Westpac just one of 11 Lenders in ASIC home loan investigation

As reported by the ABC, ASIC says it has been investigating up to 11 banks over their home lending practices, amid concerns loans are being given to people that cannot afford to repay them.

Appearing before Senate Estimates, the Australian Security and Investments Commission (ASIC) was questioned about its Federal Court action against Westpac, announced yesterday.

ASIC’s senior executive responsible for banking, Michael Saadat, said the inquiries have been underway for a couple of years.

“It started really when we conducted our review of interest only loans in 2015,” he said.

“We looked at the conduct of 11 lenders.

“We have announced action against Westpac but we have been in discussions with other lenders and we hope to make an announcement about the work that we’ve been doing with other lenders in the next few weeks.”

Mr Saadat added that Westpac had changed its lending practices after the regulator made its concerns known in 2015.

“Despite the fact that they stopped the practice … we’ve decided to bring this action because of the importance of the issues that it raises,” he said.

Westpac not alone

It’s a fair bet all four major banks are facing ASIC scrutiny over poor home loan approval practices.

In a statement yesterday, Westpac said the loans identified by ASIC are all meeting or ahead on repayments.

However, ASIC said its action is intended to head-off possible future risks for consumers and the financial system.

“One of the aims of the responsible lending legislation is to enable ASIC to take action before the problems manifest themselves,” explained the regulator’s deputy chairman Peter Kell.

ASIC’s chairman Greg Medcraft said a key motivation for the regulator was to get other banks to change their ways.

“The issues is deterrence, and when you lodge a case it’s not just for that party, it’s to send a message to the broader sector,” he said.

ASIC said the maximum civil penalty that a court could award for breaches of the responsible lending laws is $1.7 million per contravention.

Westpac currently stands accused of seven contraventions of the law.

Here is Westpac’s media release about the matter:

Westpac will defend Federal Court proceedings commenced by ASIC in relation to a number of home loans entered into between December 2011 and March 2015, including specific allegations made by ASIC regarding seven loans. The court action does not concern Westpac’s current lending policies or practices.

Of the seven specific loan applications ASIC references in its proceedings, all loans are currently meeting or ahead in repayments.

Westpac Group, Chief Executive, Consumer Bank, George Frazis said Westpac takes its responsible lending obligations seriously and has confidence in its lending standards and processes. Our objective is to help more Australian families into their homes in a responsible way.

“It is not in the bank’s or customers’ interests to put people into loans that they cannot afford to repay. It goes hand in hand that we have robust credit approval processes while helping customers purchase their home.

“Our credit policies are informed by our deep experience and understanding of the mortgage market.

“They include a consideration of customers’ specific circumstances, including income and expenditure, previous repayments history and the overall customer relationship. We build into our processes a range of conservative inputs, including the addition of buffers to take into account possible future interest rate increases.”

Mr Frazis said Westpac uses sophisticated systems as part of its rigorous credit approval process. This includes utilising benchmarks such as the Household Expenditure Measure (HEM), published by the Melbourne Institute for Social and Economic Research, which provides broad analysis of customer expenditure based on demographic criteria.

“In our experience this survey is a useful input into our loan assessment process, in combination with our understanding of customers’ circumstances.”

Westpac disputes ASIC’s claims that Westpac relied solely on the HEM benchmark and did not have regard to a customer’s declared expenses in its unsuitability assessment.

“The Australian residential market is dynamic and we are constantly reviewing and refining our credit policies.”

“Importantly, interest-only mortgages were assessed in the same way as a standard principal and interest loan, and did not increase how much a customer could borrow.

“We are committed to meeting our responsible lending obligations and servicing the needs of customers, including prompt credit approval, which enables our customers to responsibly purchase their home with confidence,” Mr Frazis said.

 

Choice Calls For Easier Credit Card Cancellation

Choice, the consumer group, has called for consumers to be able to cancel their credit cards immediately online, rather than jump through the hoops which the banks currently prescribe.

They recently reviewed the cancellation policies of the big four and found a distinct lack of easy cancellation options.

What? No online cancellation?

Instead of being able to cancel your card online and quickly cut ties with the debt monster, the banks force you to call, write a letter or visit a branch in person.

Meanwhile, almost all other banking services – including applying for a credit card and having it approved – are available online these days.

To us, it looks like a blatant attempt to keep you attached to your credit card and keep the debt clock rolling. That’s why we’ve been pushing to have the tactic abolished since August 2015.

Our review comes as the banks are set to face a Parliamentary Inquiry on Friday this week, and it follows attempts by ANZ and Westpac to ward off credit card criticism by promising to cut interest rates on some “low rate” cards.

Jumping through hoops

Here’s what the banks require if you want to cancel your credit card.

ANZ

  1. Call or write to ANZ.
  2. Return the card: “ANZ will only cancel the credit card when the account holder has returned it to ANZ cut diagonally in half (including any chip on the card) or has taken all reasonable steps to return it to ANZ”.
  3. Any additional funds will be returned by bank cheque.

NAB

  1. Call, write “or otherwise advise NAB in a manner acceptable to NAB”.
  2. Cut the card diagonally in half.
  3. Additional funds will be returned by bank cheque. NAB will charge its “usual fee” for issuing the cheque. Cash out is only available for amounts under $5.

Westpac

  1. Call, write or visit a Westpac branch.
  2. Promise to destroy the card.
  3. Additional funds are paid by bank cheque or directed into another account by direct debit.

CBA

No instructions are provided for card cancellations in the CBA credit card ‘conditions of use’ document. Customer service representatives instructed CHOICE to call the credit card team to cancel, which can only be contacted Monday to Friday, 9.00am–5.30pm.

Chasing fees and interest

“In the age of online banking if defies belief that ANZ, NAB, Westpac and Commonwealth all require you to call or email them when seeking to cancel a credit card,” says CHOICE head of campaigns and policy Erin Turner.

“It seems clear that the big banks’ ‘go slow’ on card cancellations is about protecting revenue from interest and fees, with data showing the big banks slug consumers with an average annual fee of $146 compared to just $58 through a mutual or customer-owned banks.

“Unfortunately, getting stuck paying excessive credit card interest is only one of the traps consumers face, with many of us paying excessive annual fees when we fail to cancel a card.”

The national collective credit card debt hovers at a staggering $32 billion or so at the moment (about $4300 per cardholder). If you’re one of those consumers who’ve gotten in over your head, it’s generally a good idea to cancel the offending card once you’ve climbed out of debt.

That would be doubly true if you happen to have a card from one of the big four banks: CBA, ANZ, NAB and Westpac. Their standard interest rates are among the highest. And their so-called low-interest cards aren’t that much better – or at least not better enough.

ASIC commences civil penalty proceedings against Westpac for breaching home-loan responsible lending laws

This is a big deal. Westpac is the largest investment mortgage lender, and it  highlights the need for “microprudential” analysis of loans. But in 2011 other lenders were doing the same. The question of interest only repayments is certainly a live issue.

ASIC says it has today commenced civil penalty proceedings in the Federal Court against Westpac Banking Corporation (Westpac) for a number of contraventions of the responsible lending provisions of National Consumer Credit Protection Act 2009 (Cth) (the National Credit Act).

ASIC alleges that in the period between December 2011 and March 2015 Westpac failed to properly assess whether borrowers could meet their repayment obligations before entering into home loan contracts.

Specifically, ASIC alleges that Westpac:

  • used a benchmark instead of the actual expenses declared by borrowers in assessing their ability to repay the loan
  • approved loans where a proper assessment of a borrower’s ability to repay the loan would have shown a monthly deficit
  • for home loans with an interest-only period, Westpac failed to have regard to the higher repayments at the end of the interest-only period when assessing the borrowers’ ability to repay.

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

The first hearing for the proceedings will be on 21 March 2017 at 9.30am in the Federal Court in Sydney.

ASIC will be making no further comment at this time.

Download

Background

The proceedings follow ASIC’s review of interest-only home loans (REP 445) in which ASIC reviewed the responsible lending practices of 11 lenders (refer: 15-220MR).

NAB hires former NSW premier

National Australia Bank Group Chief Executive Officer, Andrew Thorburn, today announced three new appointments to the NAB Group Executive Leadership Team.

The appointments are:

  • Mike Baird, as Chief Customer Officer, Corporate & Institutional Banking
  • Sharon Cook, to the new role of Chief Legal & Commercial Counsel
  • Patrick Wright, as Chief Technology & Operations Officer

“Mike, Sharon and Patrick each bring to NAB exceptional track records of performance and delivery and will help accelerate the execution of our strategy so we can deliver for our customers and our shareholders,” Mr Thorburn said.

“They are also authentic, inspiring and passionate leaders whose values align with NAB’s values and our ambition to be Australia and New Zealand’s most respected bank.”Mr Thorburn added:“Mike started his career with NAB in 1989 and spent 17 years working in corporate and institutional banking roles in Australia and overseas with NAB, Deutsche Bank and HSBC, before entering politics. His time as Treasurer and Premier of New South Wales means he returns to banking and NAB with invaluable experience in leading economic and financial reform to grow the economy. Mike has outstanding leadership and a determination to drive change and make a difference by building relationships with customers and the community”.

“Sharon is a vital addition to the team, bringing more than 25 years’ experience in the legal profession, most recently as a Managing Partner with King & Wood Mallesons. She has extensive experience in the banking and financial sector and is highly regarded for her commercial and strategic approach to complex issues.In a period of significant industry reform and heightened public focuson banking, this is a new and important role on our Executive Leadership Team”.

“Patrick joins NAB from Barclays in the US where he is global Chief Operations & Technology Officer of Barclaycard, leading a team of 15,000 people.He has extensive experience in driving major transformations in large financial services companies and innovating in fast-paced, competitive and highly-regulated markets.As we reshape our business, Patrick will lead our simplification, digitisation and automation agenda to deliver greater efficiency and create a simpler and easier experience for our customers and bankers.”

These appointments follow extensive global searches. All the roles on the NAB ExecutiveLeadership Team are now filled. Subject to regulatory approval, Mike and Sharon will start with NAB in mid-April, and Patrick will commence in mid-May.

The Rise of Microprudential

APRA’s revised mortgage guidance released yesterday, on the surface may look benign but if you look at the detail there are a number of changes which together do change the game in terms of risk analysis during underwriting, and through the life of the mortgage. We think this will slow credit growth through 2017 and beyond.

We suggest this is imposing significant micro-management on the portfolio, which will force some lenders to change their current practices.

Investment Property Underwriting Tightened.

APRA says a minimum haircut of 20% on expected rental income, and larger discounts on properties where there is a higher risk of non-occupancy should be applied. They also need to taking into account a borrower’s investment property-related fees and expenses. Also, APRA highlights that an ADI should ideally “place no reliance on a borrower’s potential ability to access future tax benefits from operating a rental property at a loss”, but if an ADI chooses to do so, it “would be prudent to assess it at the current interest rate rather than one with a buffer applied”.

Serviceability Tests Strengthened

APRA reaffirmed the interest rate buffer of at least 2% and minimum lending floor rate of at least 7% for mortgages. But now APRA says ADIs should apply these buffers a borrower’s new and existing debt commitments. To do this, banks will need to have more detailed knowledge of a borrower’s existing debt commitments and history of  delinquency.

Expenses Assessment Tightened

APRA wants ADIs to use the greater of a borrower’s declared living expenses or an appropriately income scaled version of the Household Expenditure Measure (HEM) or Henderson Poverty Index (HPI). They cannot rely fully on HEM or HPI to assess living expenses. They suggest expenses should be more correlated to income.

Income Assessment Tightened

APRA says banks should apply discounts of at least 20% (instead of being calculated at the ADIs’ discretion) to be applied to most types of non-salary income (rental income on investment properties, bonuses, child benefits etc.). A larger discount should sometimes be used where income is more variable over time – “an ADI may choose to use the lowest documented value of such income over the last several years, or apply a 20 per cent discount to the average amount received over a similar period”.

Interest Only Loans More Restricted

APRA expects interest-only periods offered on residential mortgage loans to be of limited duration, particularly for owner-occupiers. Interest-only loans may carry higher credit risk in some cases, and may not be appropriate for all borrowers. This should be reflected in the ADI’s risk management framework, including its risk appetite statement, and also in the ADI’s responsible lending compliance program. APRA expects that an ADI would only approve interest-only loans for owner-occupiers where there is a sound and documented economic basis for such an arrangement and not based on inability to service a loan on a principal and interest basis.

SMSF Property Loans Require More Examination

The nature of loans to SMSFs gives rise to unique operational, legal and reputational risks that differ from those of a traditional mortgage loan. Legal recourse in the event of default may differ from a standard mortgage, even with guarantees in place from other parties. Customer objectives and suitability may be more difficult to determine. In performing a serviceability assessment, ADIs would need to consider what regular income, subject to haircuts as discussed above, is available to service the loan and what expenses should be reflected in addition to the loan servicing. APRA expects that a prudent ADI would identify the additional risks relevant to this type of lending and implement loan application assessment processes and criteria that adequately reflect these risks.

LVR Is Not A Good Risk Indicator

Although mortgage lending risk cannot be fully mitigated through conservative LVRs, prudent LVR limits help to minimise the risk that the property serving as collateral will be insufficient to cover any repayment shortfall. Consequently, prudent LVR limits serve as an important element of portfolio risk management. APRA emphasises, however, that loan origination policies would not be expected to be solely reliant on LVR as a risk-mitigating mechanism.

Genuine Savings To Be Tested

ADIs typically require a borrower to provide an initial deposit primarily drawn from the borrower’s own funds. Imposing a minimum ‘genuine savings’ requirement as part of this initial deposit is considered an important means of reducing default risk. A prudent ADI would have limited appetite for taking into account non-genuine savings, such as gifts from a family member. In such cases, it would be prudent for an ADI to take all reasonable steps to determine whether non-genuine savings are to be repaid by the borrower and, if so, to incorporate these repayments in the serviceability assessment.

Granular and Ongoing Portfolio Management Required

Where residential mortgage lending forms a material proportion of an ADI’s lending portfolio and therefore represents a risk that may have a material impact on the ADI, the accepted level of credit risk would be expected to specifically address the risk in the residential mortgage portfolio. Further, in order to assist senior management and lending staff to operate within the accepted level of credit risk, quantifiable risk limits would be set for various aspects of the residential mortgage portfolio.

A robust management information system would be able to provide good quality information on residential mortgage lending risks. This would typically include:

a) the composition and quality of the residential mortgage lending portfolio, e.g. by type of customer (first home buyer, owner-occupied, investment etc), product line, distribution channel, loan vintage, geographic concentration, LVR bands at origination, loans on the watch list and impaired;
b) portfolio performance reporting, including trend analysis, peer comparisons where possible, other risk-adjusted profitability and economic capital measures and results from stress tests;
c) compliance against risk limits and trigger levels at which action is required;
d) reports on broker relationships and performance;
e) exception reporting including overrides, key drivers for overrides and delinquency performance for loans approved by override;
f) reports on loan breaches and other issues arising from annual reviews;
g) prepayment rates and mortgage prepayment buffers;
h) serviceability buffers including trends, performance, recent changes to buffers and adjustments and rationale for changes;
i) missed payments, hardship concessions and restructurings, cure rates and 30-, 60- and 90-days arrears levels across, for example, different segments of the portfolio, loan vintage, geographic region, borrower type, distribution channel and product type;
j) changes to valuation methodologies, types and location of collateral held and analysis relating to any current or expected changes in collateral values;
k) findings from valuer reviews or other hindsight reviews undertaken by the ADI;
l) reporting against key metrics to measure collections performance;
m) tracking of loans insured by LMI providers, including claims made and adverse findings by such providers;
n) provisioning trends and write-offs;
o) internal and external audit findings and tracking of unresolved issues and closure;
p) issues of contention with third-parties including service providers, valuation firms, etc; and
q) risk drivers and other components that form part of scorecard or models used for loan origination as well as risk indicators for new lending.

When setting risk limits for the residential mortgage portfolio, a prudent ADI would consider the following areas:

a) loans with differing risk profiles (e.g. interest-only loans, owner-occupied, investment property, reverse mortgages, home equity lines-of-credit (HELOCs), foreign currency loans and loans with non-standard/alternative documentation);
b) loans originated through various channels (e.g. mobile lenders, brokers, branches and online);
c) geographic concentrations;
d) serviceability criteria (e.g. limits on loan size relative to income, (stressed) mortgage repayments to income, net income surplus and other debt servicing measures);
e) loan-to-valuation ratios (LVRs), including limits on high LVR loans for new originations and for the overall portfolio;
f) use of lenders mortgage insurance (LMI) and associated concentration risks;
g) special circumstance loans, such as reliance on guarantors, loans to retired or soon-to–be-retired persons, loans to non-residents, loans with non-typical features such as trusts or self-managed superannuation funds (SMSFs);
h) frequency and types of overrides to lending policies, guidelines and loan origination standards;
i) maximum expected or tolerable portfolio default, arrears and write-off rates; and
j) non-lending losses such as operational breakdowns or adverse reputational events related to consumer lending practices.

Good practice would be for the risk management framework to clearly specify whether particular risk limits are ‘hard’ limits, where any breach is escalated for action as soon as practicable, or ‘soft’ limits, where occasional or temporary breaches are tolerated.

 

Bligh’s banking appointment is a masterstroke

From The Conversation.

The Australian Banking Association (ABA), backed by the banks’ financial and political clout, has not yet made its mark in the way the mining or gaming industries have. But this is threatening to change. The appointment of Anna Bligh to head up the ABA may represent an important turning point for the organisation.

That she is the first woman to head the ABA connotes some positive PR. But her party-political background is the true advantage. Bligh, a former Queensland Labor premier, is now the chief spokesperson for an industry that fares poorly in the public eye and is persistently at the centre of political firestorms.

The strategic advantage of Bligh’s appointment comes in two key areas of lobbying strategy. For one, she will meaningfully augment the ABA’s power behind the scenes, where lobbying is done directly between businesses and government.

But her primary role will be in the harsh glare of the public. Banking bosses are often disliked, and PR – in this case a form of “public lobbying” – is essential to win over voters on critical policy issues.

Influence in the halls of power

It is important for industry groups like the ABA to keep governments onside. This becomes difficult when, in (effectively) two-party systems like Australia, power shifts between Labor and the Coalition.

Typically, executive boards are stacked with those from a business and PR background, such as the ABA’s outgoing CEO, Steven Münchenberg (a former PR executive with NAB). Otherwise, there will typically be at least one other executive with a background in politics – usually from the Liberal Party – but ideally both parties are represented.

Along with Tony Pearson, formerly Joe Hockey’s senior economic adviser and now an ABA executive, Bligh’s appointment means the organisation has direct lines to decision-makers regardless of which party is voted in.

However, having a Labor Party elder as your CEO brings added advantages. Like other major industry groups, such as the gambling, alcohol, tobacco and mining industries, the banking industry is highly susceptible to public policy changes.

Also like the aforementioned groups, banks seem to have a better relationship with the Liberal Party (as reflected by policy outcomes) than with Labor. It was Labor that introduced the Future of Financial Advice (FoFA) legislation, which placed a fiduciary onus on banks (and others) to put the interests of clients ahead of their own.

Then came the proposed royal commission into banking in the lead-up to the 2016 election. Labor remains committed to this.

The banks’ strategy is clear: beyond her political savvy, Bligh’s appointment brings greater access than a Liberal appointee would. And she will be expected to use it. As the ABA’s head, Bligh will need to meet with her former colleagues to shape policy.

If Labor wins the next federal election, her status as a prominent and well-connected party figure will become exponentially more useful.

But if the Coalition remains in power, then the ABA takes a back seat. Treasurer Scott Morrison has made it clear that he deals directly with the banks, not through “intermediaries” such as the ABA.

The strategy of the banks is strong in that sense. Whether they lobby individually or use the Bligh-led ABA, they will be well represented.

Influence in the living rooms of power

Beyond the advantages of face-to-face lobbying and the ever-more-rapidly spinning “revolving door” between lobbying and politics, the ABA’s principal focus will be to shape public opinion.

These PR efforts acknowledge the power of representative democracy: work on the representatives first, but keep the “demos” – the people – onside, just in case.

As such, the ABA, like all industry groups with a public face, exists to try to convince the voting public that their own best interests are inextricably aligned with the best interests of businesses, whether true or not.

This PR strategy often relies on press releases and media engagement. But when a significant policy threat emerges – like a banking royal commission – the ABA may well rely on the use of “advocacy advertising”. This is where organisations use ads to try to win over public opinion, in turn pressuring the government.

This technique is used excessively in the US. It has a strong track record in Australia too, most notably during the mining tax and pokies reform debates.

To work, advocacy ads wouldn’t even need to make the public like the banks. In the case of unpopular industries, building goodwill is useful but problematic, so scaring the public can be just as effective.

To return to FoFA’s “best interests” example, convincing the public that banks should be able to put their own interests first is difficult. But if banks can suggest that the economy will suffer, and the public might lose monetarily, the strategy can work.

Currently fighting a similar “best interest” clause in the US, its financial services industry made such a case – and appears to be getting its way. The “Secure Family” financial services lobby group has run TV ads such as this:

For an industry as powerful (and rich) as banks, advocacy ads are usually worth a shot. There’s relatively little to lose but a lot to gain.

For policy battles fought in the domain of TV advertisements, it can be tremendously lopsided: those with money (like banks) can pay-to-play. But, problematically, in a system where a plurality or “marketplace” of ideas is critical to democratic ideals, similarly well-funded and advertised counter-argument is often conspicuously absent. By acting and speaking with a unified voice, banks have a significant advantage.

Commercial interests have long recognised the power of lobbying, but more are now realising the importance of harnessing public sentiment too.

Why More Capital Won’t Fix Banking

In the recent results round, the need to raise more capital in response to regulatory change was used as one of the pretexts for the need to lift mortgage rates. Given we, on an international comparison basis, still have more ground to make up to reach “unquestionably strong” we can expect this to continue, and APRA says it will be further lifting capital requirements soon. Wayne Byers said recently:

We have been doing quite a bit of thinking on this issue, but had held off taking action until the international work in Basel on the bank capital regime had been completed. Unfortunately, the timetable for that Basel work now seems less certain, so it would be remiss of us to wait any longer.

We estimate the banks will need to raise another $20-25bn to cover likely rises in the next year or two. Whilst this is manageable, lending costs will rise further. Internationally, Basel III finalisation is in question.

Shareholder returns are under pressure in the current environment, with some able to maintain payouts whilst others are trimming. CBA’s return on equity was 16% as last reported down from 19.5% in 2011. The weighted cost of capital is lower than this but the higher capital demands is still taking its toll.

The drive to hold more capital is primarily to ensure financial stability in a time of crisis, and to protect tax payers from a direct bail-out during a crisis as happened for example in the UK in 2007.  However, recent research has shown that higher capital requirements may encourage some banks to take MORE risk.

But, lifting capital does nothing to fix the root cause issues which lurk in the shadows, and which costs Australia Inc. dear. Some of the banks appear to be mounting a charm offensive where they demonstrate their contribution to society via the salaries they pay staff, the tax they pay, and returms which flow to shareholders (many of whom are institutional investors, and some offshore). But this effort sounds false to many.

The profitability of our banks sits at the top end of international lists, not because our management are especially talented, but because of the level of competition in the industry which allows higher margins to mask relative inefficiencies.  ANZ’s recent trading update showed that when a bank tries hard, they can drive costs down and efficiency up, but not all players have this same focus.  And this is hard to do.

The cultural norms where for all the lip service towards serving customers better, many customers do not feel the love; where capital costs are passed on to consumers and small business and where the litany of scandals and poor customer experiences continue to surface; are the real issues that need to be addressed.

But let us be clear, there is no necessary trade-off between good customer outcomes and profitability. Indeed, I would argue that superior long term returns will be achieved by those players who are really driving their business from a point of customer centricity. But this is hard, and requires a different set of cultural norms to those displayed in many financial services companies today. If they were to ban sales incentives, price products fairly, and put processes to train their staff to deal with errors effectively, this would lead to better outcomes all round. Such cultural changes cannot be legislated or regulated though, it requires management leadership to make this happen.

At the moment, there is a gap between (to use an old cheque processing phrase) “words and figures differ”. This is the gap between all the talk and real action. And more capital is not a replacement for the cultural change which is required.

 

 

 

Time For Some Straight Talk On Credit Card Rates

The ANZ move to cut rates on some of its cards will stimulate more discussion on the economics of the credit card business. It may appear a bold move, but we are not so sure.

Actually all the the various bank and ABA initiatives are not necessarily going to help to rebuild trust in the banks. Like a running sore, the ongoing exposure may well reinforce current negative consumer perceptions. A point event like a specific review might actually draw the poison more effectively!  And yes, there are major issues to address.

But, today we look at credit card economics. To do this we use the data provided by the RBA.  They show the number of card accounts (not the same as card numbers because some accounts will have multiple cards on them) has been growing, to approach 16.7 million accounts. The number of transactions on these accounts are also growing, with 241m transactions to December 2016.

The average value of a transaction has remained relatively static, with the average purchase around $120 and the average cash withdrawal around $380. But significantly the proportion of account balances which are accruing interest is reducing, with around 40% of accounts being cleared off each month. Households who can clear their cards should do so to avoid interest costs.

We see the monthly flows of new transactions and repayment match quite closely.

The 60% of balances which are revolving incur interest costs. The data shows despite cuts to the RBA cash rate, rates on both low rate and standard rate cards remain high, and indeed, some low rate cards have moved up recently. As a result the average interest margin between the cash rate and the charged rate is higher than it has ever been, on average close to 20%.  This puts the ANZ 2% cut on some cards into perspective!

So, now we know the proportion of cards which are revolving, and the margin, we can estimate the real net cost to the average revolving card holder. We estimate the typical account will incur a monthly interest charge of $57 each month they revolve, compared with $10 in 2003. In fact we see a stable cost until 2008, since when it has climbed substantially.  This is worth about $80m a month to the banks at the current margins.

To broaden the analysis, banks have also been slugging households with higher credit card fees. Again the RBA says, fees rose 6.6% in 2015 (last year of available data) and they took $1.5 billion in card fees in that year. In the past four years, card fees have risen significantly faster than inflation.

Finally, overall personal credit growth has fallen in recent times, as mortgage borrowing roar ahead. This is consistent with our observation that more households are repaying their cards each month.

Later we will look at the broader economics of cards, taking account of loyalty schemes and merchant fees.  Meantime you can read our earlier analysis of credit card economics by segment. But from a margin view, 2% is hardly a generous concession.

ANZ’s new credit card rate isn’t making the cut, say critics

From The NewDaily.

When you’re doing well, a little generosity is appreciated – except if it is too little, which is what consumer advocates and MPs are saying about ANZ’s surprise announcement that it will be trimming interest rates on its credit cards as of February 28.

And make no mistake, ANZ is doing very well indeed.

Last month it announced that profits for the most recent quarter had hit $2 billion, an increase of 31 per cent on the same period last year. More than that, ANZ Banking Group chief Shayne Elliott is upbeat about the burden of bad debts on his outfit’s books and recently scaled back estimates of that red-ink liability.

So given the ANZ’s strong profit result, they can afford to give users of its credit cards a break, right?

Absolutely, says CHOICE’s Tom Godfrey, who doesn’t see the reductions as anything but a very small bone indeed.

Those reductions should have been much larger, Mr Godfrey said, casting the cuts as a case of too little and too late.

“It’s an attempt by ANZ to try and take the heat off themselves and the other banks to show they’re responding to community concerns,” he said, adding that “the big four banks are just not competitive”.

Mr Godfrey noted that the best interest rates – those offered by the credit unions – are under 10 per cent, and he wondered where ANZ’s rival banks found the gall to charge “toxic interest rates” of “around 18 or 19 per cent or higher”. The best credit card rates available in Australia can be as low as 8.9 per cent.

More than 500,000 existing ANZ Low Rate accounts will benefit from the new rates, with the bank estimating that a typical consumer stands to save about $150 a year.

MPs take the credit

The government has praised the bank for the move, with Liberal MP Scott Buchholz saying ANZ has shown “commercial courage” in lowering its rates.

Malcolm Turnbull also claimed credit. Despite his government’s reluctance to conduct a Royal Commission into the banking sector, he said the newly-formed economics committee, before which the bank CEOs appear, had now provided real results.

“I am bringing the banks regularly before the house economics committee and they are being held to account for their actions and you are seeing real results,” Mr Turnbull said on Sunday.

Neither Mr Godfrey’s criticism nor South Australian Senator Nick Xenophon’s faint praise for the move ruffled the head of ANZ’s retail and commercial unit, Fred Ohlsson, who crowed that the reductions mean customers will have “the best rate available from any of the major banks or any of the regional banks owned by the majors”.

ANZ estimates that a typical consumer stands to save about $150 a year under the new rates.

And that’s the whole point, according to Senator Xenophon, who scoffed that ANZ customers have good reason to be even more miserly with their gratitude than the bank has been with its rate cuts.

“The gap between the official cash rate and credit card rates has never been higher,” he said.

“We really need to look at some form of either greater market competition, or the banks need to really explain themselves in gouging consumers in this way,” said Senator Xenophon, who has been a strong backer of Labor leader Bill Shorten’s call for a royal commission into the banking industry.

Mr Buchholz cited the grilling late last year of bank executives who were dragged before a parliamentary inquiry as a prime factor motivating Sunday’s announcement.

“We will have the banks appearing in the next fortnight in Canberra, along with the Australian Banking Association, where I will continue to take a similar line of questioning with those banks that haven’t taken the commercial choice to shift their interest rates yet.”

Anna Bligh to lead the ABA

The Chairman of the Australian Bankers’ Association, Andrew Thorburn, today announced the appointment of Anna Bligh to lead the ABA as it continues its work to strengthen trust and confidence in banking and deliver better outcomes for customers.

“We are excited to appoint Anna as Chief Executive Officer at such a pivotal time for our industry,” Mr Thorburn said.

“Anna’s focus will firmly be on the culture within banking and lifting respect for our profession; creating a strong vision for customers and on how our industry responds and leads on regulatory reform.

“As I’ve met with Anna I’ve seen the leadership, values and accountability she will bring to the role – and a willingness to confront and challenge the industry to continually improve.

“Anna has a track record of community service and a strong ability to connect with people. She is highly regarded and respected by community, political and business leaders and understands the need for all stakeholders to work together to deliver the best outcome for customers.”

Mr Thorburn added: “Australia has a world-class banking system and there is more we can do to be better for customers and demonstrate the role banks play for them, the broader community and the Australian economy.

“We have also heard the message from customers and from the public, and the industry is serious about change. The appointment of Anna demonstrates our commitment to this.”

Ms Bligh has more than 30 years’ experience in public service, initially with community organisations, before entering the Queensland Parliament in 1995. She held ministerial responsibilities for a number of portfolios including Education and Finance, and served as Treasurer and Deputy Premier before becoming Premier from 2007-2012.

She holds Honorary Doctorates from the University of Queensland and Griffith University and the National Emergency Services Medal for her service during the Queensland floods in 2011. Ms Bligh was awarded a Companion of the Order of Australia (AC) in the Australia Day honours in 2017.

Ms Bligh is currently the Chief Executive Officer at YWCA New South Wales, a role she has held for the past three years. During that time she has worked with vulnerable and financially disadvantaged Australians.

Ms Bligh said: “Our banks are critical to the strength and stability of our national economy and the prosperity and well-being of every Australian. We all rely on our bank for the most important financial decisions of our lives, so we want a system that is open, fair and trustworthy.

“I am excited by this opportunity to lead and shape the reforms needed to strengthen public trust and confidence in our banking system.”

Ms Bligh, who becomes the ABA’s first female CEO, will commence in the role on 3 April. She replaces Steven Münchenberg, who announced in October last year that he was stepping down after almost seven years as CEO.

Mr Münchenberg will finish with the ABA on 14 April, to enable a transition to Ms Bligh.

“On behalf of the membership and Council of the ABA, I want to thank Steven for his commitment and strong leadership as the industry navigated through a rapidly changing political, regulatory and economic environment following the global financial crisis,” Mr Thorburn said.

“Steven is a total professional who has worked tirelessly during what have been challenging times for our industry. We have a stronger foundation to build on thanks to Steven and his team.”