Digital Finance Analytics (DFA) Blog – Page 593

Debt agreements and how to avoid unnecessary debt traps

Debt agreements are the fastest growing form of personal insolvency in Australia. They were designed to offer debtors a low-cost way to make arrangements with their creditors, while avoiding bankruptcy and some of its more serious consequences.

When introduced, law reformers intended that debt agreements should be administered by volunteers rather than by commercial administrators who charge fees. However, in practice, debtors often pay substantial fees to debt agreement administrators.

In fact, many debtors pay more than 100% of their original debt, because of the high cost of administration fees. But there are cheaper options available for managing debt.

Debt agreements

Debt agreements are binding contracts made between debtors and their creditors in accordance with personal insolvency law. They are aimed at providing debtors in financial stress with the option of compromising with creditors. Not all debtors can enter into a debt agreement – there are income and debt limits.

In many cases, debtors pay their creditors an agreed reduced amount by instalments over a period of time. A debt agreement administrator assists in the negotiation process and distributes the payments to creditors.

Debt agreements have fewer adverse consequences than bankruptcy. One key advantage is that debtors may be allowed to keep their home.

Nonetheless, the adverse consequences of debt agreements include having a record on the National Personal Insolvency Index, and difficulties obtaining credit. Debtors’ ability to maintain a licence in various professions may be affected and the debt agreement must be disclosed in certain situations.

A growing problem in Australia

In 2016 there were 12,150 new debt agreements, comprising 41.5% of all personal insolvencies in Australia. While the number of debt agreements has increased steadily each year, bankruptcies have decreased since 2010.

Our research examines three sources of data to gauge the impact of debt agreements. These sources include statistics from the Australian Financial Security Authority (AFSA), an online survey of 400 debtors, and interviews with industry stakeholders.

Most debtors pay more under debt agreements than the amount they originally owed. This is due to the fees charged by AFSA and, in particular, for-profit debt agreement administrators.

In 2016, close to 23% of debtors’ payments went towards debt agreement administrators’ fees. The total amount of fees paid by debtors is higher when Australian Financial Security Agency fees and set-up fees paid to debt agreement administrators are included.

Many debt agreements are unsuitable

Debt agreements are useful for some people, such as those who have a home to protect from seizure in bankruptcy. However, consumer advocates find many instances of debt agreements unsuited to the needs of debtors. High administration fees are detrimental particularly for low income debtors.

Some debtors enter into debt agreements which they clearly cannot afford, aggravating their financial stress. If they are unable to make the payments required under a debt agreement and it is terminated, the fees cannot be recovered but the debts to creditors remain, leaving debtors in a worse position.

Debtors who rely primarily on Centrelink benefits are among the clearest examples of people unsuited to debt agreements. Centrelink benefits are meant to provide a basic standard of living, and diverting a portion of income towards debt agreements is likely to cause significant hardship.

People whose incomes comprise a disability or aged pension may in many cases be better off declaring bankruptcy, or seeking other forms of debt relief.

Better options available

There are several fee-free options for managing debt which do not involve the adverse consequences of debt agreements.

Financial hardship schemes commonly allow payment by instalments, or short term extensions of time, for debts owed to utilities or credit providers. Free independent dispute resolution offered by the Financial Ombudsman Service and the Credit and Investments Ombudsman is available to people who have disputes with financial service providers.

People often enter into debt agreements without seeking independent advice or accessing other options for managing debt. In 2016, 92% of debt agreement debtors relied on debt administrators as their primary source of information. Marketing often emphasises the advantages of debt agreements over bankruptcy.

Debtors often lack adequate knowledge of cheaper, better options for managing debt and of the adverse consequences of debt agreements. When the debt agreement system was established, it was not expected that private, profit-making debt administrators would assume a prominent role.

Law reformers noted in the 1996 Bankruptcy Legislation Amendment Bill that ‘if fees were charged, debt agreements would in many cases not be viable either for the debtor, or for his or her creditors’. They further noted that this would defeat the purpose for which debt agreements were introduced.

Recommendations

Reforms to the debt agreement system are currently being considered, but in order to be effective, these reforms should provide better safeguards for debtors. These should include stricter eligibility requirements for debtors entering into debt agreements such as a minimum income or ownership of assets which are protected from seizure in bankruptcy.

We need a more rigorous, legally binding assessment of debtors’ suitability on the part of debt agreement administrators; the provision of clearer information to debtors; and limits on administrators’ fees. Debtors should have access to free dispute resolution services when problems with debt agreement administrators arise.

Such reforms would reduce the risk of debtors being left worse off, financially, as a result of debt agreements that are unsuited to their circumstances.

Authors: Vivien Chen, Lecturer, Monash Business School, Monash University; Ian Ramsay, Professor, Melbourne Law School, University of Melbourne; Lucinda O’Brien, Research Fellow, University of Melbourne

Senior property investors can’t ‘sit on their hands’

From Nestegg.

The Citi report argued that the growing number of multi-property investors and falling yields were a worrying sign for senior investors who may have little time left in their working life to repay their debts. The report was compiled using Citi figures and data from Digital Finance Analytics (DFA).

“Tighter application of responsible lending laws mean that investors must now have a clear debt repayment plan, although for many prevailing interest-only (IO) borrowers this does not exist,” said the Citi analysts lead by Craig Williams and Brendan Sproules.

“The large level of debt outstanding by borrowers aged in their 50s and 60s means many investors will need to sell property to discharge their debts.”

They warned that as 28 per cent of wealthy senior investors were not asked about a capital repayment plan upon loan application and 32 per cent of them do not have a capital repayment plan, “as these cohorts begin to hit retirement age, their investment properties will need to be sold to repay the debt”.

According to Citi, mortgage debt is “one of the most important economic and social issues of our time”, due to the risk that highly indebted households pose to the economy.

Citi and DFA’s figures reported that ~35 per cent of mortgages are held by investors, ~40 per cent of mortgages are interest-only and the percentage of investors holding IO loans has grown to ~70 per cent.

Considering this, Citi said most wealthy seniors (53 per cent) preferred the repayment structure because it helped them get a bigger loan. For most stressed seniors (72 per cent), IO loans appealed because of the ability to make smaller repayments.

Multi-property investors growing

Additionally, the proportion of wealth seniors who own multiple investment properties has grown in the years since 2011.

In 2011, 22 per cent of wealthy senior investors own two or three properties, 72 per cent owned one, and just 1 per cent owned six or seven.

Conversely, in 2017, 18 per cent of this group owned six or seven properties, 7 per cent owned two or three, and 73 per cent owned one investment property.

Across all cohorts, the percentage of multi-property investors has grown and this has been “coinciding with the considerable rise in IO mortgages”.

At the same time, however, the gross rental yield in Sydney has fallen from 4.3 per cent in May 2013 to 2.80 per cent in May 2017 and the average standard variable rate for IO loans at the major banks has grown from 6.17 per cent to 6.26 per cent.

Marking these cash flow and investment fundamentals as “deteriorated”, Citi said: “Looking forward, investors are losing the ability to ride out the cycle.

“The most important question for the future direction of house prices is – What will these multi-investment property borrowers do when faced with increasing cash flow losses and flat or declining property prices?”

Given that the average age of wealthy seniors is 63 and the average IO debt is $236,400, according to their figures, Citi expressed concern that this cohort will not have enough time to repay the principal “without a significant hit to household cash flows”.

Further, this group could be additionally affected by the needs of the adult children they might have. Citi pointed to research showing that the ‘Bank of Mum and Dad’ can now be considered Australia’s fifth largest home loan lender.

The RBA backs them up

The Citi analysts are not alone in their concerns. The Reserve Bank of Australia recently flagged the “potential risk” in the growing number of property investors over the age of 60 with mortgage debt. The “significant increase” in the share of geared investors was considered particularly alarming.

The RBA conceded, however: “While this seemingly could increase risks, there are some mitigating factors.

“Although this age group is more indebted, the average retirement age has increased over time, so older investors are more likely to be working, increasing their capacity to withstand shortfalls in rental income or higher interest rates.”

Westpac to refund some package customers, costs $65m

Westpac has announced it would provide refunds to some customers holding ‘packaged’ accounts after identifying that some customers did not automatically receive benefits to which they were entitled.

The issue affected approximately 200,000 customers who held Premier Advantage Packages with Westpac or Advantage Packages with St. George, BankSA, or Bank of Melbourne from 2010.

Under the terms of the packages, customers were entitled to a range of benefits. Customers automatically received discounts on core products such as home loans, credit cards, or transaction accounts. However, some customers did not receive discounts on ancillary products such as home and contents insurance and term deposits. The packages have since been simplified and all benefits are now automated.

Westpac Chief Executive, Consumer Bank, George Frazis, said: “At Westpac, our business depends on building long term relationships with our customers. So when we get something wrong, we want our customers to have confidence that we will put it right.

“When we identified these issues we started the process of putting things right for customers. We also notified ASIC.

“Importantly, customers do not need to do anything. Over the coming months, we will provide refunds, including appropriate interest, to any customers who may have been entitled to a benefit but weren’t aware they needed to opt in.

“Westpac apologises unreservedly for a process that did not suit customers. By automating the discounts, we have ensured that our customers will not be affected in this way again.”

Mr Frazis said that some customers with various business banking packages may also not have received some of the benefits they were entitled to. Affected customers will also receive refunds.

Refunds are expected to total approximately $65 million with an after tax cost to Westpac of around $45 million, which will be included in Westpac Group’s FY17 financial results.

Westpac will proactively contact eligible customers, but has set up a dedicated webpage to assist with any questions. Business customers can also contact their relationship banker directly.

Canada Reinforces Mortgage Underwriting Guidelines

From Moody’s.

On Tuesday, Canada’s Office of the Superintendent of Financial Institutions (OSFI) published the final version of “Guideline B-20 − Residential Mortgage Underwriting Practices and Procedures,” which mandates more stringent stress-testing for uninsured mortgages. The guideline, which takes effect on 1 January 2018 and applies to all federally regulated financial institutions in the country, is credit positive because it will improve asset quality for Canadian banks.

The guideline sets a new minimum qualifying rate, or stress test, for uninsured mortgages at the higher of the five-year benchmark rate published by the Bank of Canada, the central bank, or the contractual mortgage rate plus 2%. Lenders also will be required to impose and continuously update more effective loan-to-value (LTV) limits and measurements.

A key vulnerability of Canadian banks is the high and rising level of private-sector debt/GDP. Canadian mortgage debt outstanding has more than doubled in the past 10 years (see Exhibit 1) and the index of house prices to disposable income has increased 25% over this period (see Exhibit 2), raising the prospect that real estate overvaluation is driving up overall household debt and overextending borrowers.

OFSI’s action is the latest in a series of macro-prudential measures aimed at slowing house-price appreciation in Canada and moderating the availability of mortgage financing. These measures will address the increasing risk that that growing private-sector debt will weaken Canadian banks’ asset quality. Canada’s growing consumer debt and elevated housing prices threaten to make consumers and Canadian banks more vulnerable to downside risks.

In addition to requiring that all uninsured mortgages be stress-tested against a potential rise in interest rates (high-ratio insured mortgages are already required to meet such tests to qualify for mandatory mortgage insurance), the guideline requires that banks establish and adhere to risk-appropriate LTV limits that keep current with market trends. Additionally, the guideline expressly prohibits banks from arranging with another lender a mortgage, or a combination of a mortgage and other lending products (known as bundled mortgages), in any form that circumvents a bank’s maximum LTV ratio.

Housing prices are at record highs owing to price increases in the urban areas of Toronto, Ontario, and Vancouver, British Columbia. Macro-prudential initiatives dampened volumes and prices in Toronto over the summer, but the effects of similar moves in Vancouver last year appear to be lessening this year as prices regain momentum. We believe that high consumer leverage could result in future asset-quality deterioration in an economic downturn or a housing price correction. Although Canadian banks have demonstrated prudent underwriting standards in the past, this is attributable in part to thoughtful regulatory oversight.

The new guideline follows a consultation period that ended in August. Some industry participants recommended a delay in implementation, cautioning that the combined effect of multiple macro-prudential measures affecting the mortgage market risked unduly depressing the housing market, thereby triggering a severe price correction.

Brokers ‘not recording the outcomes’ of IO discussions: ASIC

From The Adviser.

Brokers may be having the appropriate conversation with borrowers on interest-only home loans, the financial services regulator has said, but there has been some “pretty poor record keeping”.

The financial services regulator announced last week that it would “shortly” begin reviewing the loan files of brokers with a “high proportion of interest-only loans” as part of its work “to ensure that consumers are not paying for more expensive products that are unsuitable”.

The review was triggered by the fact that interest-only (IO) loans are now often more expensive than principal & interest loans, and it is therefore becoming “ever important now for lenders and brokers to explain and justify why they are putting people into more expensive loans”.

Speaking to The Adviser, Michael Saadat, ASIC’s senior executive leader for deposit takers, insurers & credit services, elaborated that while the regulator believes that brokers are having the appropriate discussions with consumers about the reasons for taking out IO loans, the record keeping on loan files has not been of a high standard.

He revealed: “In the past, I’d say we have seen pretty poor record keeping on that front, where there has been very little on the loan file which tells you why the consumer got that product. In general, when we have looked at loan files in the past, we have seen [responses to the question]: ‘What were the consumers’ requirements and objectives?’ In many cases, we see things like: ‘To buy a house’. That is pretty implicit, but it really doesn’t tell you too many things about what type of product, what type of loan, what type of rate, etc.

“So, our view is that although these discussions are happening… brokers are having these discussions, but they’re not recording the outcomes of those discussions. And it’s hard to prove that you’re meeting your obligations if you don’t have something on a file that shows why you have recommended a particular loan.”

What ASIC wants to see on IO loan files

Mr Saadat added that the next stage of the review into interest-only loans will be “getting these individual files and looking to see how consumers’ requirements and objectives have been documented on those files”.

He said: “If [borrowers] have been provided with an interest-only loan and they are an owner-occupier, we will be looking for a summary or an explanation on the loan file that describes why the consumer was provided with an interest-only loan. So, that’s really the key thing.”

Adding that ASIC “won’t be that prescriptive in terms of our expectations”, Mr Saadat revealed that what the regulator wants to see is “information on the file which is sufficient to explain why the consumer’s decision (or suggestion from the lender or broker) to go into an interest-only for an owner-occupier loan was the right one”.

The lending industry has already begun responding to some of these concerns, with Commonwealth Bank launching a new IO simulator to help brokers show customers the differences between these type of repayments as well as principal & interest repayments.

Mr Saadat told The Adviser that these types of tools, which delve deeper into why consumers need an IO product, help “make the consumer aware of some of the risks involved with going down a particular path”; for example, “the fact that at the end of that period, you do need to make higher principal and interest payments and, over the life of the loan, you may end up paying more interest as a result”.

Mr Saadat concluded: “Investors may have other reasons for getting an interest-only loan — they may be tax reasons, for example, whereas those reasons don’t necessarily apply to owner-occupiers. And that doesn’t mean that owner-occupiers should never have been given an interest-only loan. Of course, there will be cases where that still is appropriate. We just want to make sure that it is appropriate and that you’re documenting the reasons for that.”

The regulator’s crackdown on IO loans has begun to bite, according to some industry data. New data from Mortgage Choice has revealed that there was a 60 per cent decline in interest-only mortgages over a period of just six months.

According to Mortgage Choice’s latest home loan approval data, the proportion of interest-only loans written by the brokerage dropped from 35.95 per cent in April 2017 to 14.64 per cent in September 2017.

CEO of Mortgage Choice John Flavell said that the “significant decline” was a result of lenders hiking rates for these loans.

Housing Affordability Eases for Some

The HIA says that despite the poor levels of housing affordability there are signs of improvement for home-buyers. Investors are not so lucky.

“The HIA Housing Affordability index for Australia improved by 0.5 per cent in the September 2017 quarter but still remains 4.4 per cent below the level recorded a year ago.

“Housing Affordability has been deteriorating in Australia for decades, particularly in capital cities, as demand for new housing greatly exceeded the supply.

“Recent interventions by the government, through APRA, to curb growth in investor activity may have improved affordability for owner-occupiers.

“As a consequence of this intervention it appears that the market has responded with higher mortgage rates for investors and eased rates for owner-occupiers.

“This has had the unintended consequence of improving housing affordability for owner-occupiers.

“Irrespective of intent, this is positive news for owner-occupier buyers in the affordability equation.

The HIA Affordability Index has been produced for more than 17 years using a range of recent data including wages, house prices and borrowing costs to provide an indication of the affordability of housing.

A higher index result signifies a more favourable affordability outcome.

“The Report’s regional analysis demonstrates the substantial differences in affordability conditions around the country,” added Mr Reardon.

“Sydney retains the mantle as the nation’s least affordable housing market despite the affordability index showing a modest improvement in affordability during the quarter. It still takes twice the average Sydney income to service a mortgage on a median priced home in Sydney while avoiding mortgage stress.

Brisbane, Adelaide, Perth and Darwin all recorded modest improvements in affordability in the September quarter. Melbourne, Hobart and Canberra each recorded a modest deterioration in affordability during the quarter.

Trend unemployment rate lowest in 4 years

The monthly trend unemployment rate has decreased by 0.2 per cent over the past year to 5.5 per cent in September 2017, according to figures released by the Australian Bureau of Statistics (ABS) today. This is the lowest rate seen since March 2013 and reflects the strength in employment growth over the past 12 months.

But it is worth noting the underemployment trend rate (proportion of employed persons) rate still does not look that flash, especially in TAS, SA and WA.

“The trend unemployment rate had been hovering in the range of 5.6 to 5.8 per cent for almost two years, but has now dropped to a four year low of 5.5 per cent,” the Chief Economist for the ABS, Bruce Hockman, said.

The trend monthly unemployment rate for both males and females dropped to 5.5 per cent, also for the first time since March 2013.

The trend participation rate remained steady at 65.2 per cent. The male participation rate was 70.8 per cent, while the female participation rate reached a record high of 59.9 per cent.

Monthly trend full-time employment increased for the 12th straight month in September 2017. Full-time employment grew by a further 16,000 persons in September, while part-time employment increased by 8,000 persons, underpinning a total increase in employment of 24,000 persons.

“Full-time employment has now increased by around 271,000 persons since September 2016, and makes up the majority of the 335,000 person net increase in employment over the period,” Mr Hockman said.

Over the past year, trend employment increased by 2.8 per cent, which is above the average year-on-year growth over the past 20 years (1.9 per cent).

Over the past year, the states with the strongest annual growth in employment were Queensland (4.1 per cent), Tasmania (3.9 per cent), Victoria (3.1 per cent) and Western Australia (2.9 per cent).

The trend monthly hours worked increased by 3.1 million hours (0.18 per cent), with the annual figure also showing strong growth (2.9 per cent).

Trend series smooth the more volatile seasonally adjusted estimates and provide the best measure of the underlying behaviour of the labour market.

The seasonally adjusted number of persons employed increased by 20,000 in September 2017. The seasonally adjusted unemployment rate decreased by 0.1 percentage points to 5.5 per cent and the labour force participation rate remained steady at 65.2 per cent.

The Property Imperative Volume 9 Report Released

The latest and updated edition of our flagship report “The Property Imperative” is now available on request with data to mid October 2017.

This Property Imperative Report is a distillation of our research into the finance and property market, using data from our household surveys and other public data. Whilst we provide weekly updates via our blog, twice a year we publish this report. This is volume 9. It offers, in one place, a unique summary of the finance and property markets, from a household perspective.

Residential property, and the mortgage industry is currently under the microscope, as never before. Around two thirds of all households have interests in residential property, and about half of these have mortgages. More households are excluded completely and are forced to rent, or live with family or friends.

We believe we are at a significant inflection point and the market risks are rising. Many recent studies appear to support this view. There are a number of concerning trends. While household incomes are flat in real terms, the size of the average mortgage has grown significantly in the past few year, thanks to rising home prices (in some states), changed lending standards, and consumer appetite for debt. In fact, consumer debt has never been higher in Australia. As a result, households are getting loans later, holding mortgages for longer, even in to retirement, so household finances are being severely impacted, and more recent changes in underwriting standards are making finance less available to many.

Property Investors still make up a significant share of total borrowing, and experience around the world shows it is these households who are more fickle in a downturn. Many use interest only loans, which create risks downstream, and regulators have recently been applying pressure to lenders to curtail their growth.

Mortgage rates are now higher for Investors and those holding Interest Only loans, while low-risk customers with a Principal and Interest loan should be able to find some amazingly low rates. While mortgage underwriting standards are now tighter, there is an overhang of existing loans which would now fall outside existing underwriting standards. Interest Only loans are especially at risk, not least because rental incomes are being compressed.

We hold the view that home prices are set to ease in coming months, as already foreshadowed in Sydney. We think mortgage rates are more likely to rise than fall as we move on into 2018.

Finally, lenders have been able to repair their margins, under the umbrella of supervisory intervention, and their back book repricing has created a war chest to fund attractor offers.

We will continue to track market developments in our weekly Property Imperative weekly video blogs, and publish a further consolidated update in about six months’ time.

Here is the table of contents.

1 EXECUTIVE SUMMARY
 2 TABLE OF CONTENTS
 3. OUR RESEARCH APPROACH
 4. THE DFA SEGMENTATION MODEL
 3 PROFILING THE PROPERTY MARKET
 3.1 Current Property Prices
 4 MORTGAGE LENDING TRENDS
 4.1 Total Housing Credit Is Up
 4.2 ADI Lending Trends Are Suspect
 4.3 Housing Finance Flows
 4.4 The Rise of the Bank of Mum and Dad
 5 HOUSEHOLD FINANCES AND RISKS
 5.1 RBA Financial Stability at Risk
 5.2 IMF Warnings On Growth and Debt
 5.3 Household Ratios Under Pressure
 5.4 Housing Occupancy Costs Are High
 5.5 Households Are Spending More On Basics
 5.6 Savings Are Shrinking
 5.7 DFA Mortgage Stress Rises Again
 5.8 Top Ten Stressed Post Codes
 5.9 More Households Have No Equity
 5.10 Greater Risks from Interest Only Loans
 5.11 The Consumption Crunch
 5.12 A Fall in Household Financial Security
 5.13 Mortgage Rates Will Rise – Sometime
 5.14 Defaults Are Down a Little, But Risks Remain
 5.15 Observations
 6 HOUSEHOLDS’ DEMAND FOR PROPERTY
 6.1 Property Active and Inactive Households
 6.2 Cross Segment Comparisons
 6.3 Property Investors
 6.4 How Many Properties Do Investors Have?
 6.5 SMSF Property Investors
 6.6 First Time Buyers.
 6.7 Up Traders and Down Traders
 6.8 Auction Clearances Remain Quite Strong
 7 MORTGAGE UNDERWRITING STANDARDS
 7.1 ASIC Looks at Interest Only Loans
 7.2 APRA Lifts Capital
 7.3 APRA Lifts Underwriting Standards
 7.4 APRA to Regulate Non-Bank Lenders
 7.5 APRA Delays Mortgage Reporting Standards
 7.6 The Impact On Interest Only Loans
 7.7 Standards Are Tighter Now
 7.8 Risks Are Increasing; Standards Still Too Lose
 8 MORTGAGE PRICING
 8.1 It Pays to Haggle
 9 FINAL OBSERVATIONS
 10 ABOUT DFA
 11 COPYRIGHT AND TERMS OF USE

Request the free report [72 pages] using the form below. You should get confirmation your message was sent immediately and you will receive an email with the report attached after a short delay.

Note this will NOT automatically send you our ongoing research updates, for that register here.

[contact-form to=’mnorth@digitalfinanceanalytics.com’ subject=’Request for The Property Imperative Report 9′][contact-field label=’Name’ type=’name’ required=’1’/][contact-field label=’Email’ type=’email’ required=’1’/][contact-field label=’Email Me The Report’ type=’radio’ options=’Yes Please’ required=’1′ /][contact-field label=’Comment If You Like’ type=’textarea’/][/contact-form]

ANZ agrees to sell shareholding in Metrobank Card Corporation

ANZ has announced it has entered into an agreement with its joint venture partner Metropolitan Bank & Trust Company (Metrobank) regarding the sale of ANZ’s 40% stake in the Philippines based Metrobank Card Corporation (MCC).

More evidence of its “back to the knitting” strategy.

ANZ has agreed to sell half its 40% stake in MCC to Metrobank1, for US$144 million2 (A$184 million). ANZ has also entered into a put option to sell its remaining 20% stake to Metrobank, exercisable in the fourth quarter of FY18 on the same terms for the same consideration. If exercised, this would deliver a total sale price of US$288 million (A$368 million).

MCC is the leading provider of credit cards in the Philippines with more than 1.5 million cards in force. ANZ’s joint venture with Metrobank, which owns the remaining 60% of MCC, has been a successful financial and commercial transaction since it was formed in 2003:

ANZ’s original investment in MCC was A$14 million.

Since 2003, ANZ has recognised A$177 million of equity accounted earnings and received A$101 million in dividends.

MCC contributed A$34.5 million of equity accounted earnings to ANZ in FY16.

The sale of ANZ’s 40% stake (assuming the put option is exercised) represents:
‒ An implied P/B multiple of 4.4×4.
‒ An expected post-tax gain on sale of approximately A$245m5 and an increase in ANZ’s APRA CET1 capital ratio by 9 basis points in FY2018.

Excluding the gain on sale, the ROE and EPS impact to ANZ is broadly neutral.

The sale is subject to customary regulatory approvals. Payment for the initial 20% stake would occur post receipt of these approvals.

ANZ Deputy Chief Executive Officer Graham Hodges said: “This has been a highly successful joint venture for both ANZ and Metrobank creating the leading credit card company in the Philippines. The sale makes sense for ANZ given our continued efforts to simplify our business and is also a good outcome for MCC and its card customers given the strength of the business. ANZ remains committed to its institutional business in the Philippines.”

Why non-banks could be the new home for non-resident borrowers

From Mortgage Professional Australia.

Lenders eyeing up wealthy foreigners currently locked out of the banks and developing new processes to combat fraud

Non-resident lending could be set for a return as non-bank lenders become increasingly interested in the sector.

According to La Trobe Financial’s vice president Cory Bannister, “non-resident is a great example of a product that suits non-banks generally.” Speaking at MPA’s Non-Banks Roundtable last week, Bannister said that the low LVRs, low arrears and high net-worth associated with non-resident borrowers made them similar to prime clients.

The banks largely pulled out of non-bank lending in early 2016, citing fears of fraud. However, Bannister believes non-banks can operate safely: “we believe it requires manual assessment and that’s the single characteristic which meant the banks had to step out of that space.”

La Trobe, who have lent to non-residents on and off over the past year, have an international desk with bilingual staff which help ‘weed out’ fraudulent cases.

Growing niche in expat lending

Two other lenders at the panel were already lending to Australian expats: Better Mortgage Management and Homeloans Ltd.

Expats often struggle to find finance at the banks because they earn income abroad and in foreign currencies. BMM’s managing director Murray Cowan told the panel that “I think the expat sector may have been unfairly characterised as the same as non-residents and that might have created a bit of an opportunity for us there.”

Aaron Milburn, director of sales and distribution at Pepper Money, said that although Pepper doesn’t currently lend to non-residents “I wouldn’t discount it for the future.” He noted that Pepper’s international spread helped provide the infrastructure to do so.

Can non-banks handle non-residents?

Non-banks at the panel were concerned however that a return to non-resident lending could lead to a surge in business.

In fact, it could cause volumes to triple ‘overnight’, suggested Homeloans and RESIMAC general manager of third party distribution Daniel Carde. The panel broadly agreed that such a surge would be difficult to deal with. “No business is set up for triple volumes,” argued Liberty’s national sales manager John Mohnacheff “we can probably handle 5-10% variability”.

A note of caution was sounded by FirstMac founder Kim Cannon. “The RBA wants to stop [non-residents buying property]; they don’t want to cure it,” he told the panel. He warned that surge in non-residents getting financed by non-banks would be “treading on dangerous ground” with regulators.