Westpac – Page 13 – Digital Finance Analytics (DFA) Blog

Westpac refunds $20 million in credit card foreign transaction fees

ASIC says Westpac Banking Corporation (Westpac) has recently refunded approximately $20 million to around 820,000 customers for not clearly disclosing the types of credit card transactions that attract foreign transaction fees.

Following a customer complaint, Westpac notified ASIC that customers may have been incorrectly charged foreign transaction fees for Australian dollar transactions processed by overseas merchants. Because Westpac’s terms and conditions did not clearly state that foreign transaction fees would be charged for such Australian dollar transactions, Westpac commenced a process to identify impacted customers and provide refunds with interest.

Westpac has updated its disclosure to clarify that Australian dollar transactions – when they are processed by overseas merchants – will also attract a foreign transaction fee.

ASIC Deputy Chairman Peter Kell said, ‘It is essential for consumers to know when fees will be charged, so that they can make an informed decision when using financial products and services.’

ASIC acknowledges the cooperative approach taken by Westpac in its handling of this matter, and its appropriate reporting of the matter to ASIC.

ASIC warning to consumers

ASIC is also issuing a warning to consumers about unanticipated credit card foreign transaction fees.

It may come as a surprise to consumers that transactions made in Australian dollars with overseas merchants, or processed by a business outside Australia, can attract a foreign transaction fee. This may even occur where the merchant’s website has an Australian address (domain name) or where a foreign business advertises and invoices prices in Australian dollars.

‘It may not always be clear to the consumer that the merchant or entity is located outside Australia, particularly in an online environment where the website uses an Australian domain name,’ said ASIC Deputy Chairman Peter Kell. ‘We urge consumers to check whether the transaction they make is with an overseas-based merchant or processed outside Australia, especially when they shop online.

‘Equally, credit card issuers need to ensure that the disclosure of such fees is clear so customers understand the fees that they are charged when using their cards.’

‘Not all cards impose foreign transaction fees. For consumers who make frequent overseas purchases, it is worth shopping around for a card that offers no foreign transaction fees,’ he said.

ASIC is working with other industry participants on this issue, including by requiring improved disclosure by a number of credit card issuers.

Overseas merchants who display prices to Australian consumers in Australian dollars will usually give consumers the choice to pay in the applicable foreign currency or in the Australian dollar equivalent, as converted by the merchant at their own exchange rate (using a process known as ‘dynamic currency conversion’). As consumers may be unable to avoid paying international transaction fees for Australian dollar transactions with overseas merchants, consumers may wish to pay in the applicable foreign currency if they expect the exchange rate to be applied by their card issuer to be more competitive than the exchange rate used by the merchant.

Customers with queries or concerns about the charging of credit card foreign transaction fees should contact their credit card issuer. ASIC has published specific information and guidance for consumers about the charging of international transaction fees by credit card issuers on its MoneySmart website.

Background

A foreign transaction fee (also known as an international transaction fee) is a fee charged by many credit card providers for transactions – including purchases and cash advances:

that are converted from a foreign currency to the Australian dollar; or

that are made in Australian dollars with merchants and financial institutions located overseas; or

that are made in Australian dollars (or other currencies) that are processed outside Australia.

A foreign transaction fee is generally calculated as a percentage of the Australian dollar value of the transaction (typically up to 3.5%). Credit card schemes (such as Visa, MasterCard and American Express) have different rules about foreign transaction fees and the percentage fees will vary depending on the card scheme.

Debit cards may also attract a foreign transaction fee, and consumers are encouraged to check the terms and conditions to find out whether this fee will be imposed by debit card issuers.

From March 2014, Westpac’s credit card terms and conditions did not clearly state that a ‘foreign transaction fee’ would be charged for transactions:

for ‘card-not-present’ transactions in Australian dollars with merchants located overseas;

in Australian dollars with financial institutions located overseas; or

in Australian dollars (or any other currency) that is processed by an entity outside Australia (together referred to as Overseas Transactions in Australian Dollars).

This may have led customers to believe that a foreign transaction fee would be charged only when a transaction was made in a foreign currency that required a conversion into Australian dollars at the time of the transaction.

Affected customers have been provided compensation, including:

a refund of the foreign transaction fee charged on the transaction;

where any credit card interest was charged on the foreign transaction fee amount, a refund of the interest component; and

an additional interest payment on the refund amount from the date the foreign transaction fee was charged until the date of refund.

Westpac 3Q16 Update, Ditto

Westpac released their 3Q16 update today, with a focus on capital, funding and asset quality. Pretty similar to other recent bank updates, with some rising delinquencies, but stronger capital. They also face higher capital risk weights later, and higher funding costs.

One point of note was a potential 5% fall in non-interest income, thanks to lower levels of debt market transactions in the institutional bank and higher insurance claims.

Looking at housing loans, they show higher 90+ delinquencies, especially in the mining heavy states.

This translated into higher portfolio risks, and a small rise in the number of properties in possession.

That said, WBC has a higher proportion of their portfolio in the lower risk states.

Consumer credit delinquencies are also on the rise.

Looking at the commercial lending sector, we see some stress points, especially in agriculture (mainly NZ dairy), wholesale and retail trade in mining related areas, services and construction, where there are some specific single name issues. 1.36% of the mining portfolio is impaired and 3.15% graded as stressed. 14.28% of the NZ Dairy portfolio is graded as stressed, up from 10.04% in March 2016.

Taking a step back, stressed exposures were up 12 basis points to 1.15%, although impaired assets were $52m lower. The watch list and substandard assets (though fully performing) was up $1.4bn.

Westpac’s common equity Tier 1 (CET1) capital ratio was 10.1% at 30 June 2016, down 40 basis points. from 31 March 2016. The (CET1) capital ratio on an internationally comparable1 CET1 capital ratio was 14.1%. This places them in the top quartile globally.

Changes in the calculation of RWA for Australian residential mortgages are
expected to see the ratio of total mortgage RWA to EAD rise to 25% from currently around 16%. This will reduce the CET1 capital ratio by approximately 110bps.

Westpac’s APRA leverage ratio was 4.9%, down 10 basis points since 31 March 2016. The decrease was primarily due to growth in exposures over the quarter and a $0.2 billion reduction in Tier 1 capital due principally to the determination of the 2016 interim dividend partially offset by Additional Tier 1 capital raised from the issue of Westpac Capital Notes.

Westpac stable funding ratio was 84% at 30 June 2016, up 70bps over 3Q16 and the liquidity coverage ratio was 126% at 30 June 2016, compared to 127% at 31 March 2016. They noted that funding costs are rising across both wholesale markets and customer deposits.

Changes to factors for determining interest rate risk in the banking book (IRRBB) after 30 June 2016 will be impacted by:
• Basel Committee on Banking Supervision expected to finalise new arrangements (Basel IV) by end 2016. These include:
– Adjustment to advanced models for credit risk
– Revised standardised credit risk
– Advanced RWA floors based on standardised approach
– Fundamental review of trading book
– Counterparty credit risk changes
– Operational risk to standardised approach
• APRA consultation on Basel IV expected to commence in 2017 with implementation from 2018

Westpac Cuts Mortgage Rate By 14 Basis Points, Lifts Term Deposits

Westpac today announced a reduction in interest rates across a range of variable lending products for home owners and small businesses, while increasing a range of term deposit rates for savings customers.

Variable home loan (owner occupier) rate reduced by 0.14% to 5.29% per annum for customers with principal and interest repayments;
Variable residential investment property loan rate reduced by 0.14% to 5.56% per annum for customers with principal and interest repayments;
Variable home loan (owner occupier) rate reduced by 0.10% to 5.33% per annum for customers with interest only repayments;
Variable residential investment property loan rate reduced by 0.10% to 5.60% per annum for customers with interest only repayments;
Variable cash rate business loans will be reduced by 0.10%; and
One year term deposit rate increased by 0.55% to 3.00% per annum, two year term deposit rates increased by 0.45% to 3.10% per annum, and three year term deposit rates increased by 0.55% to 3.20% per annum.

The majority of Westpac customers are on the Premier Advantage Package, and receive up to 0.70% discount on their home loan.

George Frazis, Chief Executive of Westpac Consumer Bank, said while home loan rates are at historical lows, today’s decision reflects the complex domestic and international environment banks are facing.

“We take a number of factors into account when making interest rate decisions and, in an environment where the cost of funding and deposits are increasing, we have had to balance higher costs, while keeping rates as low as possible for home owners.

“In this low interest rate environment we have changed how we price interest only home loans compared to principal and interest home loans. As a result, we will now offer lower interest rates to customers who make principal and interest repayments to encourage them to pay down their debt and own their home sooner,” Mr Frazis said.

Customers with interest only home loans who wish to move to principal and interest repayments can do so without paying a switching fee until 30 September 2016.

Westpac offers competitive fixed rate home loan offers in the market, with 2 and 3 year owner occupier fixed rates in Premier Advantage package at 3.75% per annum and 3.85% per annum respectively, effective this Friday 5 August 2016.

Lost Super Balances $13.5bn

The 2016 Westpac Lost Super Report, has revealed almost half (48 per cent) of Australian workers are not sure if they have lost super however if every Australian claimed their share of the $13.5 billion in lost super today, it could be equivalent to an extra $42.4 billion in savings at the age of their retirement.

Your super account could be considered ‘lost’ if no money has been added for 12 months and your fund does not have your current address or for default employer super plans, if no money has been added for five years.

“With $13.5 billion in lost super across Australia, it’s one of the nation’s biggest financial opportunities to better secure retirement savings,” said Melinda Howes, superannuation expert at BT – the wealth management arm of Westpac.

Ms Howes said people don’t understand just how easy the process is and encouraged everyone to take the short amount of time to find what is rightfully theirs.

“It’s a real myth that finding lost super is time consuming and difficult, yet more than four in five (83 per cent) people described finding lost super like smoking or exercise; they know what they should do, but many don’t do it.

“If you have moved house, changed your name or changed your jobs you are especially vulnerable to having lost super,” she said.

The 2016 Westpac Lost Super Report also found three quarters (73 per cent) of Australians wish they looked after their super more when they were younger and the average Australian worker believes it will take them over an hour and a half (107 minutes) to find and combine lost super into one account rather than the minutes it actually requires.

“The ATO or your current super fund actually does all of the hard work for you. Just tell them you want to find your lost super or if you walk into any Westpac branch, the staff can help you search for it in a matter of minutes,” Ms Howes said.

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.

Westpac cuts business and home loan interest rates

Westpac today announced a reduction in its variable home loan (owner occupied) and residential investment property loan rates by 0.25%. It also announced a reduction in variable rate small business loans by 0.25%. The effective date is 23 May, 2016.

This will bring the headline owner occupier home loan variable rate to 5.43% per annum (comparison rate 5.57% per annum*) and the headline residential investment property variable rate to 5.70% per annum (comparison rate 5.84% per annum*).

George Frazis, Chief Executive of the Consumer Bank said today’s decision was good news for home loan customers and those looking to buy a new home. “Helping more Australians’ move into home ownership remains the top priority for
Westpac’s Consumer Bank, and today’s announcement is good news for customers.”

Westpac 1H 2016 Results Underscores Tighter Banking Environment

Westpac Group has announced First Half results for 2016. Whilst statutory net profit was $3,701 million, up 3% over the prior corresponding period it was 16% down from 2H15. Cash earnings were $3,904 million, up 3% from 1H15, but down 3% from 2H15. Cash earnings per share was 118.2 cents, down 2% on 1H15 and down 7% on 1H16. Cash return on equity (ROE) was down 166 basis points from 1H15. and down 172 basis points from 2H15, to 14.2%. The interim, fully franked dividend was 94 cents per share (cps), up 1% on the 2015 interim dividend and in line with the 2015 final dividend. They lifted the payout ratio to around 80%.

The bank is having to work hard to maintain momentum, with the lower rates on deposits, the main lever. Tighter lending standards are showing in the Australian mortgage book, as are rising delinquencies. There are headwinds in the Institutional Bank and New Zealand. The question becomes, is it sustainable to pay current dividend rates into the future? Will 2H16 impairment charges be lower as the bank suggests? What will the next capital lifting initiatives be (they were silent on this, indicating they were in the top quartile of banks globally), given we expect ratios will be going higher.

Lending and customer deposit growth of 6% and 5% respectively. Net interest income was $7,653 million, up 10%, with net interest margin up 9 basis points. Total lending rose 6% from March 2015, with above system growth in Australian mortgages, up 8%, and Australian business lending rising 6%. Lending in New Zealand increased 7% in NZ dollars. The bank is heavily reliant on the performance of its mortgage book in Australia. Customer deposits increased $21.7 billion, or 5%, with the deposit to loan ratio at 69%.

Excluding Treasury and Markets, net interest margins were up 6 basis points. But NIM in New Zealand and Institutional Bank fell. Actually the biggest contribution was from reducing interest rates on deposits.

Non-interest income of $2,966 million was down 4%. Excluding infrequent and volatile items, most of the decline was due to lower Australian credit card interchange income and lower institutional fee income in line with more subdued debt origination

An improved expense to income ratio of 41.6%, down 3 basis points from 2H15, with expenses up 4%, mostly related to higher investment including increased technology and professional services costs

Stressed assets to total committed exposures falling 9 basis points to 1.03%. But impairment charges increased $326 million due to lower write-backs, increased provisions for a small number of larger institutional facilities, and from a modest rise in consumer delinquencies. An increase in the stressed exposures ratio of 4 basis points over Second Half 2015 principally reflects a rise in consumer delinquencies, including in geographies more affected by the slowdown in mining. We see mortgage deliquencies rising in WA and QLD (but a rise shows in all states, from a low base).

The credit quality of the Group’s portfolio was little changed since First Half 2015 with stressed exposures to total committed exposures of 1.03%, down from 1.12%. But Westpac Institutional Bank (WIB) was affected by lower net interest margins and significantly higher impairment charges related principally to four large exposures which added $252 million to provisions. Impaired assets remained low at 0.26% of total committed exposures, but was up 2 basis points over the year, while the provision coverage of impaired assets has remained high at 48%.

The Group raised around $6 billion in equity over calendar 2015, lifting the Group’s common equity Tier 1 ratio to 10.5%, up 171 basis points. On an internationally comparable basis, Westpac’s CET1 ratio was 14.7% and comfortably in the top quartile of banks globally.

There were no new capital raising initiatives announced this time, but the impact of the earlier entitlement offer can be seen in the results – lifting the capital ratio by 96 basis points.

Looking at the segmentals:

Consumer Bank continued to grow the value of the franchise, with more customers and above system lending growth contributing to a 15% rise in core earnings and a 16% rise in cash earnings. However, the impact of higher capital for mortgages reduced returns in this business. The business has continued to invest in improving service by transforming the network through the upgrade of 22 branches over the half, enhancements to self-serve options including more Smart ATMs, and increasing the functionality of its online platforms. We discuss the Australian mortgage book below.
Business Bank grew core earnings by 5%, with good growth in lending. Non-interest income grew 3%, mostly through higher merchant revenue supported by the roll-out of new state-of-the-art payment terminals. Cash earnings were lower, down 3%, due to higher impairment charges. While asset quality has improved, a reduction in write-backs and an increase in auto delinquencies contributed to a $118 million increase in impairments.
BT Financial Group continues to be a leading provider of wealth solutions in Australia, with a Funds Under Administration (FUA) share of 19.6%. BTFG saw cash earnings little changed over the year with business growth offset by a reduction in Funds Management earnings mostly due to lower markets and the partial sale of BTIM in Second Half 2015. The business continued to benefit from good flows into FUM and FUA, while continued success in Private Wealth has seen lending increase 8%. Insurance has also continued to expand with Life in-force premiums up 12%.
Westpac Institutional Bank delivered cash earnings of $517 million, down $136 million. The lower result was driven by a $201 million increase in impairment charges, a reduction in fund performance fees, and lower margins. The division maintained its leading market position, growing customer numbers and generating good flows in FX. However, the more challenging market conditions from high levels of global liquidity continues to place pressure on margins. While asset quality was maintained, including a further reduction in stressed assets, downgrades to a small number of exposures was the main contributor to the higher impairment charge.
Westpac New Zealand’s cash earnings were up 2% to NZ$445 million. The business has continued to grow broadly in line with system while steadily expanding its wealth and insurance business. However, intense competition for new lending and a shift to lower spread fixed rate mortgages has compressed margins. Notwithstanding deteriorating financial conditions in the dairy sector, asset quality has remained sound and consumer delinquencies remain near historic lows, contributing to continued low impairment charges.

Finally, we look at the Australian mortgage book, because this is such a large part of the banks business. Lending standards have been tightened. We see considerable growth, with a reduction in investment loans – after adjustments to 7.2% from 9.9% in September 2015.

They provided some detail in the portfolio, with 94% of the portfolio with a dynamic LVR of below 80% and 72% of borrowers ahead with repayments (many because they have an offset account). A greater flow of mortgages are coming via the broker channel ~50%. The average loan size is still rising and the average LVR falling a little. Actual mortgage losses are stilling at 2 basis points.

Looking at the investment portfolio, the average LVR of new loans is now 67%, down from 70% 1H15. The +90 day delinquency rates are at 38 basis points, compared with 31 basis points in 2H15. 62% of households are ahead with repayments (including offsets), down from 65% in 2H15.

Westpac is now working on a minimum floor rate of 7.25% and they have tightened serviceability criteria and have stopped lending to most non-resident customers.

Westpac halts property loans to foreigners

From Australian Broker.

Westpac has announced it will no longer loan money to foreigners wishing to purchase residential property in Australia.

The bank and its subsidiaries (St George, Bank SA and Bank of Melbourne) ceased property lending to all non-residents and temporary visa holders as of April 26. Westpac is the third major bank to clamp down in this way, following announcements from ANZ and Commonwealth Bank earlier in April.

Australian and New Zealand citizens whose main source of income is from overseas will also be affected. They are restricted to loans for new housing only, with the maximum amount that Westpac will lend them falling from 80% to 70% of the total purchase price.

An email sent by Westpac to mortgage brokers said, “At Westpac, helping Australians to achieve their goal of owning a home or investment property is core to our purpose.

“For these reasons, Westpac will no longer lend to offshore customers who are not citizens or residents of Australia with an eligible visa.”

The news may spark fears of a slowdown in residential construction, with developers potentially taking a hit. In particular, Meriton has been targeting the Chinese market and may have to rethink strategy.

MFAA CEO Siobhan Hayden said of Westpac’s decision, “Westpac’s policy change… reflects a prudent decision for a more balanced portfolio at this time and reduced exposure for the bank.”

ASIC commences civil penalty proceedings against Westpac for BBSW conduct

ASIC says it has today commenced legal proceedings in the Federal Court in Melbourne against Westpac Banking Corporation (Westpac) for unconscionable conduct and market manipulation in relation to Westpac’s involvement in setting the bank bill swap reference rate (BBSW) in the period 6 April 2010 and 6 June 2012.

The BBSW is the primary interest rate benchmark used in Australian financial markets, administered by the Australian Financial Markets Association (AFMA). On 27 September 2013, AFMA changed the method by which the BBSW is calculated. The conduct that the proceedings relate to occurred before the change in methodology.

It is alleged that Westpac traded in a manner intended to create an artificial price for bank bills on 16 occasions during the period of 6 April 2010 and 6 June 2012.

ASIC alleges that on these days Westpac had a large number of products which were priced or valued off BBSW and that it traded in the bank bill market with the intention of moving the BBSW higher or lower. ASIC alleges that Westpac was seeking to maximise its profit or minimise its loss to the detriment of those holding opposite positions to Westpac’s.

ASIC is seeking declarations that Westpac contravened s.12CA, s.12CB and the former s.12CC of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act), s.912A(1), s.1041A of the Corporations Act 2001 (Cth) (Corporations Act).

Further, ASIC has sought from the court pecuniary penalties against Westpac and an order requiring Westpac to implement a compliance program.

ASIC will be making no further comment at this time.

Background

On 4 March 2016, ASIC commenced legal proceedings in the Federal Court against the Australia and New Zealand Banking Group (ANZ) (refer: 16-060MR).

Prior to filing against ANZ, ASIC’s investigations into misconduct in the BBSW has seen ASIC accept enforceable undertakings from UBS-AG, BNP Paribas and the Royal Bank of Scotland (refer: 13-366MR, 14-014MR, 14-169MR). The institutions also made voluntary contributions totalling $3.6 million to fund independent financial literacy projects in Australia.

In July 2015, ASIC published Report 440, which addresses the potential manipulation of financial benchmarks and related conduct issues.

Westpac Reports 1Q16 Capital and Asset Quality

Westpac does not provide a 1Q16 profit update, but has disclosed some information about the business in the context of Pillar 3 reporting. From that, the banks appears to be weathering the current conditions well, though their large mortgage book shows minor rises in impairment. They are well capitalised, though with a lower share of deposits in the funding mix, compared with some of updates from other banks.

Looking at exposures by industry, they reported small rises in the consumer book – including 2 basis points increased in group mortgages +90 day delinquencies to 44 basis points, in property and business services and construction.

The proportion of mining which is stressed has risen from 1.9% to 2.2%.

Australian mortgage 90+ delinquencies were up 1 basis point to 46 basis points, with WA and QLD the highest, NSW/ACT, much lower.

Australian personal loans 90+ days delinquencies were up, at more than 1.5%.

They reported improved capital ratios with common equity Tier 1 (CET1) at 10.2% and APRA’s leverage ratio at 4.9% (up from 4,8% in Sept 2015.

Funding was helped by $14bn raised year to date (31 Jan 2016), whilst customer deposits made up 60.2% of funding, up slightly from September. 14.7% of funding was off-shore.