Tag: Westpac

Westpac Puts Aside Another $235 Million For Remediation

Westpac Banking Corporation has today announced that it’s Cash earnings in Full Year 2018 will be reduced by an estimated $235 million following continued work on addressing customer issues and from provisions related to recent litigation.

The key elements include:

  • Increased provisions for customer refunds associated with certain advice fees charged by the Group’s salaried financial planners due to more detailed analysis going back to 2008. These include where advice services were not provided, as well as where we have not been able to sufficiently verify that advice services were provided;
  • Increased provisions for refunds to customers who may have received inadequate financial advice from Westpac planners;
  • Additional provisions to resolve legacy issues as part of the Group’s detailed product reviews;
  • Provisions for costs of implementing the three remediation processes above; and
  • Estimated provisions for recent litigation, including costs and penalties associated with the already disclosed responsible lending and BBSW cases.

Details of the provisions/costs are still being finalised and the Group expects to provide more information when it releases its Full Year 2018 Results template, later in October 2018. As a guide, approximately two thirds of the impact is expected to be recorded as negative revenue while the remainder will be recorded in costs. Costs associated with responding to the Royal Commission are not included in these amounts

The program of reviews will continue into Full Year 2019. This includes continuing to investigate and consider potential further costs associated with advice fees charged by our aligned planners.

Westpac is scheduled to report its Full Year 2018 results on 5 November 2018.

Notwithstanding these new provisions, Westpac remains well placed to meet APRA’s unquestionably strong capital benchmark.

Westpac first commenced its “get it right put it right” initiative in early 2017 to address legacy issues in some products and practices.

Westpac Chief Executive Officer, Brian Hartzer said “It is disappointing some of our past practices have not lived up to appropriate standards. We are committed to fixing any issue identified, as well as ensuring that any customer affected has not been disadvantaged.”

Front Book And Back Book Mortgage Pricing Plays

Today ING says it is increasing variable rates for investor mortgage customer by 15 basis points. The changes come into effect from Tuesday 25 September and  is for both new and existing investor loan customers.

This is the second rise in rates – ING had already increased its rates in June by 10 basis points for owner occupier loans.

This will put more pressure on the investor segment, already wilting under the strain.

Recently of course all the big banks but NAB repriced their entire book, attributing the rise to pressure from international funding. The rate hikes already signalled will now start to bite.

Actually the BBSW has come back somewhat, but remains elevated. This chart shows the divergence to the cash rate. The point is as the majors fund some of their book from short term sources the funding gap is real and sustained.

Westpac also put the cat among the pigeons by cutting mortgage rates by up to 110 basis points for new business, as they seek to dominate the meager pickings in the changed market. This is being funded by the back book repricing, so lower risk mortgage holders who shop around may be able to grab a low low rate, for now.

In a change from honeymoon offers, the banks new loan packages includes discounts of up to 80 basis points for the life of the loan.

Expect more specials from the other major players. This may also put more pressure on NAB, who held their rates last week.

The new Westpac Group rates will also apply for new lenders for Bank of Melbourne, BankSA and St George Bank.

The offer excludes owner occupied loans with interest only repayments or to switches within the Westpac Group.

There is also an offer to first time buyers, with an 85 basis point discount for 5 years and a lower discount beyond.

Westpac has tightened their lending policies again for existing borrowers with a focus on commitments such as Afterpay and leases.

Bottom line is there is merry dance of cross subsidization in play as existing borrowers are forced to pay more, (the back book) while certain classes of refinacing and first time buyers are being enticed.  However, bearing in mind that home prices are likely to fall further, buyers should beware.  Always read the small print!

We also wonder how sustainable these discounts are given current margin pressures. But I guess volume and margin are being traded off at least to an extent!

 

Westpac Cops A Little Fine

We look at Westpac’s poor home lending practice

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Westpac admits to breaching responsible lending obligations

ASIC says Westpac has admitted breaching its responsible lending obligations when providing home loans and agreed to submit to a $35 million civil penalty to resolve Federal Court proceedings under the National Consumer Credit Protection Act 2009 (Cth) (the National Credit Act). A three-week trial for this matter was due to commence in the Federal Court yesterday.

The parties have jointly approached the Federal Court seeking orders that Westpac contravened the responsible lending provisions of the National Credit Act because its automated decision system:

  • did not have regard to consumers’ declared living expenses when assessing their capacity to repay home loans, and instead used a benchmark (the Household Expenditure Measure); and
  • for home loans to owner occupiers with an interest-only period, failed to use the higher repayments at the end of the interest-only period when assessing a consumer’s capacity to repay the loan. For example, for a loan of $500,000 at 5.24% with a term of 30 years and a 10-year interest-only period, the assumed repayment using the incorrect method is $2,758 per month, whereas the actual repayment after the expiry of the interest-only period using the correct method is $3,366 per month.

The litigation related to Westpac’s home loan assessment process during the period December 2011 and March 2015, during which approximately 260,000 home loans were approved by Westpac’s automated decision system. For approximately 50,000 home loans, Westpac received, and did not use, consumers’ actual expense information that was higher than the Household Expenditure Measure. For approximately 50,000 home loans, Westpac used the incorrect method when assessing a consumer’s capacity to repay a home loan at the end of the interest-only period. Of these approximately 100,000 loans, Westpac should not have automatically approved approximately 10,500 loans.

If approved by the Federal Court, this will represent the largest civil penalty awarded under the National Credit Act.

Westpac admitted contraventions of the National Credit Act and the parties filed a Statement of Agreed Facts and joint submissions as to the appropriate penalty. Westpac will also pay ASIC’s litigation and investigation costs.

The National Credit Act provides consumer protections to ensure that credit providers make reasonable inquiries about a borrower’s financial situation, verify the information that they obtain and assess whether a loan contract will be unsuitable for the borrowers.

The responsible lending laws are designed to ensure that lenders have regard to all relevant information about the consumer before approving a loan to minimise the risk of adverse outcomes for the consumer over the course of the loan. Lenders must have in place the right processes to ensure that they comply with these important obligations.

ASIC Chair James Shipton said, ’This is a very positive outcome and sends a strong regulatory message to industry that non-compliance with the responsible lending obligations will not be tolerated. Responsible lending in the home lending market is absolutely vital to consumers, banks and our economy.

‘This outcome, and ASIC’s actions in relation to responsible lending, reinforce that all lenders must obtain information from individual borrowers about their financial situation to ensure that they can properly assess the ability of the customer to repay the loan. Lenders must then verify the information to ensure that it is true, and then assess whether the loan is unsuitable for the borrower. Taken together, these responsible lending obligations are a cornerstone protection for both borrowers and lenders,’ he said.

‘This outcome is a warning to all lenders that they must comply with the responsible lending obligations. If they do not, ASIC will take action to enforce the law.’

Background

ASIC published its review of interest-only loans in August 2015 (refer: 15-220MR), as part of a broader review by the Council of Financial Regulators into home-lending standards. The review included 11 lenders, including the big four banks, and found that lenders were often failing to consider whether an interest-only loan would meet a consumer’s needs, particularly in the medium to long-term (refer: 15-220MR). ASIC was particularly concerned with Westpac’s home loan assessment process, and with Westpac providing very lengthy interest-only periods (up to 15 years) for owner occupiers.

As part of the outcomes of ASIC’s work, ASIC required lenders and brokers to raise standards to ensure they were complying with responsible lending obligations. The 11 firms in our review, including Westpac, all committed to implementing stronger standards.

ASIC has provided guidance on responsible lending in Regulatory Guide 209 Credit licensing: Responsible lending conduct (RG 209). ASIC is updating its guidance this year and will be engaging in a full public consultation as part of this process.

ASIC has also been engaging with the Government in relation to comprehensive credit reporting and a proposed open banking regime. These initiatives will assist in improving responsible lending standards by making high-quality information about consumers’ financial situation available to lenders when assessing the suitability of a loan.

Westpac Blinks

Westpac has announced it will lift mortgage rates on existing variable loans by 14 basis points. This was expected (I had said by September a few months back!). Others will follow now. More pain for households in a rising cost, flat income economy. More downward pressure on home prices.

The BBSW stands 19 basis points above where it was in February.

Westpac last week had highlighted a margin problem, and showed the rise in funding, which has squeezed their margins. Expect more “great offers” to attract low risk new customers, at the expense of the back book.

Westpac chief executive Brian Hartzer says he didn’t “relish” having to make the decision to lift variable mortgage rates as higher wholesale funding costs fail to subside.

Following similar moves by several smaller lenders in recent months, Westpac today said variable interest rates for its owner occupied and residential investment property loans would rise 14 basis points due to the “sustained increase in wholesale funding costs” since February.

CEO Brian Hartzer told Westpac Wire it was a “difficult” decision but the bank had “come to the conclusion that what we’re looking at is a sustained increase in that key benchmark wholesale funding cost rate”.

“It’s now been elevated for over six months…reluctantly we came to the conclusion that needed to be reflected in our mortgage costs,” he said. He added that while conscious of the impact the interest rate change would have on consumers’ cost of living, some mortgage rates would remain below where they were three years ago and “from a credit point of view, no, I’m not concerned” about any impact on the bank’s mortgage book.

In an update to the Australian Securities Exchange last week, Westpac said funding costs had risen primarily due to the sharp increase in the bank bill swap rate (BBSW) since February. Compared to the first half, the BBSW was on average 24 basis points higher in the third quarter, the bank added.

Along with a lower contribution from the Group’s Treasury and other factors including changes in the mix of its mortgage portfolio, the higher funding costs dragged on the bank’s net interest margin, which fell to 2.06 per cent in the June quarter from 2.17 per cent in the first half to March 31.

Mr Hartzer said several factors had driven the increase in wholesale funding costs since February, including greater competition for funds from foreign banks that raise money in the domestic wholesale market. The Reserve Bank of Australia has also noted this rise in competition domestically, plus that the cost of raising funding in the United States and then converting it back into Australian dollars has also increased this year and “at times been well above the cost of raising funds domestically”.

Through The Westpac Looking Glass

Westpac released their latest disclosures today the June 2018 Pillar 3 Report and provided an update on margins for the June quarter 2018. Its not pretty. Margins down, and mortgage delinquencies up.

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Westpac Net Interest Margins Take A Hit Of 11 Points

Westpac released their latest disclosures today the June 2018 Pillar 3 Report and provided an update on margins for the June quarter 2018. Its not pretty. Margins down, and mortgage delinquencies up.

 

The share price continues lower.

Westpac Banking Corporation has today announced that its net interest margin in June quarter 2018 (3Q18) was 2.06% compared to 2.17% in First Half 2018 (1H18). The 11bp decline mostly reflected higher funding costs and a lower contribution from the Group’s Treasury.

The primary source of higher funding costs has been the rise in short term wholesale funding costs as the bank bill swap rate (BBSW) increased sharply since February.

Westpac previously indicated that every 5bp movement in BBSW impacts the Group’s margins by around 1bp. Compared to 1H18, BBSW was on average 24bps higher in 3Q18. Accordingly, in 3Q18 this movement in BBSW reduced the Group’s net interest margin by 5bps.

The remaining 6bps margin decline in 3Q18 was attributable to:

  • 4bps from a reduced contribution from Group Treasury, principally from less opportunities in markets in 3Q18 compared to 1H18; and
  • 2bps from all other factors. These included ongoing changes in the mix of the mortgage portfolio (less interest only lending) along with lower rates on new mortgages. Deposit pricing changes only had a small impact on margins in 3Q18.

In Westpac’s June 2018 Pillar 3 report released today the Group reported a Common equity Tier 1 capital ratio of 10.4% at 30 June 2018. The ratio was lower than at 31 March 2018 as capital generated over the quarter was more than offset by determination of the First Half 2018 dividend.

Credit quality has continued to be sound with stressed assets to total committed exposures down 1bp from 31 March 2018 to 1.08%.

Mortgage 90+ day delinquencies in Australia were up 3bps over the three months ended June 2018 with most States recording some increase.

Mortgage 30+ day delinquencies were flat over 3Q18 while properties in possession were lower at just 392.

Unsecured consumer credit delinquencies rose.

The proportion of interest only loans has dropped from 50% in March 17 to 37% in June 18. This had a 2 basis point impoact on margins.

More than $8 billion of IO loans were refinanced to Principal and Interest in the 3Q18, with slightly more than half because they ended their term.

The Group has maintained strong liquidity metrics with the Net stable funding ratio of 112% and the Liquidity coverage ratio of 127%, both comfortably above regulatory minimums.

For the 10 months to 31 July 2018, the Group had raised $31bn in term wholesale funding at an average duration of over 6 years. This largely completes Westpac’s Full Year 2018 term funding requirements.

ASIC permanently bans former Westpac banker from engaging in credit activities

ASIC says it has permanently banned former Westpac banker, Marten Pudun of Glenwood, NSW from engaging in credit activities.

An ASIC investigation found that, while employed as a relationship manager in Westpac’s premium banking section, Mr Pudun knowingly or recklessly gave false documents and information to Westpac to help his clients obtain home loans. In relation to 24 loan applications Mr Pudun:

  • helped create false supporting documents including payslips, employment letters and rental estimate letters; or
  • accepted documents he knew were false; or
  • was reckless in not investigating whether they were false.

In one instance, Mr Pudun requested that the employment positions on customers’ employment letters and payslips be changed from Director to Marketing Manager and IT programmer. Mr Pudun said in an email that he did not want the “deal to stuff up” and if the customers were referred to as directors, Westpac may ask for tax returns.

Mr Pudun also asked third parties to create false letters in support of loan applications, which contained weekly rental estimates for various properties. In other instances, Mr Pudun provided example documents to customers so that they could create false documents to support their loan applications.

Mr Pudun also breached Westpac policy in sharing personal client information including internet and telephone banking passwords, customer account opening forms, transaction histories and identification documents with external third parties.

ASIC found that Mr Pudun was repeatedly dishonest in his dealings with his customers, Westpac and external third parties. Therefore, he is not a fit and proper person to engage in credit activities.

ASIC’s investigation is continuing.

Mr Pudun has the right to lodge an application for review of ASIC’s decision with the Administrative Appeals Tribunal.

Background

Mr Pudun’s permanent banning is effective from 24 July 2018.

ASIC commenced its investigation following a notification of misconduct by Westpac.

Westpac has undertaken the following action with respect to those customers whose personal information had been shared:

  • contacted 161 affected customers and had their banking passwords reset; and
  • reviewed the customers’ files and accounts to determine if there had been any instances of fraud. The review did not show any evidence of identity takeover or unauthorised transactions linked to Mr Pudun’s conduct.

Westpac has also reviewed its policies and controls and implemented new systems, processes and employee training to minimise the misuse of customer information.

Banks retreat further from SMSF lending

From InvestorDaily.

Over the past week, four separate lenders have announced their exit from the SMSF lending space, with a further two banks saying loans will no longer be offered to SMSFs.

 Westpac announced that effective 31 July 2018 it would no longer offer property loans to SMSFs for both residential and commercial properties.

This followed an earlier announcement from its subsidiary St.George that it will withdraw its SMSF loan products from sale effective 31 July 2018.

Westpac Group confirmed to InvestorDaily sister title Mortgage Business that the removal of SMSF loans for both residential and business properties will be applied across all of the brands in the Westpac Group, including Bank of Melbourne and BankSA.

Commenting on the decision to withdraw all its brands from the SMSF lending space, Westpac stated that the bank “continually reviews its products to ensure we meet the expectations and requirements of customers”.

“To streamline our product offering, effective Tuesday, 31 July 2018 applications for new consumer or business lending will no longer be accepted for SMSFs,” Westpac stated in a public release.

The borrowing market has been getting tougher for SMSF trustees for several months, especially with loan to value expectations, as foreshadowed by specialist brokers like Thrive Investment Finance’s owner Samantha Bright last year.

Most recently, Ms Bright said off-the-plan purchases are becoming increasingly difficult to finance, with lenders either refusing applications for properties that are less than six months old or requiring stronger assets than normal to back their loans.

IO borrowers increasingly turning to friends for finance

Interest-only mortgagors are generally wealthier and have a higher risk appetite than other mortgagors, but they are increasingly turning to alternative sources of finance as lending criteria tighten, a Westpac economist has said; via The Adviser.

Writing in a bulletin titled Profiling Australia’s ‘interest-only’ borrowers, Westpac senior economist Matthew Hassan and graduate William Chen looked at two data sets relating to owner-occupier loans before the introduction of APRA’s 30 per cent cap on the share of interest-only loans in 2017.

The report argued that, in many cases, the borrowers that are rolling off IO period will be facing increased repayments and may encounter difficulties refinancing against the backdrop of tightening lending criteria.

It noted that interest-only (IO) borrowers have experienced significant increase in mortgage rates between 2014 and 2016, being 46–58 basis points higher than their standard counterparts.

By using data from the Melbourne Institute’s Household, Income and Labour Dynamics in Australia Survey (HILDA), the researchers therefore sought to understand what a typical interest-only borrower looks like to “get a better idea of how some of these pressures might play out”.

The report suggested that just over 12 per cent of mortgagors had IO loan terms, accounting for 3.8 per cent of all households, down slightly on 2014 when just under 4 per cent had an IO loan. The report argues that this “likely reflects tightening lending conditions and the introduction of rate tiering measures from 2015 on”.

According to the 2016 survey, the quality of interest-only borrowers has improved over 2014–16 as lending conditions have tightened, with a notable decline in the share of high loan-to-value ratio (LVR) loans — from nearly 10 per cent of IO borrowers having a self-assessed LVR over 0.9 — down to 6.7 per cent in 2016.

Most IO mortgagors, the researchers outlined, came from eastern capitals and Perth (accounting for just under 70 per cent of all IO borrowers in 2016) and are generally wealthier than their non-IO counterparts.

Just under 30 per cent of IO borrowers in 2016 had “regular” disposable incomes over $150,000 a year (compared to around 20 per cent of other mortgagors), up from 25.9 per cent in 2014, while the proportion of IO borrowers with casual jobs or self-employed was down by 5 per cent in 2016 when compared to 2014.

While the report found that the share of fixed term IO contracts remained “relatively high” (around 10 per cent versus 6.9 per cent for other loans), which it said was “likely reflecting the product’s appeal for those with intermittent income flows”, it added: “Overall, it appears that ‘lower-quality’/‘higher-risk’ borrowers are being squeezed out of the interest-only market as lending standards have tightened.”

Behind schedule and borrowing from others on the rise

Other findings in the bulletin included:

  • A higher prevalence among interest-only borrowers to identify as financial “risk takers” (in 2016, 20.4 per cent of IO borrowers self-assessed as willing to take “above-average” or “significant” financial risks, roughly double the 10.1 per cent of other mortgagors).
  • An increase in risk appetite among interest-only borrowers across 2014–16.
  • IO borrowers also tend to be more trusting (71.7 per cent of IO borrowers agreed that “most people can be trusted” while just under a third of other mortgagors said the same).
  • IO borrowers are also more likely to have high spending on education fees (5.6 per cent paying more than $10,000 a year compared to 4.4 per cent of other mortgagors), which the authors argued “may impact those seeking to refinance loans, with some lenders changing the way education costs are treated in loan serviceability assessments (shifting more towards a mandatory expense rather than a discretionary one).

Notably, the bulletin showed that less IO borrowers are ahead of repayments than other types of mortgagors (28.3 per cent compared to 56.4 per cent), which the researchers suggested could be an indication that interest-only borrowers have “less financial ‘headroom’ to make ahead of schedule repayments” and/or reflect that those with higher risk appetites may be more likely to put spare cash towards investment in yielding assets rather than service their mortgages ahead of schedule.

Those behind schedule are also higher than other types of mortgagors — 3.9 per cent versus 2.2 per cent. However, this marked an improvement from 2014 when 7.7 per cent of IO borrowers reported being behind schedule.

“This likely reflects the wider improvement in borrower quality seen in the income, employment and LVR profile of interest-only borrowers. An increased reliance on ‘alternate’ funding sources may also relate to tightening credit criteria and affordability pressures,” the report read.

Further, more IO borrowers are borrowing from others (friends, relatives, solicitors or community organisations) in order to help finance their home purchase, up from 5.4 per cent in 2014 to 7.9 per cent in 2016. This compares to a small decrease among non-interest-only borrowers over the same period.

“It is evident that some are having to resort to alternate sources of finance as lenders apply tighter lending criteria. Some would-be borrowers that have been unable to raise alternate funds have likely been squeezed out of the interest-only market.”

In conclusion, the senior economist wrote: “It is very likely that there are several different ‘stylised’ types of interest-only borrowers. Some will be making choices that suit their income flows. Others may be actively seeking to take on financial risks but with the capacity to do so.

“Some, however, may have opted for interest-only loans as a more desperate measure to acquire property that could see them more stretched and exposed.”

Mr Hassan added: “Since the last HILDA release, there has been further tightening in lending conditions, with APRA imposing a 30 per cent cap for interest-only lending in March 2017. Given this further tightening, it will be interesting to see what picture subsequent surveys paint for Australia’s interest-only borrowers.”

Indeed, some statistics have already shown that interest-only lending is falling out of favour with borrowers. In March, Mortgage Choice revealed that the proportion of interest-only (IO) mortgages written by its brokers fell by more than 20 per cent in the 12 months leading to February 2018. IO loans accounted for 12.22 per cent of all home loans written in February 2018, down by 23.73 per cent from 35.95 per cent.

Meanwhile, APRA property exposure figures show that only 15.71 per cent of loans written in the March quarter were interest-only.