RBA – Page 70 – Digital Finance Analytics (DFA) Blog

Bank Fees Rose More than 3% Over The Year

According to the Australian Bankers Association, total bank fees paid by households and businesses were $12.5 billion in 2015. This is an increase of 3.4 per cent over the year, (which is significantly higher than inflation). The ABA report, Fees for banking services, was released, on the same day as the latest analysis from the RBA.

The mix of fees has changed, with more drawn from loans and payments, whilst fees on transaction accounts – a product used by virtually every household – are now at the lowest level in 15 years. Fees have fallen by $1 billion or 51 per cent since the peak in 2008, yet the number of transactions has increased by around 60 per cent over that same time.” “Households are paying an average of $9 a week in bank fees – the same as what we were paying in 2004”

The ABA highlighted the increased volumes of products and services accessed. “Banks provide around six million housing loans and last year alone approved more than 900,000 new home loans. The number of credit card accounts also increased last year by more than half a million to 13.5 million. So, the growth in fees paid on home loans and credit cards is low given many more of these products are in the market”

The RBA data, contained in the latest Bulletin, shows overall growth of 3.5%.

Banks’ fee income from households grew by 2.9 per cent in 2015, the third consecutive year of positive growth. Higher fee income largely reflected growth in fee income from credit cards, which grew strongly for the second consecutive year. Growth in housing and personal lending fees was moderate, while fee income from deposit products declined in 2015. Fee income from credit cards, the largest single source of fee income from households, increased strongly in 2015. The increase in fee income from credit cards was due to both more instances of fees being charged and an increase in unit fees on some products. An increase in currency conversion fees incurred by households for overseas purchases was largely a result of an increase in the number of foreign currency transactions, with only a small increase in average unit fees. Banks increased some unit fees during 2015, in particular those relating to credit card annual fees and cash advances. Several banks also increased fee income from credit cards through the acquisition of existing credit cards from other providers.

The main drivers of modest growth in fee income on personal lending were higher unit fees and increased turnover. Some banks also increased lending volumes, resulting in higher establishment and loan registration fee income. Exception fees and transaction fees on personal lending declined. Growth in fee income from housing loans was consistent with housing credit growth during 2015. Higher fee income was due to a higher volume of new loans, more instances of early repayment fees and, to some extent, higher unit fees on home loan packages. The major banks and large regional banks recorded the highest growth in housing loan fee income, while some smaller regional banks reported declines in fee income as a result of lower volumes of loans.

Fee income from deposit accounts declined further over 2015. The decline in fee income was broad based across most types of deposit fees, but there were notable declines in fee income relating to non-transaction accounts such as term deposits and online savings accounts.

Total fee income from businesses increased by 3.9 per cent, primarily reflecting higher fee income from small businesses. By product, growth in fee income from businesses continued to be driven by merchant fees and business loans. Fee income from bank bills declined sharply in 2015, similar to previous years. Fee income from other business products was little changed. The increase in loan fee income was mainly due to increases in unit fees for small business loans, although lending volumes also increased. Loan fee income from large businesses declined over 2015 as several banks lowered their unit fees due to increased competitive pressures.

Growth in merchant fee income over 2015 was evenly spread across small and large businesses. The increase in income from merchant fees was largely a result of growth in the number and value of transactions, resulting from a higher number of merchant terminals on issue and increased use of contactless payments. This partially offset a decline in fees earned on cash payment services, via ATM and deposit account withdrawals. A few banks also increased unit fees on merchant services, although the ratio of merchant fee income to the value of credit and debit card transactions continued to decline during 2015. Fee income from business deposit products also declined slightly. This was mainly due to a reduction in deposits held by these customers; however, the decline in fee income was also the result of customer switching between deposit accounts in order to make use of lower fee products.

Will Rates Fall Further?

The RBA statistical release shows the relative policy rates in US, UK, Canada, Japan, ECB and Australia. Looking at the rates from 1999, we see that since the GFC rates have been lower, thanks to unconventional monetary policy. In contrast to other countries, the Australian cash rate has remained higher, for longer, but is at a record low. Will it fall further?

Yahoo7News reports that according to 1300HomeLoan managing director John Kolenda, who last year accurately warned banks would lift their mortgage rates out-of-sync with the Reserve Bank, said the current official rate of 1.75 per cent would be the “new norm”.

The Reserve sliced rates to 1.75 per cent – the lowest level on record – last month over fears about the level of inflation. Prices have been dropping for several months across the country with deflation a real threat in Perth.

Mr Kolenda said consumers were now more sensitive to the impact of higher interest rates which meant taking them back to what was once considered normal was unlikely.

“We are unlikely to see official interest rates move to pre-global financial crisis (GFC) levels and the standard norm of the future will be lower than historical levels for the next decade,” he said.

“The monetary policy game has changed and the RBA has found cutting its cash rate is not necessarily an instant remedy for economic stimulus.

“Conversely, any time the RBA increases official rates in the future could have a disastrous impact on consumer confidence and the economy. Consumers are now very rate sensitive and when they rise they are likely to stop spending and revert to saving.”

Markets are pricing in another interest rate cut by the end of the year although economists believe the Reserve’s next move will be a rate increase.

Mr Kolenda said there was a real prospect the Reserve would cut rates again.

This despite stronger than expected GDP growth, reported recently. Inflation is below the RBA’s lower bounds.

Currently, lenders are heavily discounting their mortgage rates for new loans and refinanced transactions. Property transaction momentum appears to be increasing after a slow few months, and house prices are rising in most states.

So, on one hand, there are good reasons to expect the RBA to cut further, and keep rates low for a long time. On the other, the property market is alive and well, and will be a handbrake on further cuts.

We expect out of cycle rate hikes for many mortgage holders, once the election is passed as lenders attempt to repair their margins, and we are less convinced the RBA will cut again anytime soon, give the current property trends – in fact, we need more macroprudential controls, not lower interest rates. That said, the medium term outlook is for rates to stay low for a long time, and this does mean large mortgages will continue to be serviced as current levels. But any hike in rates would have significant negative impact on households and the economy, given the sky-high debt levels in place at the moment.

Household Debt Ratio Grinds Higher And Mortgage Discounts Rise

The latest RBA chart pack, just released, shows that household debt, as a percentage of disposable income continues to rise. Also from our analysis, banks are offering larger discounts again.

RBA data shows interest payments are below their peak, but are also rising (though the May cash rate cut will have an impact down the track as mortgage rate cuts come home). However, given static incomes (which are for many falling in real terms), this debt burden is a structural, and long term weight on households and the economy, and is dangerous. However low the interest rate falls, households will still have to pay off the principle amount eventually.

We are also seeing some relaxing of lending standards now, as banks chase investor loans well below 10% growth rates, and continue to offer cut price loans for refinance purposes. Average discounts on both investment loan have doubled.

RBA Cash Rate Unchanged at 1.75 per cent

At its meeting today, the Board decided to leave the cash rate unchanged at 1.75 per cent.

The global economy is continuing to grow, at a lower than average pace. Several advanced economies have recorded improved conditions over the past year, but conditions have become more difficult for a number of emerging market economies. China’s growth rate moderated further in the first part of the year, though recent actions by Chinese policymakers are supporting the near-term outlook.

Commodity prices are above recent lows, but this follows very substantial declines over the past couple of years. Australia’s terms of trade remain much lower than they had been in recent years.

In financial markets, conditions have generally been calmer for the past several months following the period of volatility early in the year. Attention is now turning to some particular event risks. Funding costs for high-quality borrowers remain very low and, globally, monetary policy remains remarkably accommodative.

In Australia, recent data suggest overall growth is continuing, despite a very large decline in business investment. Other areas of domestic demand, as well as exports, have been expanding at a pace at or above trend. Labour market indicators have been more mixed of late, but are consistent with continued expansion of employment in the near term.

Inflation has been quite low. Given very subdued growth in labour costs and very low cost pressures elsewhere in the world, this is expected to remain the case for some time.

Low interest rates have been supporting domestic demand and the lower exchange rate overall is helping the traded sector. Over the past year, growth in credit to businesses has picked up, even as that to households has moderated a little. These factors are all assisting the economy to make the necessary economic adjustments, though an appreciating exchange rate could complicate this.

Indications are that the effects of supervisory measures have strengthened lending standards in the housing market. Separately, a number of lenders are also taking a more cautious attitude to lending in certain segments. Dwelling prices have begun to rise again recently. But considerable supply of apartments is scheduled to come on stream over the next couple of years, particularly in the eastern capital cities.

Taking account of the available information, and having eased monetary policy at its May meeting, the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and inflation returning to target over time.

Home Lending Rises Again To New Record $1.56 trillion

Latest credit aggregate data from the RBA today, shows lending momentum to business and the housing sector remained strong. As a result, total lending to residential property rose by $6.7 billion or 4.3% to $1.56 trillion, seasonally adjusted, with loans for owner occupation comprising $6.0 billion and $0.7 billion for investment housing. Business lending rose by $6.5 billion, or 0.76% to $854 billion. Housing lending is still growing at 7% annualised, well above inflation and income growth. This is sufficient to maintain home price growth.

Investment lending makes more than 35.4% of all lending for housing, and all lending for housing comprises more than 60% of all lending in Australia. So the banks remain strongly leveraged to the housing sector.

Looking at the 12 month growth rates, we see investment lending sliding from about 10% last year to around 6.5%, business lending growing at 7.4% and lending for owner occupation growing at 7.3%. These growth trends contain the adjustments between owner occupied and investment lending due to reclassification.

The RBA says:

Following the introduction of an interest rate differential between housing loans to investors and owner-occupiers in mid-2015, a number of borrowers have changed the purpose of their existing loan; the net value of switching of loan purpose from investor to owner-occupier is estimated to have been $40 billion over the period of July 2015 to April 2016 of which $1.2 billion occurred in April. These changes are reflected in the level of owner-occupier and investor credit outstanding. However, growth rates for these series have been adjusted to remove the effect of loan purpose changes.

Review of Card Payments Regulation Outcomes

The Reserve Bank has today released the Conclusions Paper and three new standards which they say will contribute to a more efficient and competitive payments system. As expected the review has focussed on reducing excessive payment surcharges, changes to interchange fee bench-marking and the inclusion of the American Express companion card system. The RBA has not designated UnionPay, JCB, Diners Club, or any other systems. Accordingly the RBA’s new standard does not apply to transactions carried out using those systems.

The banks says the new standard is likely to result in some reductions in the generosity of rewards programs on premium and companion cards for consumers. Some adjustment in annual fees on these cards is also possible. Commercial and corporate card products often provide significant benefits free of charge to the company holding the card. It is possible that there will be changes to either the pricing or services provided by these products. These changes are part of the process of improving price signals to cardholders and creating a more efficient and lower-cost payments system.

Note that the new surcharging framework only applies to payment surcharges – that is, to fees that are specifically related to payments or apply to some payment methods but not others. Some merchants apply fees, such as ‘booking’ or ‘service’ fees, which are unrelated to payment costs and apply regardless of the method of payment (this is for instance common in the ticketing industry). The surcharging framework is not intended to apply to these fees but merchants will be required to meet all provisions of the Australian Consumer Law in terms of disclosure of any such fees.

The Review was initiated with the publication of an Issues Paper in March 2015. After extensive consultation with stakeholders, the Bank published some draft standards in December 2015. The Bank received submissions on the draft standards from more than 40 organisations and the staff have had over 50 meetings with stakeholders since their release. There was significant support for the proposed reforms from end users, including major consumer and merchant organisations.

The new surcharging standard will preserve the right of merchants to surcharge for more expensive payment methods. However, consistent with the Government’s recent amendments to the Competition and Consumer Act 2010, the new standard will ensure that consumers using payment cards from designated systems (eftpos, the debit and credit systems of MasterCard and Visa, and the American Express companion card system) cannot be surcharged in excess of a merchant’s cost of acceptance for that card system. Eligible costs are clearly defined in the standard and new transparency requirements will promote compliance with and enforcement under the new framework. With the cost of acceptance defined in percentage terms, merchants will not be able to impose high fixed-amount surcharges on low-value transactions, as has been typical for airlines. The ACCC will have enforcement powers under the new framework, which will take effect for large merchants on 1 September 2016 and for other merchants on 1 September 2017.

The new interchange standards will result in a reduction in payment costs to merchants, which will place downward pressure on the costs of goods and services for all consumers, regardless of the payment method they use. The weighted-average benchmark for credit cards has been maintained at 0.50 per cent, while the benchmark for debit cards has been reduced from 12 cents to 8 cents. The weighted-average benchmarks will be supplemented by ceilings on individual interchange rates which will reduce payment costs for smaller merchants. Commercial cards will continue to be included in the benchmarks, but the Board has decided for the present against making transactions on foreign-issued cards subject to the same regulation as domestic cards. Schemes will be required to comply with the benchmarks on a quarterly frequency, based on weighted-average interchange fees over the most recent four-quarter period. These tighter compliance requirements will ensure that the regulatory benchmarks are an effective cap on average interchange rates. The new interchange standards will largely take effect from 1 July 2017.

To address issues of competitive neutrality, interchange-like payments to issuers in the American Express companion card system will now become subject to equivalent regulation to that applying to the MasterCard and Visa credit card systems. More broadly, to prevent circumvention of the debit and credit interchange standards, there will be limits on any scheme payments to issuers that are not captured within the interchange benchmarks.

These changes to the regulatory framework are consistent with the direction of reforms suggested in the Final Report of the Financial System Inquiry and endorsed in the Government’s October 2015 response to the Report.

How Much Benefit Do Major Banks Get From Implicit Government Guarantees?

In a freedom of information request, released by the RBA we get some insights into the discussion around whether the major banks benefit from the implicit assumption that in a time of strife they will be bailed out by Government.

The credit ratings of Australian banks do benefit to some extent from rating agencies’ perceptions that the Government would support them if they got into trouble. The major banks and Macquarie receive a two notch credit rating uplift from S&P as a result of the rating agency’s expectation that these banks will receive support from the government in a crisis. Other Australian banks do not receive any rating uplift, as S&P does not expect government support.

The released documentation discusses the different modelling approaches and also some of the international analysis which has been done on the subject. The real benefit does appear to change over time (depending on the risks in the system) but the net conclusion is the majors do get benefit. It is hard to put a value in it, but a figure between $1.9 and $3.8 billion (between 14 and 28 basis points) was suggested in 2013.

One submission to the financial system inquiry applied rates from the same study to the non-deposit liabilities of the major banks to estimate the dollar value of the implicit subsidy to these institutions at between $5.9 and $7.9 billion per year.

Systemic risks may be higher as a result.

An implicit government guarantee creates on incentive for creditors to fund banks at rates below those justified by their financial health, thus providing an implicit subsidy. lf of significant size, this subsidy has the potential to distort competition and increase systemic risk.

However you read it, the majors are supported by the implicit Government guarantee. It does not seem to pass through to borrowers or depositors in better rates.

Westpac Turns The Property Investment Lending Tap On

Westpac has lifted the maximum LVR for investment loans to 90%, up from 80% (which was below many other lenders). With the largest share of investment loans they trimmed back their lending to the sector last year in order to get under the regulators 10% speed limit. Now the brakes are off, and with refinance growth slowing, and loans to overseas investors on the nose, lenders are targetting the investment sector. Other underwriting parameters are still tighter than they were.

The Digital Finance Analytics household survey highlighted that demand from investors was on the rise, and last month there was more growth in investment loans, as investors gained renewed confidence in home price growth, and saw the prospect of negative gearing changes dissipate. The RBA’s rate cut was the gilt on the gingerbread.

Given that household lending appears to be the only game in town to force economic growth, it will be interesting to see how the RBA and APRA react to a resurgence in the more risky investment lending sector. They seem happy with a 7% annual growth in credit, a rate way higher than real incomes or inflation, meaning high household debt will go higher still.

Was The Last RBA Rate Cut Needed?

From Business Insider.

The intervention of former RBA governors continues.

Recently Bernie Fraser said he is not “in the slightest” bit worried about letting inflation in Australia slip below the bottom of RBA’s 2-3% band.

His comments have now been reiterated by Ian Macfarlane, the man who followed him as governor of the Reserve Bank.

The AFR reports this morning that Macfarlane, who is now a director of the ANZ bank, took dead aim at market traders and forecasters whom he implies don’t understand the RBA’s approach to inflation targeting.

He said the problem at the Reserve Bank “is that financial markets, particularly offshore, assume a mechanical application of what they regard as the standard model”.

That’s a comment that reflects the reality of how the RBA has conducted monetary policy since the inflation targeting approach was first adopted under Fraser’s reign at the bank.

“The RBA has always prided itself on having a more flexible – as opposed to mechanical – inflation targeting model than other countries,” Macfarlane said.

He’s right on the money. The flexibility the RBA has given itself in the management of monetary policy, and its approach to the wild gyrations of the Australian dollar, are in no small part responsible for Australia’s magic run of 25 years without a recession.

But Macfarlane also appears to have a message to those who believe the RBA will have to cut deeply in the future (my emphasis).

The inflation targeting approach says that if inflation forecasts are below target, we should run an easy monetary policy – we already have that. It doesn’t say that each time we receive an inflation statistic showing it is below target, we have to cut interest rates.

You can read the original story at the AFR here.

RBA Minutes Show Lower Reported Inflation Tipped The Cut … Just

The RBA Board minutes, released today suggests that, inflation outlook apart, things are set fair … so, given the low rate already, why cut at all? Have they been captured by central bank group think? After all, ultra low/negative rates are working so well in er… well, not Japan, Europe, UK or USA… Chances are going lower will just make the journey back to more normal times more painful and longer.

In considering the stance of monetary policy, members noted that the recent data on inflation and labour costs had been lower than expected at the time of the February Statement on Monetary Policy. Although the March quarter outcome for the CPI reflected some temporary factors, the broad-based softness in prices and labour costs signalled less momentum in domestic inflationary pressures than had previously been expected. As a result, there had been a downward revision to the inflation outlook and the profile for wage growth. Underlying inflation was expected to remain around 1–2 per cent over 2016 and to pick up to 1½–2½ per cent by mid 2018.

The recent data suggested that growth in Australia’s major trading partners was likely to be a little softer than previously expected and below its decade average in 2016 and 2017. While growth in the Chinese economy had continued to slow, the growth outlook had remained much as previously forecast based on the expectation of further support being provided by more stimulatory policy settings. The renewed focus of the Chinese authorities on the short-term growth targets had been accompanied by a strong rally in bulk commodity prices over recent months. Higher commodity prices would typically support incomes and activity in Australia. However, the rally in commodity prices was not expected to boost mining investment over the next couple of years.

Sentiment in financial markets had improved following a period of heightened volatility earlier in the year. Despite uncertainty about the global economic outlook and policy settings among the major jurisdictions, funding costs for high-quality borrowers remained very low and, globally, monetary policy was remarkably accommodative.

Domestically, the outlook for economic activity and unemployment had been little changed from that presented three months earlier. The available data suggested that the economy had continued to rebalance following the mining investment boom, supported by very accommodative monetary policy and the depreciation of the exchange rate since early 2013, which had helped the traded sector. GDP growth overall had been a bit stronger than expected over 2015, but appeared to have been sustained at a more moderate pace since then. Growth was forecast to pick up gradually to be above estimates of potential growth later in the forecast period. Accordingly, the unemployment rate was expected to remain around current levels for a time before declining gradually as GDP growth picked up. The exchange rate depreciation since early 2013 was assisting with growth and the economic adjustment process, although an appreciating exchange rate could complicate this.

In coming to their policy decision, members noted that developments over recent months had not led to a material change in the outlook for economic activity or the unemployment rate, but the outlook for inflation had been revised lower. At the same time, they took careful note of developments in the housing market, which indicated that supervisory measures were strengthening lending standards and that the potential risks of lowering interest rates therefore were less than they had been a year earlier.

Members discussed the merits of adjusting policy at this meeting or awaiting further information before acting. On balance, members were persuaded that prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting.

The Decision

The Board decided to lower the cash rate by 25 basis points to 1.75 per cent, effective 4 May.