CBA – Page 17 – Digital Finance Analytics (DFA) Blog

NSW Leads The States, Says CommSec

The latest CommSec State of The States report has been released. NSW has held on to the position as the best performing economy, supported by strong construction activity, whilst the economic performance of Western Australia reflects the ending of the mining construction boom.

The states performing better are associated strongly with rising residential construction, home prices and home loan volumes.

Each quarter CommSec attempts to find out by analysing eight key indicators: economic growth; retail spending; business investment; unemployment; construction work done; population growth; housing finance and dwelling commencements.

Just as the Reserve Bank uses long-term averages to determine the level of ‘normal’ interest rates; we have done the same with key economic indicators. For each state and territory, latest readings for the key indicators were compared with decade averages – that is, against the ‘normal’ performance.

The latest State of the States report also includes a section comparing annual growth rates for the eight key indicators across the states and territories as well as Australia as a whole. This enables another point of comparison – in terms of economic momentum.

NSW has retained its top rankings on business investment, retail trade, and dwelling starts. But NSW is now is second spot on unemployment, construction work, population growth and housing finance. NSW is in third spot on economic growth.

Victoria remains in second spot on the economic performance rankings. Victoria is top ranked now on population growth and ranked second on retail trade and business investment. Victoria is third ranked on construction work, housing finance and dwelling starts.

The ACT also has held on to its position as the third ranked economy. The ACT is top ranked on housing finance, second on economic growth and third ranked on retail trade, unemployment, business investment and population growth. Retail trade is up 5.1 per cent on a year ago.

The Northern Territory holds fourth position and remains in top spot for economic growth, construction work done and unemployment. However the Territory economy is losing momentum, ranked last on four indicators – population growth, business investment, housing finance and retail trade.

The South Australian economy is in fifth position. South Australia is middle ranked on business investment and housing finance and fifth ranked on three indicators.

Queensland is in sixth placeon the economic performance rankings. The economy is second-ranked on dwelling starts and population growth is lifting. Both tourism and agricultural exports will provide momentum in coming months and higher coal prices are encouraging.

Tasmania has improved from eighth position to seventh on the rankings. Tasmania is fourth ranked on two indicators and fifth on three indicators. Annual growth on home lending is strongest in the nation at 10.3 per cent.

The economic performance of Western Australia reflects the ending of the mining construction boom. But income levels will lift in line with record mining export volumes and the recent improvement in resource prices.

CBA Announces New Chair

The Commonwealth Bank of Australia today announced its new Chairman will be current non-executive director Ms Catherine Livingstone. Current Chairman Mr David Turner will retire from the Board at the end of December 2016.

Mr Turner has been a member of CBA’s Board since 2006, and has served as Chairman since the beginning of 2010.

Commenting on his decision to retire from the Board, Mr Turner said “I have greatly enjoyed my time on the Board of the Commonwealth Bank and especially as Chairman for the past seven years. It has been a privilege to work with an exceptional Board and management team.

“The strength of CBA meant that following the Global Financial Crisis it was able to continue supporting its customers, accelerate innovation and fulfil its vital role in the broader Australian economy. It has been exciting to be Chairman of the Bank in such a fast changing environment.”

Ms Catherine Livingstone has been a non-executive director of CBA since March 2016. She was formerly Chairman of Telstra Corporation and Chief Executive Officer of Cochlear. She is presently President of the Business Council of Australia and will retire from that role in November 2016.

Mr Turner said “Catherine’s strong business experience complemented by her interest in technology and innovation will mean she will be an excellent and well-qualified Chairman.”

Ms Livingstone said “It is an enormous honour to be appointed Chairman by the Board of the Commonwealth Bank of Australia.

“David will be stepping down from the Board with a legacy of firm and decisive leadership, but always bringing a sense of compassion and humility to any discussion. His relentless focus on long-term investment in the Bank has also been coupled with a passion for driving diversity and positive community impact. I look forward to working with the Board and the very strong management team to continue this focus.”

CBA pays $180,000 in penalties and will write off $2.5 million in loan balances

ASIC says Commonwealth Bank of Australia (CBA) has paid four infringement notices totalling $180,000 in relation to breaches of responsible lending laws when providing personal overdraft facilities.

CBA reported this matter to ASIC following an ASIC surveillance. CBA conducted an internal review which identified a programming error in the automated serviceability calculator used to assess certain applications for personal overdrafts.

As a result of the error, between July 2011 and September 2015, CBA failed to take into consideration the declared housing and living expenses of some consumers.

Instead, CBA’s serviceability calculator substituted $0 housing expenses, and living expenses based on a benchmark which in some instances was substantially less than the living expenses declared by the consumer. As a result, this led to an over-estimation of the consumer’s capacity to service the overdraft facility.

CBA informed ASIC that between July 2011 and September 2015, as a result of the error, CBA approved:

9,577 consumers for overdrafts which would have otherwise been declined; and

1,152 consumers for higher overdraft limits than would have otherwise been provided.

Some consumers were approved for a personal overdraft, or an increased limit on their personal overdraft, even though their declared expenses were greater than their declared income.

ASIC was concerned that this conduct breached responsible lending laws and that affected consumers would have been unable to comply, or could only comply with substantial hardship, with their obligation to repay their personal overdraft on demand.

CBA has informed ASIC that it will write off a total of approximately $2.5 million in personal overdraft balances.

ASIC Deputy Chairman Peter Kell said, ‘Credit licensees should continuously monitor their internal processes to ensure compliance with the law. This is especially the case with automated decision-making systems where ongoing monitoring is needed to ensure that information is correctly inputted into systems.’

Background

The responsible lending obligations that prohibit lenders from entering into credit contracts which are unsuitable for the consumer are found in the National Consumer Credit Protection Act 2009 (Cth). The laws aim to ensure that credit contracts are not unsuitable for consumers (see s133(1)), and consumers are likely able to afford the credit contract (see s133(2)).

ASIC issued four infringement notices in August 2016 totalling $180,000 for the breaches outlined above.

CBA self-reported the breaches to ASIC, and has co-operated with ASIC’s investigation.

The payment of an infringement notice is not an admission of guilt in respect of the alleged contravention. ASIC can issue an infringement notice where it has reasonable grounds to believe a person has committed particular contraventions of the National Credit Act.

Weighing up the risks behind the profits of Australia’s big four banks

From The Conversation.

The biggest Australian banks are fairing well in a year of increased pressure to reform from politicians, international events like the Britain’s exit from the European Union and more regulation from the Australian Prudential Regulation Authority (APRA).

A number of interrelated factors have contributed to the relatively strong performance of the Australian banks. For instance, the banks have limited exposure to the types of securities which led to massive losses for their counterparts in other countries. The banks also heavily rely on domestic loans, particularly the low risk household sector, so better lending standards and a proactive approach to prudential supervision by APRA may have contributed.

The Basel III regulatory requirements, brought in after the 2008 financial crisis, emphasise holding an increased amount of subordinated debt, as a measure of market discipline. However all the big four banks are holding less and less subordinated borrowings. More specifically, it declined by more than 50% from 2007 to 2014, according to our calculations.

APRA limits banks’ holdings of higher risk securitised assets, these are loans packaged into securities, to a maximum of 25% of the banks’ loan portfolio. These are high risk if not properly understood or defined, as happened with United States home loans, blamed for the start of the global financial crisis.

When Australian banks calculate bank capital requirements, they need to fully account for securitised assets. This is a rule from APRA that goes beyond international standards, to reflect the risk inherent in these products.

Inter-bank liquidity tightened significantly with all banks increasing their holdings of Exchange Settlements Accounts at the Reserve Bank, this a form of low risk liquidity. Australian banks have lower interbank deposits compared to their Europe and USA counterparts and are also heavily involved in long term wholesale funding and are required to hold more liquid assets including government debt to deal with liquidity. All of this makes Australian banks less risky in times of crisis because spillover effects from other banks are less likely.

The big four CC BY

There has been a significant increase in concentration in the Australian banking industry since the global financial crisis. For example with Westpac and the Commonwealth Bank of Australia taking over St. George Bank and Bank West, respectively.

Following mergers, the big four account for 88% of the Australian banking system assets. This reinforces the idea that the banks are “too big to fail”.

The banks have also moved to more fee generating activities, which increases risk, but to a lesser extent in Australian banks. Data shows between 1998 and 2014, on average, 1.2% greater interest income was generated relative to non-interest income for Australian banks, according to our analysis. However, there is also similar evidence for the top eight publicly-listed Canadian banks. They exhibit on an average, a 2.5% increase in net interest revenue relative to non-interest income over the same time period.

This reinforces that Australian and Canadian banks demonstrated extra ordinary resilience during the credit turmoil in the global financial crisis. The World Economic Forum in 2008 reported that Australia and Canada were among the top four safest banking systems in the world.

Large banks in Australia are active in international markets through direct ownership of foreign based banks and having offshore operations as a source of capital. Deregulation of banking in countries such as the USA, Canada, Australia and many developing countries has opened up new markets for foreign banks. Australian banks’ largest international exposure is to New Zealand, where all big four banks retain sizeable operations.

Although the growing interdependence among international economies and financial markets is certain to continue, the impact of Brexit on Australian banks remains minimal. It remains to be seen in the long-run how Australian banks will weather the international banking/economic developments.

As a last measure of the bank health, we can measure the domestic systemic risk with a methodology based on one used by the official Basel Committee on Banking Supervision. Based on July 2016 monthly data, the big four banks account for 80.38% of the systemic risk in the financial system and the riskiest, from highest to lowest, are the National Australia Bank, the Commonwealth Bank of Australia, Westpac and ANZ.

CommSec pays $700,000 in infringement notice penalties and refunds $1.1 million in brokerage

ASIC says Commonwealth Securities Limited (“CommSec”) has paid a total penalty of $700,000 to comply with two infringement notices given to it by the Markets Disciplinary Panel (“MDP”), and has voluntarily refunded $1.1 million in brokerage to more than 25,000 clients.

Confirmations: disclosure of crossings and trading as principal

The MDP had reasonable grounds to believe that CommSec contravened subsection 798H(1) of the Corporations Act by reason of contravening:

rules 3.2.3 and 3.4.1(3)(f) of the ASIC Market Integrity Rules (ASX Market) 2010; and

rule 3.4.1(3)(f) of the ASIC Market Integrity Rules (Chi-X Australia Market) 2011.

These rules relate to confirmations of transactions which require disclosures in relation to crossings and trading as principal. A crossing occurs where a market participant acts for both the buyer and the seller in a transaction.

Failure to disclose crossings

Between 1 August 2010 and 13 February 2014, CommSec issued 114,841 confirmations to retail clients whose orders were executed as crossings but which did not contain the required statement that the transactions had involved a crossing, namely:

between 1 August 2010 and 13 February 2014, in relation to trading on the ASX market, CommSec issued 6,579 confirmations which failed to include the required disclosure of crossings. This failure was caused by different fields being used by the systems of CommSec and another NZ-based financial services company to identify crossings for the purposes of marking confirmations;

between 1 August 2011 and 9 October 2012, in relation to trading on the ASX market, CommSec issued 56,522 confirmations which failed to include the required disclosure of crossings. This failure was caused by the CommSec’s systems not being able to interpret all of the different condition codes relating to crossings;

between 15 August 2011 and 9 October 2012, in relation to trading on the ASX market, CommSec issued 46,231 confirmations which failed to include the required disclosure of crossings. This failure was caused by a configuration flag within CommSec’s settlement system not being turned on;

between 17 October 2011 and 18 December 2013, in relation to trading on the ASX market, CommSec issued 1,768 confirmations which failed to include the required disclosure of crossings. This failure was caused by a system platform change for the settlement of options market contracts, which contained an incorrect data field, as a result of which it was unable to correctly identify that a crossing had taken place; and

between 15 March 2012 and 26 April 2013, in relation to trading on the Chi-X market, CommSec issued 3,741 confirmations which failed to include the required disclosure of crossings. This failure was caused by CommSec’s retail and institutional participant identifier numbers being treated as two separate participants by Chi-X’s systems.

Failure to disclose trading as principal

Between 16 May 2011 to 13 February 2014, CommSec issued 50,484 confirmations to retail clients in relation to which CommSec had entered into transactions as principal but which did not contain the required statement that CommSec entered into the transactions as principal and not as agent, namely:

between 16 May 2011 and 13 February 2014, in relation to trading on the ASX market, CommSec issued 3,949 confirmations which failed to state that CommSec entered into the transactions as principal. This failure was caused by different fields being used by the systems of CommSec and another NZ-based financial services company to identify principal trading for the purposes of marking confirmations;

between 15 August 2011 and 9 October 2012, in relation to trading on the ASX market, CommSec issued 46,231 confirmations which failed to state that CommSec entered into the transactions as principal. This failure was caused by a configuration flag within CommSec’s settlement system not being turned on; and

between 26 February 2013 and 6 March 2013, in relation to trading on the ASX market, CommSec issued 304 confirmations which failed to state that CommSec entered into the transactions as principal. This failure was caused by the introduction of new operator references in CommSec’s system which did not contain the phrase typically used by CommSec to indicate when a related entity was the originator of the orders.

The MDP specified a penalty of $400,000 for the alleged contraventions.

CommSec voluntarily refunded approximately $1.1 million in brokerage to more than 25,000 clients, and notified 48,205 clients of the lack of disclosure and to provide corrective disclosure.

CommSec also co-operated with ASIC throughout its investigation and did not dispute any material facts.

Download the infringement notice

The compliance with the infringement notice is not an admission of guilt or liability, and CommSec is not taken to have contravened subsection 798H(1) of the Corporations Act.

Verification of identity of selling shareholders

The MDP had reasonable grounds to believe that CommSec contravened subsection 798H(1) of the Corporations Act by reason of contravening rule 5.5.2 of the ASIC Market Integrity Rules (ASX Market) 2010. This rule requires a trading participant to maintain the necessary organisational and technical resources to ensure that, among other things, trading messages submitted by the participant do not interfere with the efficiency and integrity of the market.

The MDP has reasonable grounds to believe that, between 2 August 2010 to 14 April 2013, CommSec did not have in place adequate organisational and technical procedures or controls that verified the name and address on an issuer sponsored holding matched that of the client who provided the instructions prior to submitting the orders for the sale of the holdings.

The MDP specified a penalty of $300,000 for the alleged contravention.

Download the infringement notice

The compliance with the infringement notice is not an admission of guilt or liability, and CommSec is not taken to have contravened subsection 798H(1) of the Corporations Act.

CBA Juggernaut Motors On, Uphill

The CBA have released their full year results to June 2016. They announced a statutory net profit after tax (NPAT) up 2% to $9,227 million, Cash NPAT up 3% to $9,450 million, Cash return on equity of 16.5%, down 170 basis points and cash earnings were $5.55 per share, same as last year. All pretty much as expected, so no surprises, but some signs of stress ahead.

The Fully franked final dividend is $2.22 per share, taking the full year dividend to $4.20, flat on the prior year, and representing a cash dividend payout ratio of 76.5%.

However, looking below the hood, operating income was up 5%, helped by volume growth, and trading income, but hit by a 2 basis point NIM fall.

Net interest income was up 7% to $16,935m, net interest margin was down 2 basis points to 2.07%.

Comparing the two half years, asset pricing was up 1 basis point, reflecting keen competition in the mortgage sector, funding costs rose, thanks to elevated short term costs, the portfolio mixed helped, thanks to savings growth, and capital and treasury fell thanks to the impact of lower rates. The last six months is the better indicator of future trends.

Customer deposits were $518 bn, up 8%, and represents 66% of total funding, up 1% from last year. They have 11.3 million deposit customers.

Operational expenses rose 4% to $10,429m, with an improved cost to income ratio of 42.4%, down 40 basis points.

Loan impairments were up 27%, thanks to higher provisioning for resource, commodity and dairy exposures.

Home Loan arrears were stable year on year. WA and QLD portfolios continue to experience stress, mainly due to mining towns, while NSW improved. Personal Loan arrears remain elevated mainly due to economic worsening in WA and QLD.

The state differences are clear – here is the home loan book arrears by state.

Bank West has the higher delinquency rates.

Investment loans are performing better than other mortgage loans.

Wealth, showed a rise in funds under management, but compared with FY15, investment experience fell.

During the financial year, the Group responded to increased regulatory capital requirements and raised $5.1 billion through an entitlement offer for all shareholders. As at 30 June 2016, the Group had a CET1 capital ratio of 10.6% on an APRA basis, up from 9.1% as at 30 June 2015; and a CET1 capital ratio of 14.4% on an internationally comparable basis up from 12.7%. They claim to be well within the APRA top quartile.

The larger capital base impacted return on equity which was down 170 basis points to 16.5%. Liquid assets of $134 billion and a Liquidity Coverage Ratio of 120%.

The APRA leverage ratio is calculated at 5%.

CBA Cuts Mortgage Rate by 13 basis Point, Ups Term Deposits

Commonwealth Bank has responded to the Reserve Bank of Australia’s (RBA) cash rate decision by reducing interest rates for home owners and small business while increasing term deposit rates.

Standard Variable Rate (SVR) mortgages reduced by 0.13%; owner occupiers to receive record low rate of 5.22%. Business customers to benefit from 0.13% reduction to variable cash rate products, One year term deposit rate increased to 3.00%, a rise of 0.55%, Two and three year term deposit rates to lift by 0.50% to 3.10% and 3.20% respectively. All offers available to new and existing customers.

The CBA standard variable rate (SVR) mortgages will reduce by 0.13%, taking the rate for owner occupiers to a record low 5.22%. The SVR for investor loans will fall to 5.49%. While this decrease delivers benefits to mortgage holders, Commonwealth Bank will also support savers by increasing the return on several products, some by as much as 0.55%.

“While the circumstances of each RBA rate decision will always vary, we’ve carefully considered the current environment and the needs of both borrowers and savers,” said Matt Comyn, Group Executive Retail Banking Services.

“Today we’ve reduced our mortgage rates to a record low while increasing term deposit rates to provide an opportunity to the millions of Australians who rely on savings.”

To meet the needs of savers, Commonwealth Bank will increase one, two and three year term deposits with all rates set to rise to 3.0% or greater.

“Given increased funding costs and capital requirements, today’s announced changes seek to balance the needs of both customers and shareholders,” Mr Comyn said.

Business customers with variable rate products will also benefit from a 0.13% rate reduction.

Over the past two years, the official cash rate has decreased three times, and during this period Commonwealth Bank home loan customers who are owner occupiers have had cumulative savings of about $939 a year on the average loan of $350,000.

CBA fixed mortgage rates are unchanged and all new rate offers announced today will be effective from Friday, 19 August.

CBA Update Mirrors Peers – Losses Up; Profit Down

CBA has released its unaudited cash earnings for 3 months to 31st March 2016 of $2.3 billion and a statutory net profit on an unaudited basis of $2.4 billion. They reported that income growth and net interest margin was similar to 1H16. Costs were higher. Wealth Management funds under management fell, reflecting falling investment markets. Loan impairment expense was higher at $427m or 25 basis points, reflecting exposures in the institutional lending portfolio and consumer losses. Total provisions were higher at $3.9 billion.

Group Troublesome and Impaired Assets was also up, at $6.3 billion.

Consumer arrears were in line with expectations, despite higher home loan arrears in mining impacted areas of WA and QLD.

Personal loan arrears remained elevated.

The Group’s Basel III CET1 APRA ratio was 10%, down from 10.2% in Dec 15. Comparable CET1 ratio at 31 March 2016 was 13.9%. The Group’s leverage ratio was 4.9% on an APRA basis and 5.5% on an international comparable basis.

Customer deposits comprised 64% of funding (reflecting above system deposit growth) and the average tenor of wholesale funding was 4.2 years. The Group issues $13 billion of long term funding in the quarter.

CBA Will Cut Home Loan Rates By 0.25%

CBA announced that the bank will be decreasing the interest rate for their variable Home Loans and Investment Home Loans by 0.25% p.a. The interest rate cut on variable rates will be effective 20/05/2016.

For a variable rate home loan of $350,000 this change will save our customers around $55 a month.

Commonwealth Bank tightens criteria on home loans for foreigners

From Australian Broker.

The nation’s largest mortgage lender, the Commonwealth Bank of Australia (CBA), has announced that it is tightening its criteria for home loans for foreigners.

The CBA will no longer approve applications for home loans that cite self-employed foreign income, according to a note sent to mortgage brokers this week.

The bank also says it will no longer accept the foreign-currency income of temporary Australian residents. These individuals can also only borrow up to 70% of a property’s value, compared with the previous rate of 80%.

Home loan applications from foreigners make up a “significantly low proportion of our total home loan applications” according to a CBA statement, adding, “We constantly review and monitor our home loan portfolio to ensure we are maintaining our prudent lending standards and meeting our customers’ financial needs.”

The fact that home loans for foreigners make up a relatively small segment of the market means CBA’s new policy should not have major consequences for mortgage brokers, according to principal at Ocean Home Loans, Brad Kirwan.

“This is a very small part of the overall market,” he told Australian Broker. “Self-employed foreign investors are an even smaller part of that market. Most lenders won’t accept foreign self-employed income anyway – I’d suggest that CBA are aligning their policy with the other major banks so as not to be over-exposed to one particular type of applicant.”

When asked what steps brokers might take in response to CBA’s changes, Kirwan added, “There are several large brokerages that focus entirely on the Chinese market and have done very well over the past few years, they will obviously have to reassess how they do business in the future, for the majority of mortgage brokers it will be business as usual.”