NAB 2017 Third Quarter Trading Update

NAB gave their June 17 quarter update today.  There were no surprises, with an unaudited statutory net profit of $1.6 billion and unaudited cash earnings of $1.7 billion, up 2% versus March 2017 Half Year quarterly average and 5% versus prior corresponding period.

Andrew Thorburn, Group CEO said:

The major bank levy became effective from 1 July 2017 and is estimated to cost NAB approximately $375 million annually, or $265 million post tax, based on our 30 June 2017 liabilities.

Separately, in July, the Australian Prudential Regulation Authority (APRA) announced a CET1 ratio target of at least 10.5% by January 2020 for major banks to be viewed as ‘unquestionably strong’, with finalisation of international capital reforms not expected to require any further increases to Australian requirements. NAB expects to meet APRA’s new capital requirements in an orderly fashion given the existing capital position and the timelines involved.

Revenue was up 2%, with growth in lending and improved Group net interest margin (NIM) partly offset by lower Markets and Treasury income. They reported a higher Group NIM largely reflects loan repricing and more favourable funding conditions. Expenses were up 2%, or 1% excluding redundancies, due to increased investment spend.

The biggest impact was a reduction in the bad debt charges. Bad and doubtful debt charges (B&DDs) fell 12% to $173 million, reflecting improved asset quality trends and non-repeat of the collective provision overlay for commercial real estate raised in the March 2017 Half Year.

The ratio of 90+ days past due (DPD) and gross impaired assets (GIAs) to gross loans and advances (GLAs) of 0.80% declined 5 basis points (bps) from March 2017 mainly reflecting improved conditions for New Zealand dairy customers.

The Group Common Equity Tier 1 (CET1) ratio of 9.7%, compared to 10.1% at March 2017 mainly reflecting the impact of the interim 2017 dividend declaration and 17 bps for higher risk weights due to previously advised mortgage model changes.

The Leverage ratio was 5.3% (APRA basis), the Liquidity coverage ratio (LCR) quarterly average was 127% and the Net Stable Funding Ratio (NSFR) was 108%.

For this full year they remain confident of achieving more than $200 million in productivity savings and, excluding the impact of the bank levy, expect to deliver positive ‘jaws’.

 

 

 

Industry ‘needs to make adjustments’ to commissions: NAB

From The Adviser.

As the latest organisation to reveal the details of its submission to Treasury regarding ASIC’s proposals for broker remuneration, Anthony Waldron, executive general manager of NAB broker partnerships, said that the bank largely agreed with all six proposals, which could “improve the trust and confidence that consumers can have in brokers”.

Mr Waldron said: “Like ASIC, we want to strengthen the positive contribution that brokers provide. We see opportunity to lead by example and grow trust if we take it on ourselves to improve and to embrace change within our industry for consumers. This is because any strong industry needs to earn, retain and continue to build the trust of its consumers. Trust is the most valuable commodity.”

He continued: “We don’t believe that the current standard commission model has resulted in poor consumer outcomes, but we believe it is essential to manage not only actual conflicts but also the potential for perceived conflicts of interest.

“ASIC suggests lenders should not ‘structure their incentives in a way that encourages larger loans that initially have larger offset balances’. We believe the industry needs to make adjustments to the standard commission model by paying up front commissions based on the drawn down amount, not the total facility amount, and by paying up front commission net of offset balances.”

Reiterating that NAB has “never paid any sort of volume bonuses on mortgages” as it recognises that this could create a conflict of interest, Mr Waldron suggested that “the time for such payments has passed”.

Touching on soft dollar benefits, Mr Waldron said that these could be “managed transparently through gifts and conflicts of interest registers”, but suggested that the ongoing education and professional development of brokers was “essential” and that the industry should “continue to focus on this, ensuring it’s conducted in line with community expectations”.

Public reporting regime should be ‘cautious’ in comparing data

Acknowledging that NAB is in a “unique position in the broker market, operating as both a lender, provider of white label lending and having ownership of three of Australia’s leading aggregator groups — PLAN Australia, Choice and FAST”, Mr Waldron said that the bank knew that it needs to “build a more robust industry model, not just to reduce the perception of conflict of interest but for end-to-end governance”.

He elaborated: “We know we need to increase transparency to protect the interests of customers and brokers, and we’re mindful that today’s actions will be judged by tomorrow’s standards. We have already improved disclosure of our ownership of aggregators: PLAN Australia, Choice and FAST.”

However, he suggested that ASIC’s proposal for a new public reporting regime should be “cautious” in comparing some data, such as price, as there “are many factors that impact price and simple comparisons are difficult to make”.

A reporting regime would therefore “require the support of the industry to be successfully and consistently implemented”.

“Our industry needs to come together to get this right,” he said.

Lastly, Mr Waldron said that improving the oversight of brokers by lenders and aggregators will also require industry consultation and would require a “clear delineation between the requirements of brokers, aggregators and lenders to avoid duplication and overlap”.

NAB reportedly believes that the two important areas of any oversight model should cover responsible lending, and the reporting of ACL’s and brokers in the market regardless of licensing agreements.

“If we are focused on good customer outcomes, proving responsible lending guidelines have been followed will be even more important, both at the time of establishing a loan and when ongoing service is provided,” the executive said. “And any governance regime should also consider how lenders and aggregators will report cases of alleged misconduct of mortgage brokers to ASIC.”

In conclusion, Mr Waldron said: “Our industry has an opportunity to lead by example. We need to manage conflicts of interest, pursue self-regulation, proactively manage perceptions and demonstrate how we will continue to improve for the end benefit of customers. This will require consultation and discussion for us as an industry, with brokers, aggregators, Treasury, regulators and other industry participants to work out how this can best be put into practice.”

Noting that it has been “great to see the industry already come together” to form the mortgage industry forum, Mr Waldron went on to thank brokers for their support.

“Our priority is to continue to back [brokers] in delivering the best customer experience by moving forward with the times.

“We have a real opportunity to chart our own course for the interests of consumers and the progress of our industry.”

Aging Japan Puts a Strain on the Financial System

From The IMFBlog.

Japan’s population is shrinking and getting older, posing challenges to the nation’s financial system. How Japan copes could guide other advanced economies in Asia and Europe that are grappling with the same trends but are at an earlier phase of similar demographic developments.

A declining and aging population weighs on growth and interest rates. This puts pressure on profits of banks and insurance companies. Judging how these shifts affect financial firms was part of the IMF’s Financial Sector Assessment Program for Japan, the world’s third-largest economy. The program is a comprehensive and in-depth assessment of a country’s financial sector. It analyzes the resilience of the financial sector, the quality of the regulatory and supervisory framework, and the capacity to manage and resolve financial crises.

An aging population is also likely to reduce the role of banks in the financial system. With increasing longevity, the demand for longer-term securities rises (since people save more for longer retirements). This results in a flatter yield curve–and banks typically make money by borrowing at low short-term rates and lending at higher longer-term ones. In line with this intuition, analyses of data from 34 countries around the world confirm that the size of the banking sector relative to nonbank financial intermediaries is negatively associated with aging. About 40 percent of the increase in the size of market finance in Japan since 1990 can be explained by aging.

Smaller banks that rely on lending to local markets are particularly vulnerable, since they face less demand from households and firms. Older households still need banking services for transaction purposes, which means that lending will likely fall much faster than deposits. As a result, over the next two decades some regional banks could see their loan-to-deposit ratios fall by 40 percentage points.

In response to profitability problems, banks are also engaging in riskier forms of lending and investment as they search for yield. They have been making more real estate loans, helping to drive up housing prices in some areas despite overall population shrinkage. Condominium prices appear to be moderately overvalued in Tokyo, Osaka, and several outer regions. Banks have also been investing more in securities in countries where economic growth is faster than Japan’s.

Life insurance companies are also facing increasing pressure. They have been putting more money into riskier overseas markets to get the yield needed to meet interest guarantees.

The problem is that many banks and insurers still need to develop the capacity to manage the risks associated with these new types of investments.

Consequently, stress tests suggest that market risks are increasing and that there are some vulnerabilities among regional and shinkin (cooperative) banks and life insurers. Although bank liquidity is generally ample, some of the regional banks are exposed to risks in foreign-currency funding.

The Bank of Japan has had to adapt its monetary policy to low “natural” rates in the economy and sought to stimulate demand by monetary easing. In this context, it had to resort to large-scale asset purchases. These purchases in turn, have put a strain on markets. The level of liquidity—how easily and quickly investors can buy and sell securities—in Japanese government bond markets seems to have been adversely affected by the central bank’s purchases. Moreover, the resilience of government bond market liquidity also seems to have declined as the share of Bank of Japan holdings has increased.

Japan’s financial system has so far remained stable. But there are steps policymakers can take to ensure that it remains sound as society ages and slow growth continues:

  • Supervisors need to modernize supervision to keep pace with the more sophisticated activities emerging across banks, insurers, and securities firms. Tailoring capital requirements to individual bank risk profiles and implementing a framework that appropriately recognizes the financial conditions of insurers would be key.
  • Corporate governance needs to be strengthened across the banking and insurance sectors to manage new risk taking.
  • The macroprudential framework could be further strengthened to better identify and address any buildup of systemic risks.
  • Some (in particular regional) banks will feel increased pressure, so they should be encouraged to take timely action in response to viability concerns.
  • Regional banks should be encouraged to consider augmenting fee-based income, reducing costs, and consolidating.
  • Sustaining productivity growth is a particular challenge as the population ages, and new, innovative firms can play an important role. Constraints to financial access for small and medium enterprises and start-ups should be eased by further promoting risk-based lending. Alternative forms of financing for these young businesses should be further encouraged.

These long-term challenges for business models of many banks, combined with the existence of large systemic institutions, highlight the need for a strong crisis management and resolution framework.

Banking with a chatbot: a battle between convenience and security

From The Conversation.

Soon, you will be able to check your bank balance or transfer money through Facebook Messenger and Twitter as banks experiment with chatbots. Companies like Ikea have used customer service chatbots for close to a decade. But their use in financial services represents a new tension – do we want convenience or a feeling of security from our banks?

Research shows that when it comes to online banking, customers are prepared to trade security for convenience. But when customers think there is a threat to their security, this feeling reverses.

Researchers at QUT recently found that a sense of insecurity is one of the reasons consumers do not already interact with financial institutions on social media. And the feeling of insecurity actually increased between 2010 and 2014, as social media became more popular.

This means banks will likely have to design their chatbots to give a sense of security, just like they do with bank branches.

The trade-off between the convenience and security of a service comes down to trust. Trust in the service provider to protect our personal details (“soft trust”) and trust in the platform and infrastructure you use to access the service (“hard trust”). Both types of trust are important to ensure a sense of balance.

For instance, it’s of little use having an impregnable vault if consumers don’t trust the person with the key. Likewise, trusting a staff member is of little value if consumers can see there are safety flaws in the system. Consumers need to know that their trust (both hard and soft) is well placed before they can enjoy the added convenience of emerging technologies.

Designing a sense of security

Banks previously used physical design to create a sense of security and trust. This is called signalling and involved the use of marble floors, metal bars, and imposing vaults in bank branches to reassure us that our money is safe.

As our banking shifted into apps and websites, we faced the same problem as chatbots currently do – the internet was undoubtedly more convenient but at the expense of a feeling of safety. This was also solved with design.

Websites and apps were designed to send similar signals as that of the physical bank branches. For instance, by using security symbols (such as the green padlock next to the URL of this website), logging customers out if they’re inactive for too long, and moving keyboards for entering online banking passwords.

Research has found consumers feel more secure when a system generates a unique password for each login, than they do when they are allowed a permanent password. Even seeing the initials of an employee in a Tweet can humanise the interaction and instil trust.

All of these design aspects evolved to signal trust and security. But chatbots do not have access to these same design capabilities – you can’t do something as obvious as having a big vault or green padlock.

So what does all this mean for chatbots?

Research from Accenture indicates Australians are ready for artificial intelligence in the financial sector – 60% are open to entirely computer-generated banking advice.

And a World Retail Banking Report found that while 51% of consumers still prefer face-to-face interaction for more complex products and services, they also demand greater levels of digitised customisation and personalisation from financial institutions.

All of this means chatbots could work for banks. On the back end, chatbots can be secured just like websites and apps – using two-factor authentication and encryption etc.

It’s important to promote this feeling in users too. A big part of it will be “humanising” the interaction. For instance, chatbots can be programmed to seem more human – achieving the same thing as staff members’ initials on social media. They can be given names, personalities, and even emotions.

But this will just be the start. As artificial intelligence and chatbots become a part of daily life, the trust signals will need to be built, one digital brick at a time.

Authors: Kate Letheren, Postdoctoral Research Fellow, Queensland University of Technology; Paula Dootson, Research Fellow, PwC Chair in Digital Economy, Queensland University of Technolog

Will We Have Our Own Version Of The GFC?

Ten years ago this week, the first hints of risks in US mortgage portfolios emerged. French bank BNP Paribas wrote a warning of the risks in the US securitised mortgage system. Later, UK lender Northern Rock saw customers queuing to get their money from the bank, a reminder of what happens when confidence fails.  Later still, Lehmann Brothers crashed. In the ensuing mayhem, as banks fell from grace and were either left to die, or were bailed out – mostly with public funds – and as mortgage arrears rocketed away in many northern hemisphere centres, the die was cast. In the subsequent period, growth has been sluggish, central government have cut their benchmark rates, and households have seen their incomes squashed, whilst asset prices have risen to amazing levels. Regulators responded with measures to force banks to hold more capital, but we are not out of the woods yet.

Australia, it seems dodged the bullet, either thanks to luck or good judgement, so we never directly experienced the full impact. But, on the 10th anniversary, its worth reflecting on whether our version of the GFC is still to come.

In 2009,the RBA’s then Head of Financial Stability Department,  Luci Ellis gave a speech ” The Global Financial Crisis: Causes, Consequences and Countermeasures“. It is, in my view well worth reading in hindsight.

She makes the point that low policy rates in the early 2000’s allowed a flood of mortgages to to be written, lending standards to fall, (helped by the securisation of loans) and leverage to rise, significantly.

But in 2005, the Fed started to lift rates.

But you can’t borrow your way to a good time forever, and this recent example of a credit-fuelled boom was no exception. The first signs of trouble were in the US mortgage market. Lending standards had eased so far – and outright fraud had gotten to be such a problem – that arrears rates started to rise more than lenders and investors expected. The rise started in around 2006 for both prime and sub-prime mortgages, but became more obvious through 2007. The extraordinary thing was that, unlike in every other housing bust, arrears rates increased significantly before the labour market started to weaken.

Banks had enjoyed a bumper period of growth, as an article in the balance highlights. That created an asset bubble, and a building boom.  (Any of this sound familiar?)

Banks, hit hard by the the 2001 recession, welcomed the new derivative products.  In December 2001, Federal Reserve Chairman Alan Greenspan lowered the fed funds rate to 1.75 percent. The Fed lowered it again in November 2002 to 1.24 percent.

That also lowered interest rates on adjustable-rate mortgages. The payments were cheaper because their interest rates were based on short-term Treasury bill yields, which are based on the fed funds rate. But that lowered banks’ incomes, which are based on loan interest rates.

Many homeowners who couldn’t afford conventional mortgages were delighted to be approved for these interest-only loans. As a result, the percent of subprime mortgages doubled, from 10 percent to 20 percent, of all mortgages between 2001 and 2006.  By 2007, it had grown into a $1.3 trillion industry. The creation of mortgage-backed securities and the secondary market ended the 2001 recession. (Source: Mara Der Hovanesian and Matthew Goldstein, “The Mortgage Mess Spreads,” BusinessWeek, March 7, 2007.)

It also created an asset bubble in real estate in 2005. The demand for mortgages drove up demand for housing, which homebuilders tried to meet. With such cheap loans, many people bought homes as investments to sell as prices kept rising.

Many of those with adjustable-rate loans didn’t realize the rates would reset in three to five years. In 2004, the Fed started raising rates. By the end of the year, the fed funds rate was 2.25 percent. By the end of 2005, it was 4.25 percent. By June 2006, the rate was 5.25 percent. Homeowners were hit with payments they couldn’t afford. For more, see Past Fed Funds Rate.

Housing prices started falling after they reached a peak in October 2005. By July 2007, they were down 4 percent. That was enough to prevent mortgage-holders from selling homes they could no longer make payments on. The Fed’s rate increase couldn’t have come at a worse time for these new homeowners. The housing market bubble turned to a bust. That created the banking crisis in 2007, which spread to Wall Street in 2008.

Now consider Australia. We have very high household debt, high home prices, flat income, rising living costs and ultra low, but rising mortgage rates. We also have a construction boom, with a large supply of new (speculative) property, and banks that have around 60% of their assets in residential property. Arguably lending standards are still too lose despite recent tightening (which note, had to be imposed on the lenders by the regulators!).

So, consider this illustrative chart. I plotted the Fed benchmark rate – you can clearly see the run-up to 2008/9 when the GFC hit, from low levels in 2003-2004.  It took 3-4 years and a 4% uplift to lead to the crash.

Then I look the RBA cash rate and placed the current low rate in 2003. Do we face a series of rises ahead – the RBA says the neutral setting is 2% higher than current rates?  If rates do rise, then mortgage rates will surely follow, and given the majority of households are on variable rates, pain will follow too. 25% of owner occupied borrowers are having cash flow problems already – at current low rates.

So it seems to me the conditions are set for our own version of the GFC, and the bear-traps have already been laid by too high lending, high asset prices, and large debts in an ultra-low rate environment.

Of course banks hold more capital, of course the regulators are more aware, but is that enough? Judging by recent home price rises and continued lending growth such that household debt has never been higher, it may not be.

ANZ pays further $10.5 million to consumers for OnePath breach

The Australian Securities and Investments Commission (ASIC) has confirmed an additional $10.5 million in compensation for 160,000 superannuation customers who were affected by breaches within the OnePath group between 2013 and 2016.

ASIC has been monitoring the resolution of a number of OnePath breaches. This has resulted in ANZ (the parent company of OnePath) providing further compensation, mainly in relation to incorrect processing of superannuation contributions and failure to deal with lost inactive member balances correctly.

ASIC has also confirmed the finalisation of all recommendations made by an independent review of OnePath’s business activities. The final two recommendations were the last to be implemented after an independent review of OnePath’s compliance functions was announced in March 2016.

The independent review was sought by ASIC, following ANZ reporting a number of significant breaches. The review addressed OnePath’s life and general insurance, superannuation, and funds management activities.

OnePath has contacted the majority of affected customers and finalised the majority of these additional compensation payments. Customers who have queries about whether they are owed compensation or another form of remediation should contact OnePath on 133 665.

ASIC will continue to monitor the breaches reported to us by ANZ until the matters are resolved, including any remediation where appropriate.

Background

The ANZ Group’s subsidiaries with AFS Licences include OnePath Custodians Pty Ltd, OnePath Life Limited, OnePath Funds Management Limited and OnePath General Insurance Pty Limited.

From early 2013 to mid-2015 around 1.3 million OnePath customers were affected by breaches requiring refunds and compensation of around $4.5 million, rectifications and other remediation of around $49 million.

An ANZ spokesperson said:

In March last year we estimated we would reimburse about $4.5 million in relation to compliance breaches that affected 1.3 million customers.

Following detailed analysis this has increased $10.5 million impacting 160,000 customers.

While this work is ongoing, we don’t expect the majority of these customers to receive significant further reimbursements.

As soon as we became aware of issues in 2013 we reported these breaches to ASIC and have fully cooperated with their review of this matter.

In January 2016 we appointed PwC to conduct an independent compliance review, and reported the findings of that review in December 2016.

Is Bitcoin Money?

From Daily Reckoning

At various times in history, feathers have been money. Shells have been money. Dollars and euros are money. Gold and silver are certainly money. Bitcoin and other cryptocurrencies can also be money.

People say some forms of money, such as Bitcoin or U.S. dollars, are not backed by anything.

But that’s not true.

They are backed by one thing: confidence.

If you and I have confidence that something is money and we agree that it’s money, then it’s money. I can call something money, but if nobody else in the world wants it, then it’s not money. The same applies to gold, dollars and cryptocurrencies.

Governments have an edge here, because they make you pay taxes in their money. Put another way, governments essentially create an artificial use case for their own forms of paper money by threatening people with punishment if they do not pay taxes denominated in the government’s own fiat currency.

And the dollar has a monopoly as legal tender for the payment of U.S. taxes. According to John Maynard Keynes and many other economists, it is that ability of state power to coerce tax payments in a specified currency that gives a currency its intrinsic value. This theory of money boils down to saying we value dollars only because we must use them to pay our taxes — otherwise, we go to jail.

So-called cryptocurrencies such as Bitcoin have two main features in common. The first is that they are not issued or regulated by any central bank or single regulatory authority. They are created in accordance with certain computer algorithms and are issued and transferred through a distributed processing network using open source code.

Any particular computer server hosting a cryptocurrency ledger or register could be destroyed, but the existence of the currency would continue to reside on other servers all over the world and could quickly be replicated. It is impossible to destroy a cryptocurrency by attacking any single node or group of nodes.

The second feature in common is encryption, which gives rise to the “crypto” part of the name. It is possible to observe transactions taking place in the so-called block chain, which is a master register of all currency units and transactions.

But the identity of the transacting parties is hidden behind what is believed to be an unbreakable code. Only the transacting parties have the keys needed to decode the information in the block chain in such a way as to obtain use and possession of the currency.

Murdered Soviet Economist Exposes Next Crash

This does not mean that cryptocurrencies are fail-safe. But on the whole, the system works reasonably well and is growing rapidly for both legitimate and illegitimate transactions.

It’s worth pointing out that the U.S. dollar is also a digital cryptocurrency for all intents and purposes. It’s just that dollars are issued by a central bank, the Federal Reserve, while Bitcoin is issued privately. While we may keep a few paper dollars in our wallets from time to time, the vast majority of dollar-denominated transactions, whether in currency or securities form, are conducted digitally.

We pay bills online, pay for purchases via credit card and receive direct deposits to our bank accounts all digitally. These transactions are all encrypted using the same coding techniques as Bitcoin.

The difference is that ownership of our digital dollars is known to certain trusted counterparties such as our banks, brokers and credit card companies, whereas ownership of Bitcoin is known only to the user and is hidden behind the block chain code.

Bitcoin and other cryptocurrencies present certain challenges to the existing system. One problem is that the value of a bitcoin is not constant in terms of U.S. dollars. In fact, that value has been quite volatile, fluctuating between $100 and its present high above $3,400 over the past few years. It’s currently around $3,467.

It’s true that dollars fluctuate in value relative to other currencies such as the euro. But those changes are typically measured in fractions of pennies, not jumps of $100 per day.

One potential solution to the Bitcoin volatility problem I find interesting is to link Bitcoin to gold at a fixed rate. This would require consensus in the Bitcoin community and a sponsor willing to make a market in physical gold at the agreed value in Bitcoin. This kind of gold-backed Bitcoin might even give the dollar a run for its money as a reserve currency, especially if it supported by gold powers such as Russia and China.

Both are looking for ways out of the current system of dollar hegemony, which will only take on added urgency now that the U.S. has imposed harsh sanctions against Russia and is signaling a trade war against China.

Home saver scheme may eat into your super before buying you a house

From The New Daily.

The Turnbull government’s plan to allow first home buyers to direct up to $30,000 of superannuation savings into a housing deposit could end up draining super accounts and costing savers more than using a traditional bank account.

Stephen Anthony, chief economist with Industry Super Australia, said the First Home Super Saver Scheme, sold by the government as a housing affordability measure, would offer limited benefits to first home savers and threaten retirement savings.

The plan, introduced in the May budget, allows first home buyers to salary sacrifice up to $30,000 into their super account at a maximum rate of $15,000 a year.

The savings are taxed at the super rate of 15 per cent on the way in, which is lower than the 19c bottom tax rate and so gives you a benefit. When funds are withdrawn they are taxed at the marginal rate of the saver less 30 per cent.

This is where the plan strikes trouble. The ATO doesn’t simply tax the money you take out when you buy a home, it will assume you made a return on it that is equivalent to the bank bill rate (what banks pay professional investors) plus three per cent.

That guaranteed return is added to the amount you withdraw, which is fine if your super fund is earning that amount or more. But in years when your super fund makes less than that benchmark, money is effectively being taken out of the rest of your super to make up the figure the taxman wants you to have.

“Super funds will be forced to dip into compulsory savings to cover shortfalls in ‘guaranteed’ returns, leaving people with much less at retirement,” Dr Anthony told The New Daily.

Those transfers from your super to fund your home deposit can be significant. For the year to June 2016, for example, using the ATO’s formula would have seen you transfer an average of 2.3 percentage points of your general super returns into your deposit savings account, ISA research says.

There are other problems with the proposal, due to go before Parliament in the second half of the year, as well. While it might look attractive at first blush, the savings you think you’re making are less than they appear.

The super contributions tax will take a significant bite from your fund.

“People must also understand that after paying super contributions and earnings tax, the $30,000 put into the scheme could be worth as little as $25,000 on withdrawal,” Dr Anthony said.

People are likely to forget that if they had saved the money into a high interest savings account they would have avoided to the contributions and earnings tax as well as getting interest on their deposit.

For people carrying HECS/HELP debt from their tertiary education days, the benefits are even less. That’s because they have to pay back their debt once they hit relevant income targets.

Add all that together and the overall benefits from the scheme shrink significantly, as the chart above demonstrates.

Eva Scheerlinck, CEO of Australian Institute of Superannuation Trustees, said the plan is in conflict with the aim of super because it diverts benefits to current housing needs.

“The use of a super fund for a deposit on a first home is inconsistent with the sole purpose test which requires that super funds maintain benefits for members’ retirement or for insurance-related purposes,” she said.

“It is also inconsistent with the government’s own stated objective of superannuation to provide income in retirement.”

AMP reports 1H 17 results

AMP reported their 1H17 results today. Underlying profit was A$533 million in 1H 17, up 4 per cent (1H 16: A$513 million), and net profit of A$445 million (1H 16: A$523 million).

The results reflect strong operating earnings growth from AMP Capital (+11%), AMP Bank (+10%) and New Zealand financial services (+5%).

Australian wealth protection earnings increased by 11% on 1H 16, reflective of the steps taken to stabilise the business in 2H 16. Australian wealth management earnings declined 1% from 1H 16, largely due to margin compression from MySuper transitions and a reset of the investment management agreement with AMP Capital.

Underlying investment income decreased A$11m to A$50m from 1H 16, due to lower shareholder capital resources and a 50 bp reduction in the assumed underlying after-tax rate of return.

Australian wealth management 1H 17 net cashflows were A$1,023m, up 76% from 1H 16. AMP’s retail and corporate super platform net cashflows were positively impacted by recent changes to superannuation contribution limits and large mandate wins.

AMP Capital external net cash inflows were A$2,439m, up from net outflows of A$153m in 1H 16. Inflows were driven by strong flows into fixed income and real asset (infrastructure and real estate) capabilities.

Underlying return on equity rose 2.6 percentage points to 14.5% in 1H 17 from 1H 16, largely reflecting the impact of capital management programs.

Completion of reinsurance program delivers on strategy, with new arrangements to release approximately A$500 million of capital from AMP Life (subject to regulatory approval) further reducing the capital intensity of the wealth protection business.

Sustained cost management on track to deliver 3 per cent reduction in controllable costs (ex AMP Capital) by FY 17.

Strong capital position with A$1.9 billion over minimum regulatory requirements. Interim dividend increased to 14.5 cents a share, franked to 90 per cent.

Wealth protection: reinsurance update

AMP today announced a series of new reinsurance agreements, delivering on its strategy to release capital from the Australian wealth protection business and reduce future earnings volatility. Releasing approximately A$500 million in capital from AMP Life (subject to regulatory approval), the new reinsurance agreements include:

A new quota share agreement with General Reinsurance Life Australia Limited (Gen Re) to cover 60 per cent of the NMLA retail portfolio, which was merged with AMP Life on 1 January 2017.

An extension to the existing agreement with Munich Reinsurance Company of Australasia Limited (Munich Re) to cover 60 per cent (up from 50 per cent) of the AMP Life retail portfolio.

A new surplus cover agreement with Gen Re to assist in managing risk and volatility in individual retail claims.

Recapture of 35 existing reinsurance treaties, simplifying AMP’s overall reinsurance arrangements.

The new reinsurance agreements will commence on 1 November 2017 and, when combined with the first tranche of reinsurance completed in 2016, effectively means 65 per cent of AMP’s retail life insurance portfolio will be reinsured for claims incurred from 1 November 2017.

Australian wealth management

Australian wealth management operating earnings, down 1 per cent to A$193 million, were resilient. The result demonstrates effective margin management during the final transitions to low-cost MySuper funds and amid significant activity across the superannuation industry. MySuper transitions completed in 1H 17 with margin compression expected to continue to be around 5 per cent this year.

Net cashflows were significantly higher in 1H 17, with stronger inflows from discretionary super contributions ahead of 1 July changes to non-concessional caps. The transition of corporate super mandates also supported inflows, with one mandate bringing more than 3,700 new customers to AMP. During the period, AMP paid A$1.3 billion in pensions to help customers through their retirement.

AMP’s flagship North platform performed well in 1H 17, with flows up 8 per cent and AUM up 13 per cent on FY 16. North now has more than A$30 billion in assets under management.

To offset the impact of margin compression, AMP is targeting additional revenue growth from its Advice and SMSF businesses, which is reported in the Other revenue line. AMP expects Other revenue to increase by 10 per cent in FY 17, with growth in Advice and SMSF revenues emerging in 2H 17 and accelerating into 2018. This will support the delivery of AMP’s target of 5 per cent overall revenue growth in Australian wealth management through the cycle.

AMP Capital

AMP Capital delivered strong growth in operating earnings, up 11 per cent to A$92 million, benefiting from good growth in fee income. External assets under management fees rose by 6 per cent to A$132 million and non-AUM based management fees also increased, benefiting from growth in real estate development fee revenue.

External net cashflows increased to A$2.4 billion, with significant cash inflows into fixed income and higher-margin real assets. Real assets proved popular with investors wanting exposure to leading infrastructure and real estate investments.

Delivering on its strategy to expand internationally, AMP Capital grew its number of direct international institutional clients from 199 at FY 16 to 252 in 1H 17 and now manages A$10 billion in assets on their behalf. In China, AMP Capital’s asset management joint venture, China Life AMP Asset Management (CLAMP), continues to grow rapidly with AUM increasing 22 per cent to RMB 141 billion (A$27.1 billion) in 1H 17. Total AUM for China Life Pension Company, the pensions joint venture in which AMP owns a 19.99 per cent stake, grew 8 per cent to RMB 408.2 billion (A$78.5 billion) in 1H 17.

At 30 June 2017, AMP Capital had A$3.5 billion of committed funds available for investment including funds raised in its Infrastructure Debt Fund III (IDFIII), which has attracted strong international interest.

AMP Bank

Strong growth momentum continued in AMP Bank, with operating earnings up 10 per cent to A$65 million, driven by 17 per cent growth in lending to A$18.8 billion.

AMP Bank delivered residential mortgage book growth of A$1.7b in 1H 17 to A$18.2b (an increase of 18% from 1H 16 and 10% from 2H 16), driven by strong growth in owner occupied lending. Growth in AMP Bank’s investment property and interest only lending segments was constrained, in response to regulatory requirements. They expect this trend to continue in 2H 17.

Above system loan growth was delivered through both the broker and AMP aligned adviser channels. Sales through the AMP aligned channel in 1H 17 were up 49% on 1H 16.

The cost to income ratio rose slightly to 29 per cent, with controllable costs increasing by A$4 million reflecting ongoing investment to support growth. Lending growth in the bank is expected to moderate in the second half as the market adjusts to new regulatory requirements.

Net interest margin declined 4 basis points from 1H 16 but improved 4 basis points on 2H 16.

Asset quality remains strong, with mortgages in arrears (90+ days) at 0.48% as at June 2017. Loan impairment expense to average gross loans and advances was 0.02% in 1H 17, reflecting the conservative underwriting standards

Australian wealth protection

Actions undertaken in 2016 to stabilise and reset the business are working and have delivered an improved result. Operating earnings rose 11 per cent, with improved experience offsetting lower profit margins.

The announcement of further reinsurance agreements, completing the strategic reinsurance program, lessens exposure to retail claims volatility and will further stabilise wealth protection earnings. AMP continued to support customers during their time of need, paying A$575 million in claims during the six months to 30 June.

New Zealand financial services

Operating earnings, up 5 per cent to A$65 million, reflect higher experience profits. AUM increased 6.9 per cent to A$15.5 billion on positive markets.

A strong focus on cost management supported a reduction in controllable costs by 3 per cent to A$38 million and improved the cost to income ratio by 1.4 percentage points to 27.2 per cent.

Australian mature

Operating earnings are up A$6 million from 1H 16 to A$75 million due to strong markets, lower controllable costs and improved experience.

Capital and dividend

AMP’s capital position remains strong, with level 3 eligible capital resources A$1,887 million above minimum regulatory requirements at 30 June 2017, down from A$2,195 million at 31 December 2016.

The reduction largely reflects capital returned to shareholders through an on-market share buy back and investment in business growth during the period. The new reinsurance agreements are expected to release up to an additional A$500 million from AMP Life (subject to regulatory approval).

The interim dividend has been increased to 14.5 cents per share, franked at 90 per cent. The 1H 17 dividend payout is within AMP’s stated target range of 70 to 90 per cent of underlying profit

Why bankers so often fail to comply with policies and regulations

From The Conversation.

Allegations that the Commonwealth Bank of Australia has been complicit in money laundering is just the latest example of issues with regulatory compliance and risk management in the financial sector.

Our research shows that some of the problem is due to the incentives paid to financial professionals to boost profits. But the personal attitudes of individual staff members also matter, as does tenure (how long individuals have been in the industry).

Even though risk management has become a priority in the financial industry since the global financial crisis, compliance is hard to monitor and so staff are tempted to disobey policies.

Risk management

Recent years have seen regular scandals in the financial industry, notably the Libor interest rate rigging, CommInsure and the more than a million fraudulent accounts created by 5,000 Wells Fargo employees.

Good risk management is designed to ensure risks are within the organisation’s appetite, which should reduce scandals. Senior leaders set the risk appetite and the policy framework – they design the rules that staff should follow.

Finance professionals are expected to comply with all kinds of policies, from limits on the amount/kinds of loans they can make, to policies to reduce the risk of cyber-attack, not to mention reporting of suspicious transactions.

But these policies can mean that potentially profitable deals aren’t pursued, or that time is “wasted” that could be devoted to generating profits.

Our experiment

Our experiment sought to find out more about how incentive schemes and culture affect compliance with risk management policies. With help from industry body FINSIA, we invited 306 financial professionals into a lab and put them through a simulation that mimics investment decisions – buying securities, granting loans, underwriting insurance etc.

The participants had to do some simple analysis (with a calculator) and then decide whether to invest. Over an hour they could complete up to 60 transactions and were given a risk policy/limit to follow. We observed how often participants violated the rules during the session, focusing on those transactions that were outside of policy.

Participants were randomly assigned to one of five “treatments” representing a range of workplace environments that varied how the employees were paid and the behaviour of managers/peers: variable payment and profit-focused, variable payment and no-focus, variable payment and risk-focused, fixed payment and profit-focused, fixed payment and no-focus.

In the risk-focused treatments, participants were told that managers and co-workers prioritise risk management. Participants with variable payments received cash based on the amount of profits they could generate during the session (less penalties for non-compliance). The rest received a fixed payment.

In the profit-focused treatments, we gave participants information showing that managers and co-workers prioritise profits:

“Your manager rarely mentions the risk policy but talks often about the need to meet budget. He is always giving you motivational messages to encourage you to boost profits. You notice that colleagues who breach policy are excused if they are top performers. The risk policies are often criticised by staff because they can interfere with meeting profit targets; risk managers have low status compared with people who have great profit figures.”

The following chart shows the compliance rates in each treatment – the proportion of “bad” transactions where the rules were followed.

We found that when people had variable payments that are linked to profits, their compliance with risk management was significantly reduced. When managers and co-workers were also profit-focused, compliance reduced even further. Interestingly, the variable payments did not produce significant increases in productivity in our experiment. Participants worked about the same amount as those on fixed payments.

On the other hand, when participants were paid a fixed amount regardless of profit, compliance with risk management policies was higher. Although still not perfect. Surprisingly, some people broke the rules even when there was no financial benefit for them to do so. This could be human error or just for the enjoyment of rule-breaking.

But compliance with risk management depends not only on incentives, but also on individual factors. For example, we observed different compliance behaviour across individuals depending on their personal attitudes towards risk management and compliance.

We also found that those with longer tenure in the financial industry were more likely to act in compliance with risk policy. Perhaps such people understand why good risk management matters having lived through a few scandals.

What to do about it?

These findings can be used to guide human resource policies. For example, financial institutions could screen potential employees for their attitudes to risk management. And they could choose to promote or reward staff with favourable attitudes.

But there are other important implications for the industry. Since incentive structures that are profit-based have an adverse impact on risk compliance and do little for productivity, such remuneration programs should be reconsidered. Perhaps it’s time to switch to fixed payments across the industry.

Our research shows that it is difficult to have high rates of risk compliance in the presence of profit-based payments. Staff are likely to believe that profit-based payments signal the true priorities of the organisation and they modify their behaviour accordingly.

But in the end, non-compliance with regulation and policies occurs even in the best environments. Scandals caused by non-compliance are inevitable, although financial institutions can reduce the rate of non-compliance through improved practices.

Authors: Elizabeth Sheedy, Associate Professor – Financial Risk Management, Macquarie University; Le (Lyla) Zhang, Lecturer in Economics, Macquarie Graduate School of Management