists, and ratings agencies are unlikely to rate institutions’ fund raising such that there is no effective differential between Australia’s major and smaller banks.

Australia’s major banks have delivered substantial profits to their shareholders  — over and above many other sectors in the economy and in excess of banks in most other developed countries post GFC. In recent times, regulatory changes have put pressure on bank funding costs, but by passing on cost increases to borrowers, Australia’s large banks in particular have been able to maintain high returns on equity (ROEs).
The ROE on interest-only investor loans doubled, for example, to reach over 40% after APRA’s 2017 intervention to stem the flow of new interest-only lending to 30% of new residential mortgage lending (reported by Morgan Stanley). This ROE was possible largely due to an increase by banks in the interest rate applicable to all interest-only loans on their books, even though the regulator’s primary objective was apparently to slow the growth rate in new loans. Competing smaller banks were unable to pick up dissatisfied customers from this re-pricing of their loan book because of the application of the same lending benchmark to them.

Regulators have focused on a quest for financial stability prudential stability since the Global Financial Crisis, promoting the concept of an unquestionably strong financial system.

The institutional responsibility in the financial system for supporting competition is loosely shared across APRA, the RBA, ASIC and the ACCC. In a system where all are somewhat responsible, it is inevitable that (at important times) none are. Someone should.

The Council of Financial Regulators should be more transparent and publish minutes of their deliberations. Under the current regulatory architecture, promoting competition requires a serious rethink about how the RBA, APRA and ASIC consider competition and whether the Australian Competition and Consumer Commission (ACCC) is well-placed to do more than it currently can for competition in the financial system.

Some of APRA’s interventions in the market — while undertaken in a way that is perceived by the regulators to reflect competitive neutrality — have been excessively blunt and have either ignored or harmed competition. Such consequences for competition were neither stated nor transparently assessed in advance. APRA’s interpretation of Basel guidelines on risk weightings that non-IRB banks use for determining the amount of regulatory capital to hold, puts it among the most conservative countries internationally.

  • For home loans, the main area in which Australia’s risk weights vary from international risk weightings is for (lower risk) home loans that have a loan to value ratio below 80%.Australian non-IRB lenders are required to use a risk weight of a flat 35%, compared with Basel-proposed guidelines of 25% to 35% for such loans.
  • For small and medium enterprise (SME) loans, the main area of difference is lending that is not secured by a residence. A single risk weight (of 100%) applies to all SME lendingnot secured by a residence, with no delineation allowed for the size of borrowing, the form of borrowing (term loan, line of credit or overdraft) or the risk profile of the SMEborrowing the funds. In contrast, Basel proposed risk weights for SME lending vary from75% for SME retail lending up to €1 million, to 150% for lending for land acquisition, development and constructions.

The RBA should establish a formal access regime for the new payments platform (NPP). As part of this regime, the RBA should review the fees set by participants of the NPP and transaction fees set by NPPA; and require all transacting participant entities that use an overlay service to share de-identified transaction-level data with the overlay service provider.

Measures that should be prioritised to help consumers become a competitive force in the longer term include:

  • consumer rights to have their financial data transferred directly from one service provider to another, either facilitated through Open Banking arrangements or as part of a more broadly-based consumer data right
  • automatic reimbursement of the ‘unused’ portion of lenders mortgage insurance when a consumer terminates the loan
  • payment system reforms that help detach consumers from their financial providers
  • provision of information on median home loan interest rates provided in the market over the previous month
  • inclusion on insurance premium notices, of the previous year’s premium and percentage change.

A Blip or Something More Substantive?

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!

 

Volatility Roars Back To Life

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.

A Viable Alternative To Pay Day Loans

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:

  • Speckle is a fast online cash loan for amounts of $200 – $2,000, that is around half the cost of other similar loans.
  • Speckle’s fees include a 10 per cent establishment fee and two per cent monthly fee compared to the market norm of 20 per cent and four per cent.
  • Repayment options range from three months to one year, and are flexible so customers can pay as early or as often as they wish with no extra fees. Speckle loans are offered by anot for profit organisation which puts customers at the heart of products and services that are fair and affordable.

About Good Shepherd Microfinance and NAB’s partnership:

  • NAB has backed Good Shepherd Microfinance to create Speckle NAB and Good Shepherd Microfinance have been working together for over 15 years to provide people in Australia with access to fair and affordable finance through the No Interest Loan Scheme (NILS) and StepUP low interest loans.
  • The partnership has seen more than $212 million in no and low interest loans provided to over half a million people in Australia doing it tough.
  • Last year more than 27,000 loans valued at almost $30 million were provided to people on low incomes through a national network of more than 180 community organisations in 694 locations across Australia.
  • Good Shepherd Microfinance are leaders in the development and delivery of microfinance programs for people who experience limited access to financial products and services.
  • NAB has committed $130 million for lending to people on low incomes and together with Good Shepherd Microfinance aims to reach 100,000 people each year.

About payday lending in Australia:

  • The use of short term cash loans by households in Australia has more than doubled in the past 12 years (from 356,000 in 2005 to 786,500 in 2017).
  • Use of short term cash loans by women (25.4%) is growing faster than the market growth (22.3%).
  • Women are using cash loans at a younger age than men. In the 20-30 year range, women represent 34% and men 15%.[3]
  • 4 million adults in Australia were facing some level of financial stress in 2016 and around 25 per cent of the population lack access to any form of credit such as a credit card or personal loan.[4]

[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

RBA Holds Again

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.

More Suggestions Of Poor Mortgage Underwriting Standards

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.

Retail turnover falls 0.5 per cent in December

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.

ClearView refunds $1.5 million for poor life insurance sales practices

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.