Banking – Page 6 – Digital Finance Analytics (DFA) Blog

Short positions in big Aussie banks have shrunk by more than $4 billion

Short positions in the major Aussie bank stocks have steadily decreased since the middle of last year.

In a research note, Deutsche Bank analysts said that short positions reduced by around 24 basis points in March to an average of 0.9% of total bank shares outstanding. Average short positions for the big four banks have shrunk by 1% year-on-year.

After a sustained build-up, bank short selling reached a peak in May 2016. The majors were under fire amid calls for a royal commission into poor conduct, increased regulation and uncertainty about the medium-term interest rate outlook.

Those fears appear to have eased, as this chart tracks the reduction in short positions over the last 12 months:

After experiencing the most rapid reduction in shorts over the last 12 months, ANZ was the only major in which short selling ticked upwards in March. March shorts in ANZ stock rose by a fractional 4 basis points.

Calculating the reduced volume of short shares on issue with reference to the market cap of the big four banks before markets opened this morning, the reduced short volume equates to $4.89 billion worth of value. See here:

Deutsche Bank said that the key macro-prudential control administered by APRA was a 30% limit on new interest-only lending. DB said that it expects the new measure would only have a “modest impact” on credit growth.

“While this category contributes ~40% of the majors’ mortgage approvals, a large proportion of borrowers should be able to switch to P&I loans instead (particularly owner-occupiers who account for ~40% of interest-only loans)”.

The DB research shows that short positions in major banks were noticeably lower than their regional counterparts, Bendigo Bank and Bank of Queensland. This chart shows the discrepancy:

Bank of Queensland had short positions amounting to 2.6% of issued stock, with a minor uptick in March shorts. The bank’s reported half-year profit missed forecasts last week.

Looking at the short interest ratio, Commonwealth Bank is the only big four bank with a days-to-cover ratio higher than the ASX average:

The days-to-cover ratio shows the number of days it would take to close out all the short positions on a company’s stock. It’s calculated by summing the total number of shares currently shorted, divided by the company’s average daily trading volume.

When this number is high, it exposes short sellers to a rapid rise in share prices as they scramble to recover their borrowed stock from the market.

Banks Act to Strengthen Community Trust

In response to the recent discussions on bank culture, and regulation, Australia’s banks have announced they will begin to implement comprehensive new measures to protect consumer interests, increase transparency and accountability and build trust and confidence in banks. Of note is a review of product sales commissions, enhanced complaints procedures, and whistle blower procedures. They will publish quarterly reports on progress.

“This package aims to address consumer concerns about remuneration, the protection of whistleblowers, the handling of customer complaints and dealing with poor conduct,” Australian Bankers’ Association Chief Executive Steven Münchenberg said.

“Customers expect banks to keep working hard to make sure they have the right culture, the right practices and the right behaviours in place.

“That’s why the banks will immediately establish an independent review of product sales commissions and product based payments, with a view to removing or changing them where they could result in poor customer outcomes,” he said.

“Banks will also improve their protections for whistleblowers to ensure there is more support for employees who speak out against poor conduct.

“This plan delivers immediate action to make it easier for customers to do business with banks, including when things go wrong. For example, improved complaints handling and better access to external dispute resolution, as well as providing compensation to customers when needed,” he said.

The plan, parts of which are subject to regulatory approval or legislative reform, will be overseen by an independent expert.

“We recognise the importance of having an impartial third party to oversee this process,” Mr Münchenberg said.

“The industry has appointed Gina Cass-Gottlieb, Gilbert + Tobin Lawyers, to lead the work on establishing the governance arrangements around the implementation of the plan, the review process, public reporting, and the selection of an independent expert to oversee implementation of this initiative.

“The banks also support the Federal Government’s review of the Financial Ombudsman Service, who is the independent umpire for customer complaints, to ensure it has the power and scope required to deal with a variety of issues that currently fall outside its thresholds,” he said.

“Trust is at the centre of banking and is critical for the stability of our financial system. The strength of our banking sector got us through the global financial crisis. Since then banks have done a lot of work in improving customer satisfaction, strengthening their balance sheets, and making it easier for customers to do their banking wherever and whenever they want.

“The plan also responds to a range of expert reports and public inquiries that have identified key areas of reform, including the Financial System Inquiry.

“Banks recognise the importance of the community discussion about the delivery of banking and financial services, and are pleased to put forward this plan,” Mr Münchenberg said.

A copy of the industry statement is below.

Industry Statement

Australia’s banks understand that trust is critical to a strong and stable banking and financial services sector. We acknowledge that we have a privileged role in the economy. Our customers, shareholders, employees and our communities rightly expect the behaviour of banks to meet high ethical standards as we look after their financial needs.

For some years now banks have been responding to community feedback to improve customer service and our industry’s contribution to the community more broadly. This has been largely successful. While all banks have customer satisfaction ratings above 80%, we acknowledge there is more to do. We continue to implement wide ranging reforms that have already been agreed through the inquiries, reviews and consultations undertaken over recent years.

Subject to regulatory approval, we are committing to a further six actions to make it easier for customers to do business with us and to give people confidence that when things go wrong, we will do the right thing.

We understand the importance of independence and transparency. To ensure this, the industry has appointed Gina Cass-Gottlieb, Gilbert + Tobin Lawyers, to lead the work on establishing the governance arrangements around the implementation of the plan, the review process, public reporting, and the selection of an independent expert to oversee implementation of this initiative. This initial stage will take a month. We will publish public quarterly reports on our progress, with the first report within three months of this announcement.

We believe these actions will further lift standards and transparency across the banking and financial services sector and bolster the existing strength of the regulatory framework.

1. Reviewing product sales commissions

Building on the ‘Future of Financial Advice’ reforms, we will immediately establish an independent review of product sales commissions and product based payments with a view to removing or changing them where they could lead to poor customer outcomes. We intend to strengthen the alignment of remuneration and incentives and customer outcomes. We will work with regulators to implement changes and, where necessary, seek regulatory approval and legislative reform.

Each bank commits to ensure it has overarching principles on remuneration and incentives to support good customer outcomes and sound banking practices.

2. Making it easier for customers when things go wrong

We will enhance the existing complaints handling processes by establishing an independent customer advocate in each bank to ensure retail and small business customers have a voice and customer complaints directly relating to the bank, and the third parties appointed by the bank, are appropriately escalated and responded to within specified timeframes.

We support a broadening of external dispute resolution schemes. We support the Government’s announcement to conduct a review into external dispute resolution, including the Financial Ombudsman Service conducting a review of its terms of reference with a view to increasing eligibility thresholds for retail and small business customers.

We will work with ASIC to expand its current review of customer remediation programs from personal advice to all financial advice and products.

We will evaluate the establishment of an industry wide, mandatory last resort compensation scheme covering financial advisers. We support a prospective scheme being introduced where consumers of financial products who receive a FOS determination in their favour would have access to capped compensation where an adviser’s professional indemnity insurance is insufficient to meet claims.

3. Reaffirming our support for employees who ‘blow the whistle’ on inappropriate conduct

We will ensure the highest standards of whistleblower protections by ensuring there is a robust and trusted framework for escalating concerns. We will standardise the protection of whistleblowers across banks, including independent support, and protection against financial disadvantage. As part of this, we will work with ASIC and other stakeholders.

4. Removing individuals from the industry for poor conduct

We will implement an industry register which would extend existing identification of rogue advisers to any bank employees, including customer facing and non-customer facing roles. This will help prevent the recruitment of individuals who have breached the law or codes of conduct.

5. Strengthening our commitment to customers in the Code of Banking Practice

We will bring forward the review of the Code of Banking Practice. The Code of Banking Practice is the banking industry’s customer charter on best practice banking standards, disclosure and principles of conduct. The review will be undertaken in consultation with consumer organisations and other stakeholders, and will be completed by the end of the year.

6. Supporting ASIC as a strong regulator

We support the Government’s announcement to implement an industry funding model. We will work with the Government and ASIC to implement a ‘user pays’ industry funding model to enhance the ability for ASIC to investigate matters brought to its attention.
We will also work with ASIC to enhance the current breach reporting framework.

HSBC restructuring shows universal banks are coming back down to earth – The Conversation

From The Conversation. HSBC’s decision to end its operations in Brazil and Turkey, and lay off around 10% of its workforce worldwide shows just how far it has come from the days of touting itself as “the world’s local bank”. Its strategy used to be to offer any financial service everywhere in the world. Whether you were in Shanghai, Sydney, Springfield or Southampton, you could access services such as personal banking, foreign exchange business banking and investment banking.

This model paid off for years. The bank provided impressive returns to investors, progressively extended its footprint, and even seemed to dodge the worst effects of the financial crisis.

HSBC was not alone in doing well by doing everything, anywhere. Its competitors have built similar business models during the last 20 years.

Merger mania wasn’t for customers

In the past, different financial services were provided by different organisations. You went to one company for insurance, one for investment banking, and one for personal banking. There were co-operatives, partnerships, publicly listed companies and privately held companies. Banks in each country looked completely different. This meant there was a verdant landscape of different kinds of financial service organisation.

But during the 1980s, all this changed. Retails banks started to provide a whole range of services they had not before, such as insurance. Then retail and investment banks began to merge. Building societies demutualised. Banks began to expand across the world. The result was that the world’s financial sector was dominated by a handful of gigantic players. There was also a business model mono-culture: a universal bank which provided almost every service to everyone in the world.

Banks claimed to do this because their customers wanted it. There certainly were a number of sophisticated global clients looking for global banking services. But the real reason for adopting this model had nothing to do with customers. By merging retail and investment banks and continually growing the size of the bank’s balance sheet, these global giants were able to effectively use the money deposited in their retail banks to engage in risky – but highly profitable – trading and investment activities.

This model paid off for many years. As big banks grew, they delivered double digit returns to their shareholders. But perhaps more importantly, they created a lucrative stream of bonuses for senior managers. They also pumped out tax income for governments which hosted them. It seemed everyone was winning.

Downsizing

That was until 2007, when the financial crisis struck. When this happened these global giants with massive balance sheets became a liability. It quickly became obvious that they were too big to fail. If a bank went down, they could threaten the global economy.

And we quickly learned too that they were too big to manage. In the long aftermath of the financial crisis, we discovered that CEOs of large banks (including HSBC) had no idea what was going on in parts of their far flung empires. We also found out they were too big to trust. The ongoing stream of revelations around wrongdoing in markets like foreign currencies and LIBOR – the rate at which banks lend each other short-term money – show that bad behaviour appeared endemic in certain parts of these global giants.

Now shareholders are beginning to ask whether these giant universal banks are too big to succeed. With costs of bad behaviour mounting and many lines of business less profitable than before, shareholders are asking whether big banks should be trying to be everything for everyone. It seems that the universal banking model has failed.

The announcement by HSBC that it is cutting 25,000 jobs across the world, 8,000 in the UK, selling operations in Turkey and Brazil and shrinking its investment bank are an important part of moving away from this model. Underneath this is the recognition the bank can’t do everything for anyone. Instead, if banks like HSBC are to be trusted, profitable and sustainable they need to focus on a few markets where they have genuine expertise.

A benefit for all?

A more focused bank may look appealing to investors and regulators. But if we are to believe recent research, a smaller banking sector may actually be good for the wider economy. However, this focus is unlikely to appeal to staff who will lose their jobs. The UK government must be rightly nervous about losing HSBC, which is one of the country’s biggest tax payers and an important employer. Many of the other large banks are engaging in similar processes of shrinking their scope and balance sheets.

But the big question which remains is whether closing a few lines of business and a little restructuring will do enough to bring back diversity to the banking sector. Creating real diversity in this sector probably means not just slightly smaller global banks – it means ensuring there are a wide range of business models. The risk is that we simply end up with a small number of global giants with oversized footprints. Creating new business models to replace the universal banks is one of the biggest challenges of our time.

Author: Andre Spicer Professor of Organisational Behaviour, Cass Business School at City University London

Bank Profits Under Pressure In 2015?

Fitch Ratings 2015 Outlook: Australian Banks report has a stable sector outlook for Australian banks in 2015, reflecting what should be a relatively steady operating environment despite a likely modest decline in real GDP growth and an elevated unemployment rate. These factors should in turn result in modestly weaker asset quality and an increase in impairment charges, which are likely to be offset by strengthened balance sheets and strong profitability.

A significant slowdown in China is the biggest risk to the outlook, given it is Australia’s largest trading partner, but such a slowdown is not Fitch’s base case. A relaxation of underwriting standards to improve growth also looms as a risk, although this appears less likely following the announcement in December 2014 of regulatory reviews of potentially higher-risk lending.

Housing credit growth is likely to slow in 2015, in part because of the regulatory review but also due to high household indebtedness and slower house price growth. Fitch expects household indebtedness to stabilise in 2015, with an easing in wage rises and as unemployment remains high.

Nevertheless, competition for loans will likely remain intense, placing some pressure on net interest margins. This and an expected rise in impairment charges will likely mean lower profit growth in 2015. Offsetting this, capital positions are likely to be strengthened, in part to address potential new requirements stemming from the 2014 Financial Services Inquiry (FSI) recommendations, while the shift towards more stable funding sources will probably continue.

Although banks may act on some FSI recommendations during 2015, many of the measures requiring government action, including legislation, are unlikely to be implemented before the end of the year. Fitch expects implementation timeframes to be set such that meeting the new requirements should not be overly onerous for banks

BIS Banking Benchmarks – Where Australian Banks Stand

The BIS published their 84th annual report 2013-14 recently. As well as discussing the merits of central banks relying on low interest rates to try and drive recovery from 2007, and the risks in this strategy with regards to laying the foundations for GFC mark II thanks to expanding credit; there is some interesting data on relative bank performance across several countries. We will focus attention on this data, recognising of course that making cross country comparisons is fraught with dangers because of differences in reporting. That said there are some interesting points to consider. We look at Profitability, Net Interest Margins, Losses and Costs. In each case, I have sorted the countries by the relevant 2013 data, to highlight where Australia appears relative to its peers. The data shows the number of major banks in each country, and they have averaged the results, giving three cuts of data, 200-2007, 2008-2012 and 2013. All the BIS metrics are calculated relative to total bank assets.

Lets first look at relative profitability. We see that Russia, China, Brazil and India all reported profitability higher than the Australian banks. However, Australia has the most profitable banks amongst advanced western countries, and is significantly more profitable than banks in Canada, Germany and UK. It is also worth noting that in Australia, banks are still not as profitable, relative to assets as they were before the GFC. But then, that is pretty consistent across the sample countries.

So, what is driving relative profitability? Could it be net interest margins? Well, comparing margins relative to assets, Australia is somewhere in the middle, the highest margins are returned from Russia and Brazil, the lowest margins from Switzerland and Japan. Margins in Australia are however higher than Canada, Italy, UK and France. Higher margins, in my view reflect limited real competition, and we know that Australian banks have been repairing their margins by not passing on recent lower funding costs to borrowers, or savers. Small business customers are being hit quite hard. So, banks in Australia are more profitable thanks to higher margins, in a relatively benign environment competitively speaking.

Lets look at losses. Here Australian banks have some of the lowest loss rates in the sample. The UK and USA have higher rates of loss, as do the developing economies. Only Japan. Switzerland, Sweden and Canada have lower loss rates. Actually banks in Australia have reduced their provisioning and returned some of these earlier provisions to enhance profitably recently.

Finally, we look are operational costs. Here again Australian banks rank well, with some of the lowest costs as a proportion of assets of all countries. Many countries including the UK. Canada and USA have higher operating costs.

So, putting that all together, what can we conclude. Australian banks are some of the most profitable, thanks to efficient operations, low loss levels and relatively high margins. That strength should serve us well if the BIS scenario of rising interest rates comes true. However, we should not loose sight of the fact that the big four march together when in comes to pricing, products and fees. There is ample room for banks to become more competitive, and drive margins lower. Its unlikely though they will because they all enjoy the fruits of the current environment, at the expense of Australia Inc. The argument that shareholders benefit many be true, but it misses the point because that excess profitability dampens broader economic activity, thanks to higher ongoing costs.