Bendigo Bank – Digital Finance Analytics (DFA) Blog

ASIC sues Bendigo and Adelaide Bank for use of unfair contract terms

ASIC has commenced proceedings in the Federal Court of Australia against Bendigo and Adelaide Bank concerning unfair contract terms in small business contracts.

ASIC alleges that certain terms used by Bendigo and Adelaide Bank in contracts with small businesses are unfair. If the Court agrees with ASIC, the specific terms will be void and unenforceable by the Bendigo and Adelaide Bank in these contracts.

ASIC alleges that certain terms used by the Bendigo and Adelaide Bank and are unfair, as the terms:

cause a significant imbalance in the parties’ rights and obligations under the contract;
were not reasonably necessary to protect the Bendigo and Adelaide Bank’s legitimate interests; and
would cause detriment to the small businesses if the terms were relied on.

Some of the unfair terms pleaded by ASIC include clauses that give lenders, but not borrowers, broad discretion to vary the terms and conditions of the contract without the consent of the small business owner, along with clauses that allow the bank to call a default, even if the small business owner has met all of its financial obligations.

ASIC is also seeking a declaration from the Federal Court that the same terms in any other small business contract are also unfair.

Background

If the Federal Court finds that any of the terms of the standard form contracts are unfair, the unfair terms are void (it is as if the terms never existed in the contracts). ASIC is seeking that the terms are declared void from the outset – not from the time of the court’s declaration. The remainder of the contract will continue to bind parties if it can operate without the unfair terms.

Since 1 July 2010, ASIC has administered the law to deal with unfair terms in standard form consumer contracts for financial products and services, including loans.

With effect from 12 November 2016, the unfair contract terms provisions applying to consumers under the Australian Consumer Law and the ASIC Act were extended to cover standard form ‘small business’ contracts.

Small businesses, like consumers, are often offered contracts for financial products and services on a ‘take it or leave it’ basis, commonly entering into contracts where they have limited or no opportunity to negotiate the terms. These are known as ‘standard form’ contracts. Small businesses commonly enter into these ‘standard form’ contracts for financial products and services, including business loans, credit cards, and overdraft arrangements.

The unfair contracts law applies to standard form small business contracts entered into, or renewed, on or after 12 November 2016 where:

the contract is for the supply of financial goods or services (which includes a loan contract);
at least one of the parties is a ‘small business’ (under the ASIC Act, a business employing fewer than 20 people is a ‘small business’); and
the upfront price payable under the contract does not exceed $300,000, or $1 million if the contract is for more than 12 months.

In March 2018, ASIC released Report 565: Unfair contract terms and small business loans. The report:

Identifies the types of terms in loan contracts that raise concerns under the law;
Provides details about the specific changes that have been made by the ‘big four’ banks to ensure compliance with the law; and
Provides general guidance to lenders with small business borrowers to help them assess whether loan contracts meet the requirements under the UCT law

Bendigo And Adelaide Bank Profit: $376.8 million, down 13.3 percent

Bendigo and Adelaide Bank, Australia’s fifth-largest retail bank, today announced results for the year ending 30 June 2019.

Statutory net profit: $376.8 million, down 13.3 percent, as a result of remediation and redundancy costs and unrealised losses relating to Homesafe due to the decline in property valuations in Melbourne and Sydney
Cash earnings after tax: $415.7 million, down 6.6 percent, primarily attributable to remediation and redundancy costs
Underlying earnings: $435.7 million, down 2.5 percent, excluding remediation and redundancy costs
Net interest margin: 2.36 percent, steady year-on-year, increasing 2 basis points (bps) in second half, compared to the first half
Total income: $1.6 billion, steady
Bad and doubtful debts: $50.3 million, down 28.8 percent
CET 1: 8.92 percent, up 30 bps
Cash earnings per share: 85 cents per share (cps), down 8 percent
Total fully franked dividends: 70.0 cps, steady
Total lending: $62.1 billion, up 1.1 percent, with residential lending above-system, at 3.5 percent
Total deposits: $64.0 billion, up 1.5 percent, with retail deposits up 3.3 percent

“Earnings for the year were impacted by remediation and redundancy costs. Despite this, we delivered total income of $1.6 billion, in line with the prior year, in an environment of low growth, political uncertainty, subdued consumer confidence and increasing competition.

“Net interest margin was steady year-on-year, and, half-on-half, increased by 2 basis points, reflecting the active management of margin and volume for both lending and deposits.

Key metrics

Total lending grew by 1.1 percent to $62.1 billion, with noticeably stronger growth of 3.6 percent in the second half – well above system growth of 2.6 percent. In the second half, residential lending was up 4.3 percent and agribusiness showed growth influenced by seasonality up 12.8 percent, both well above system; whilst small and medium-sized business lending grew 9.5 percent.

Bad and doubtful debts being down 28.8 percent to $50.3 million.

During the year, the Bank divested Bendigo Financial Planning which serves to further simplify and de-risk the business and deliver cost savings.

The Board declared a final dividend of 35 cents² per share, taking the fully franked full year dividend to 70 cents per share, continuing our history of rewarding shareholders with a high yield and long-term returns.

During the year, the Bank launched Australia’s first and largest next-gen digital bank, Up, which has exceeded initial customer growth expectations. We also became the first lender globally to offer a digital home loan application and assessment process under its own brand, Bendigo Express, using Tic:Toc’s instant home loan technology.

Remediation

Total costs for remediation for the year were $16.7 million. These were all self-reported to the regulator and relate to:

Insufficient documentation to demonstrate that services had been provided to Bendigo Financial Planning customers in accordance with their service contracts. This business was subsequently sold.
Products not operating in accordance with their terms and conditions.

Operating expenses were $954.5 million, up 5.9 percent on prior year. This included $16.7 million remediation costs; and $11.9 million redundancy costs.

Excluding remediation and redundancy costs, adjusted cost to income ratio was 57.4 percent, up from 55.4 percent in prior year, attributable to staff costs, including the additional Elders agri-finance managers; insurance premiums; and IT investment.

The Bendigo Bank Conundrum

Yesterday Bendigo and Adelaide Bank released their results for the half year to December 2018. The after tax statutory profit was $203.2 million up 0.2% on the prior half, but significantly lower than the $231.7 million in 1H18. The cash earnings was flat at $219.8 million, but again lower than $225.3 million in 1H18. The earnings per share was 45.1 cents, down 0.2 cents and the fully franked dividend was 35 cents per share. The return on equity fell 19 basis point half on half.

They are positioning as “Australia’s fifth largest retail bank” and they saw a rise of 18% in new customers joining and according to research are the 9th most trusted brand in Australia. Have no doubt the franchise and “local” approach is attractive to some customers, but the question is, can the current formula work in the current tight margin, highly competitive market at a time when home loan momentum is falling. One signal is cost to income, which is rising – a reflection of the high touch model.

Mortgage book growth was 2.7%, compared with system growth of 3.3% with a portfolio of $23.1 billion. They saw more growth in investor loans than owner occupied loans.

Earnings were support by other income (card activity and commissions on managed funds plus FX transactions), but net interest income was flat and Homesafe reflects changes to its accounting treatment.

Net interest margin was down 2 basis points reflecting discounting for new loans, higher funding costs and deposit repricing.

The exit margin was 2.34% and will remain under pressure ahead.

Homesafe contribution was subject to a review of their portfolio valuation methodology, as a result they removed the overlay and revised down valuation growth rates to 0% in year 1, 3% year 2 and 4% year 3 and beyond. The result was a $1.9m change to the valuation. Essentially, they tweaked the property valuations lower (from 6% growth) but then changed the discount rate to mask the effect. A little sneaky! We said last year their home price projections were heroic… but there is still more downside risk here in our view.

Their costs were higher, up 30 basis points to a cost income ratio of 57.3%, including higher staff costs, technology and legal and compliance.

Along with the other banks, they continue to adjust their provisions to AASB9 which has lifted the collective provisions. It stands at 8 basis points, below the long term average.

Arrears appears well contained at the moment. There was a small spike in 90 days plus credit card arrears, and business loans. Note though these figures EXCLUDE impaired loans over 90 days.

Capital position is 8.76% CET1, up 14 basis points. They are still working on advanced APRA accreditation (though the benefit looks increasing questionable in my view given APRA’s moves to lift the advanced ratios, relative to standard approaches.

Funding from deposits increased to 82.4% but they noted that higher BBSW impacted the cost of wholesale and securitisation funding.

So to conclude, we wonder about ongoing margin compression and the slowing housing sector and mortgage growth. Their cost base appears to contain significant fixed elements, which means they may have ongoing cost ratio issues. The benefit of advanced capital accreditation may be lower as APRA turns the screws. A tricky time for a player which gets the consumer, but has difficulty in competing in the current environment.

Fund managers not keen on ‘good customer outcomes’

The “dilemma” of pleasing both customers and institutional shareholders as a listed bank have been explored by the royal commission this week, via InvestorDaily.

On Thursday (29 November), Bendigo and Adelaide Bank chairman Robert Johanson spent a short amount of time in Hayne’s witness box where he was mostly used as an example of how banks should be remunerating their staff.

Unlike the big four, Bendigo bankers are paid a higher proportion of their remuneration in a base salary, with a smaller proportion linked to short-term incentives. Part of the long-term incentives are linked to the bank’s Net Promoter Score (NPS) and other customer centric measures.

Mr Johanson told the commission that shareholders have generally supported the bank’s remuneration model, which he admitted was different to its peers.

However, counsel assisting Rowena Orr submitted into evidence a report by proxy advisers ISS Governance relating to Bendigo’s 2018 AGM, which advised shareholders to vote against a resolution approving performance rights and a deferment of shares to the bank’s managing director, Marnie Baker.

The report noted that one reason for the recommendation was the increased weighting given to the “customer hurdle” in Ms Baker’s long-term incentives. The proxy advisers believed this “had no direct link to shareholder wealth outcomes”, and that “customer-centric measures should be “considered and assessed as part of a banking executive’s day job”.

Mr Johanson said he believes, to the contrary of the ISS recommendation, that customer centricity is linked to the long-term viability and profitability of the bank.

“The ‘day job’ as is were includes thinking about how all parts of the remuneration package are working together to achieve common outcomes,” he said.

“The proxy advisers of course are employed by institutions. It provides a pretty rigorous way for large numbers of institutions to get to grips with these questions when historically they haven’t been that interested in them.

“But the people who pay the proxy advisers themselves are assessed typically on short-term financial outcomes. So it’s no surprise that a fund manager is interested in short-term financial outcomes because we all as investors, through our superannuation funds, are concerned about whether our fund has done well over the last six months or not.

“There is a dilemma in all this.”

Mr Hayne suggested the process was “reducing some quite complex problems to binary outcomes”.

Approximately 40 per cent of Bendigo and Adelaide Bank is held by institutions.

Bendigo Bank To Use Tic:Toc’s Proprietary Technology to Power its Own Instant Home Loan

Australian fintech Tic:Toc – the world’s only fully digital home loan platform – has announced Bendigo Bank will use Tic:Toc’s proprietary technology to power its own instant home loan, Bendigo Bank Express.

The white label partnership will allow Bendigo Bank to be the first Australian lender offering a digital home loan application and assessment process under its own brand, accelerated with Tic:Toc technology.

Tic:Toc launched the World’s first instant home loan™ in July 2017, and is now collaborating with financial institutions to offer their platform as a service; helping bring traditional home loan processes up to speed.

Tic:Toc’s technology offers customers a streamlined digital fulfilment process, while lenders benefit from significant efficiencies in the way they can originate home loan customers. The automated assessment strips cost from the process and delivers higher responsible lending standards via inbuilt reg-tech and digital validation of income and expenses.

Announcing the agreement, Tic:Toc founder and CEO, Anthony Baum, said most importantly, the customer will be the ultimate beneficiary of the collaboration between financial institutions and fintechs.

“Tic:Toc is changing the customer experience when it comes to home loans. It’s no longer necessary to wait weeks for home loan approval, when it can be done digitally and conveniently.

“There’s actually not much difference between home loan options. But there can be a big difference in how that home loan is delivered, and the experience for the customer.

“Our automated assessment and approval technology also creates dramatic cost efficiencies for lenders.

“You only need to look to the United States to see how a digital home loan can change a market: Quicken Loans is now America’s largest home loan lender after launching their online product, Rocket Mortgage.

“Our partner, Bendigo and Adelaide Bank, shares our passion for great customer outcomes, so we’re delighted the Bank has chosen Tic:Toc to offer its customers a truly digital experience, if they want it.”

Bendigo and Adelaide Bank Managing Director, Marnie Baker said, “Our partnership with Tic:Toc is another example of Bendigo and Adelaide Bank investing in innovative technologies to offer Australian consumers more choice, and ultimately, better digital experiences.

“Our strategy means we can provide the best solution to customers by selecting the right partner to offer the right services to meet our customers’ needs and make it easier for them to do business with us. Fintech disruption, combined with banking innovation, is helping us drive better outcomes and we consider relationships with fintechs, such as Tic:Toc, as a mutually beneficial strategy.

“We believe we can grow our business through our vision of being Australia’s bank of choice and we will do this by providing new and existing customers with valued and relevant products and services, all while investing in new capability and innovation,” she said.

Bendigo Bank Express will be available to customers in early 2019.

Since its launch, Tic:Toc has received more than $1.6 billion in value of submitted home loan applications. While the white label product will be available directly from Bendigo Bank, the multi award-winning home loans originated by Tic:Toc are already available throughout Australia at tictochomeloans.com.

More Lenders Hike Mortgage Rates

Now Westpac has broken the dam, others are following, as expected. More will follow, especially late on a Friday afternoon…

Both regional banks, Suncorp and Adelaide Banks said that “challenging” market conditions have forced them to hike rates on variable rate mortgages across both owner-occupied and investor mortgage products by as much as 40 basis points.

Suncorp says rates on all variable rate home and small business loans will rise by 17 basis points and 10 basis points respectively, from September 14.

Adelaide Bank says rates for eight products across its range of principal and interest and interest-only owner-occupied and investor products will apply from September 7. Specifically, principal and interest-owner occupied and investment variable loans will be increasing by 12 basis points, interest-only owner occupied and residential investment loans will rise by 35 basis points and 40 basis and interest-only investment loans settled before January 1 will be increased by 12 basis points.

Lets be clear about what is happening here. Funding costs are indeed rising, as we show from the latest BBSW.

In addition some of the smaller lenders are lifting some deposit rates to try and source funding.

But the real story is the they are also running deep discounted rates to attract new borrowers, (especially low risk, low LVR loans) and are funding these by repricing the back book. This is partly a story of mortgage prisoners, and partly a desperate quest for any mortgage book growth they are capture. Without it, bank profits are cactus.

Once again customer loyalty is being penalised, not rewarded. Those who can shop around may save, but those who cannot (thanks to tighter lending standards, or time, or both) will be forced to pay more.

Swimming Up Hill Is No Fun

We review the latest results from Bendigo Bank and Domain in the light of the slowing property market.

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Bendigo And Adelaide Bank FY18 Results

Bendigo and Adelaide Bank released their full year results today. And given everything, it was not a bad result. But margin pressures and questions about future home lending volumes haunt the sector, and Bendigo is no exception.

Australia’s fifth largest bank announced an after tax profit of $434.5 million for the 12 months to 30th June 2018, up 1.1% from the prior year. Underlying cash earnings were $445.1m up 6.4% on the prior year. They were lower in the second half.

Their cost to income ration fell 50 basis points to 55.6% and their return on equity was 8.23%, up 13 basis points. They called out increase compliance costs, a 3.5% rise in staff salaries, higher software amortisation and “2H18 negative jaws”.

Total gross loans rose 1.4% to $61.8 billion, home lending grew below system at 4.7%, and retail deposits stayed steady at 80.2%, growing at 0.9% in the year.

They reported a margin of 2.36%, up 14 basis points, but the exit margin is falling, reflecting pressure in the market. Deposits were repriced by 11 basis points over the year, especially in the second half.

There was a significant fall in “other income” with lower ATM fees, lower trading book income and a range of other factors. It fell 9.2% on the prior year from $309.7 million to $281.2 million this year. This is reflective of industry-wide pressures.

While business arrears fell slightly, there were rises in 90+ past due in WA, QLD and NSW/ACT rising, so the portfolio risks rose. Keystart loans were included from June 2017.

Homesafe’s overlay reflects an assumed 3% increase in property prices in the next 18 months, before returning to a long term growth rate of 6%.

Great Southern past due 90 days was $50.5 m, down 36% from June 2017.

Their CET1 ratio rose 35 basis points since June 2017 to 8.62%. Their total capital rose 39 basis points to 12.85%.

AASB9 lead to an increase of $112.8 expected loss and the increase was taken through retained earnings as at 1 July 2018. CET1 ratio will decreased by 8 basis points on 1 July 2018.

They said their last RMBS transaction was in August 2017 for $750m, they are evaluation the new APRA credit risk proposals, and work toward advanced accreditation is continuing (though we think the benefit is being eroded). Their liquidity coverage ratio is 125.6% and the Net Stable Funding ratio at 109% at 30 June 2018.

They also disclosed data from Tic:Toc, the quick approval lender, with $1.36bn of submitted applications and $170m loan portfolio.

…suggesting a “more responsible way to lend”.

Bendigo Bank Lifts Mortgage Rates

From SMH.

Bendigo Bank is the latest lender to increase interest rates for home loan customers, blaming higher funding costs for a round of rate rises of between 0.1 and 0.16 percentage points.

Bendigo and Adelaide Bank says it will raise rates on owner-occupier loans to customers paying principal and interest by 0.1 percentage points. Rates for property investors will rise by the same amount, while owner-occupiers who have interest-only mortgages face a larger 0.16 percentage point increase.

Chief executive Marnie Baker said the interest rate hikes, which will take effect from June 23, had been driven by an increase in bank funding costs over the year.

“Funding costs have been steadily increasing this year, and we’ve absorbed this cost impact to date. Today’s adjustment to the variable interest rates will assist in balancing this funding cost increase,” Ms Baker said.

The bank said its hike would raise repayments on a $250,000 home loan by $15.71 a month.

Bank Says Broker Fees Would Remove Conflicts

From The Adviser.

The Productivity Commission (PC) had posed the question in its draft report into competition in the Australian financial system of whether consumers should pay service fees, with the aim of finding out if such a model would ensure consumer interests are being served without any conflicting commercial influence.

In a public hearing on Wednesday (28 February), Travis Crouch, divisional CFO for revenue at Bendigo and Adelaide Bank, contended that a “fee-for-service brokerage [would] remove the inherent conflicts involved in a commission-based structure and ensure fees earned are aligned with the value of the service provider”.

The representative explained that the bank relies less on mortgage brokers than other banks, as its primary focus for the last two decades has been on developing a strong branch network.

“We have been focused on the development of a strong branch network primarily since the advent of our community banking model, some 20 years ago, where communities can open a branch of a Bendigo Bank as a franchisee. That remains a reverse enquiry model… We’re not out there selling to a community that you should open a community bank; rather, [the] community comes to us and [says], ‘We would like to open a branch’,” Mr Crouch told the PC in the hearing.

“There is a significant process including feasibility studies [that] they need to go through to show that they could be successful. But we continue to increase our branch footprint primarily through that community bank model.”

Mr Crouch further explained the difference between the organisation’s Adelaide Bank and Bendigo Bank brands, saying: “Our brand that we use in the broker market is the Adelaide Bank brand. The Bendigo Bank brand is our retail offering through our retail and community bank network. The Adelaide Bank brand is effectively an online brand once you take out the mortgage through a mortgage broker.”

Trail “an absurd option”

In response, a PC representative commented that if Adelaide Bank is ultimately an online brand, paying trail commissions must be an “absurd option”.

“For the average loan, $665 per year in perpetuity for an online-based product seems very expensive,” the PC said.

“You presumably have very little choice about that because, as you say, you have to play in the market.”

The Bendigo and Adelaide Bank representative agreed with the comment, drawing back to why the bank believes that a fee-for-service model is “more appropriate”.

Mr Crouch did not, however, deny the importance of brokers, saying that it would be a “brave decision to not participate in that market”, given that “roughly half of Australians [are] choosing to select a mortgage by going to a broker”.

When asked about whether the bank has had to make “either/or” decisions around opening branches in the same location as brokerages, Mr Crouch noted that it has separate strategies for its retail and broker businesses.

“The reality is both are generally competing in the same market, whether that be a geographic market or anything else, and quite often you’ll find one of our branches in the same shopping strip as an outlet of a major broker. So, it is not an either/or in our organisation,” the CFO explained.

“I can’t think of a time when we made a decision around our branch network based on ‘should we actually use a third party in that particular space’.”

While the bank is in support of consumers paying service fees to brokers, its representative acknowledged that “such a change will have significant and varied implications, which will need to be carefully considered before such a change is implemented”.

The proposed monetisation model has been met with criticism from the aggregator and broker community, with Connective director Mark Haron previously telling The Adviser that if brokers charged a fee for service, the Australian broker population would decline significantly, which, in turn, would negatively impact the non-major banks and non-banks that depend on brokers for business. It was his contention that such a model would decrease competition in the Australian financial system.

The major banks — which already control more than 80 per cent of all owner-occupied housing loans and 85 per cent of investor housing loans, according to the Australian Prudential Regulation Authority — would therefore gain additional market share if consumers chose to go directly to banks for their loans in order to avoid paying broker fees, Mr Haron said.

The Connective director also warned that a fee-for-service model could make financial advice less accessible to customers who need it the most, such as first home buyers, and further noted that, by managing home loan applications, brokers actually reduce the workload for banks.

“[Brokers are doing] the work that the banks would have to do themselves, so it’s only fair that the brokers get remunerated by the banks,” the director said.