Who Would Be Affected by More Banking Deserts?

From The St. Louis Fed On The Economy Blog.

Although technology has made it easy to bank from almost anywhere, personal and public benefits are still derived from bank branches. In areas without branches—commonly referred to as “banking deserts”—the costs and inconveniences of cashing checks, establishing deposit accounts, obtaining loans and maintaining banking relationships are exacerbated.

Banking Deserts a Growing Concern?

The closing of thousands of bank branches in the aftermath of the last recession has intensified societal concerns about access to financial services among low-income and minority populations, groups that are often affected disproportionately in such situations. The number of people stranded in areas devoid of bank services would probably expand in the future if branches continue to close.

From this perspective, available resources may be better spent trying to prevent more deserts than trying to repopulate existing deserts with new branches.

What Areas Are at Risk?

In the figure below, we isolated branches that were outside the 10-mile range of any others. That is, we found branches that would create new banking deserts if closed. Our analysis is based on demographic and economic data collected for the county subdivision in which each branch is located.

Banking Deserts

We identified 1,055 potential deserts in 2014, of which 204 were in urban areas and 851 in rural areas. The urban areas had a combined population of 2 million, while the rural areas had a combined population of 1.9 million.

These potential deserts have relatively low population densities of 26 people per square mile in urban areas and 12 people per square mile in rural areas. Comparative densities outside potential deserts are, respectively, 176 and 26 people per square mile. In other words, areas with dispersed populations are more at risk of becoming a banking desert.

Potential Effects of New Banking Deserts

Median incomes are $46,717 in potential urban deserts and $41,259 in potential rural deserts. This suggests that any desert expansion would affect lower-income people more than higher-income people.

Minorities constitute 9.8 percent of the population in potential urban deserts and 4.0 percent of the population in potential rural deserts. Both percentages are lower than those for existing deserts and nondeserts. This suggests that newly created deserts may not disadvantage minorities to a greater extent than existing deserts do.

Branches in potential deserts are small, with median deposits of $23 million in urban areas and $20 million in rural areas. They tend to be operated by small banks, with median total assets of $776 million in urban areas and $317 million in rural areas.

The small size of these branches and the banks that own them suggest that what stands between a community and its isolation within a new banking desert are not the decisions made by big banks with a national footprint but, rather, the decisions made by locally oriented community banks. Additionally, potential deserts are more likely to be located in Midwestern states.

Hung Out To Dry – The Property Imperative Weekly – 1 July 2017

Data this week showed the impact of ever higher mortgages, with more households in debt for longer, and thanks to rising property prices, more households cannot get even into the market and are forced to rent. Welcome to this week’s edition of the Property Imperative.

This week we had the first look at the latest Census data, and it was a mixed bag. The Census counted 23.7 million people in Australia on the night. In the last 10 years’ average population has been 1.7% each year, compared with 1.4% in the prior decade. Strong migration is part of the story, with 1.3 million new migrants arriving since 2011, from some 180 countries.

Superficially, households appear to be more wealthy, but in fact the real issue is that there are more and more jobs being created which are not paying enough to live on. One-fifth of households in 2016 recorded a gross income, including all government benefits, of less than $650 a week. Many of these households are left behind by the skyrocketing housing market, stuck in the rut of under-employment, attacked as a drain on the budget or for not paying more tax, seeing their penalty rates cut, or forced to jump through undignified job-seeker hoops.

The census also suggested that housing supply is not the issue many are claiming it to be. The key myth-busting statistic is the average number of people per dwelling, which has not budged an inch in the five years since the last census. It’s staying at 2.6 which is where it was back in 2000 well before the house price boom began. Moreover, the number of unoccupied dwellings grew at 11.3 per cent over five years. That equates to 105,000 more empty dwellings since 2011, whereas the census shows the number of occupied dwellings increased by 6.8 per cent over five years, which is less than population growth over the same period: 8.8 per cent. That said, more households are renting, and more households have larger mortgages.

Other data also showed that rising mortgage debt is affecting everything from employment to spending, as Australians approach retirement. Australians are having to work for longer to pay off their mortgage, indeed many are expecting to take the debt into retirement. In addition, overall, the percentage of home owners aged 25 years or over who are carrying a mortgage debt climbed from 42% to 56% between 1990 and 2013.

More banks hiked investor loans and tightened underwriting standards this week. CBA changed their mortgage rates for owner occupied and investor mortgage holders. This included a significant hike for interest only borrowers, and they already tightened serviceability requirements a couple of weeks ago, whilst Principal and Interest Owner Occupied holders got a 3 basis point reduction! All this has, they say, nothing to do with the bank tax.  But it has everything to do with margin repair.

ME Bank lifted the rates for existing and new interest-only mortgages by 40 basis points, or 0.4%, whilst decreasing rates for lower LVR new owner-occupied loans by 10 basis points.

St George announced tighter serviceability requirements when borrowers seek to move to interest only mortgages

Bank profits will be bolstered thanks to ongoing mortgage growth, and the benefit of the recent mortgage repricing, under the alibi of regulatory pressure.

The latest RBA data showed that mortgage lending grew again in May to $1.67 trillion, up 6.6% in the past year, compared with 6.9% a year ago. Owner occupied lending rose $7.8 billion (up 0.72%) and investment lending rose $1.6 billion (up 0.28%), both seasonally adjusted. Surprisingly another $1.4 billion of loans were reclassified in the month between owner occupied and investor, taking total adjustments to an amazing $53 billion. We will probably never know how much of these switches related to legitimate changes of use, and how much is because of poor bank data or borrowers seeking out routes to cheaper loans.

The APRA data, which covers just the banks, also showed a rise in the value of their mortgage books, up $9.2 billion to $1.56 trillion.  Within this, owner occupied loans grew 0.7% to $1,010 billion and investment loans grew 0.42% to $550 billion (higher than the 0.39% last month). The proportion of loans for investment purposes stands at 35.4% on a portfolio basis. In fact, overall mortgage growth is accelerating – so much for the regulatory pressure to slow lending.

It is also worth noting that some lenders are still well above the 10% speed limit for investor loans.  We think further steps need to be taken to cool the mortgage market – too much debt is being loaded on to households in a rising interest rate, low/no income growth environment.  This also suggests home prices will continue to rise, after recent slowing trends were reported. We saw quite good auction clearances last week, and after a dip, home prices might indeed be on the up again.

The Productivity Commission’s review of Financial Services competition kicked off this week, with APRA arguing that financial stability and banking competition are not mutually exclusive. The peak body for Customer Owned Banks made the case that the competition landscape is really tilted in favour of the big banks, thanks to the implicit Government Guarantee, and more generous capital rules. The banking sector is an oligopoly, they say.

Big deals were announced by online real estate platforms and mortgage lenders. Domain Group has announced it is expanding into home loans broking with the launch of ‘Domain Loan Finder’ in partnership with digital home loan platform Lendi.

Realestate.com.au and NAB are building a realestate.com.au-branded mortgage broking business and will launch later this year. All Choice Home Loan brokers will be invited to join the new business, which will benefit from realestate.com.au’s near 5.9m unique visitors a month. Separately Realestate.com.au acquired an 80.3% controlling stake in Smartline mortgage brokers.

These deals highlight the digital transformation underway, as consumers use online tools to search for real-estate, and then can apply for a loan within the same environment. Essentially, this disruptive play is really just another plank in the end-to-end lending value chain, and such vertical integration may not, in the long term, be good for consumers.  We wonder if the Productivity Commission have this type of deal on the competition radar.

Finally, the spectre of eight, yes eight rises in the cash rate ahead were flagged by a former RBA board member this week. But in fact it was mis-reported by many. What he said was, if the economy started to track in line with RBA projections, they would be able to lift the cash rate.

The truth is, the economy is bumping along, with too little investment by the business sector (which can create real growth), and too much flowing into the overpriced housing sector. Until more radical action is taken, as for example the Bank of England did this week, we think future growth will be significantly below forecast, so the cash rate will only rise slowly.

But we still think mortgage rates will go higher, and so pressure on households will get significantly worse.

If rates were to rise by 2%, the number of households in mortgage stress would nearly double and, again – as the Bank of England highlighted – this would translate to significant dampening on future growth. We are in an uncomfortable position, with no easy way out, thanks to poor policy settings in recent years, and housing affordability reduced to a spurious debate about property supply.

And that’s the Property Imperative week to 1 July 2017. Check back next time for the latest update.

Housing Lending Reached A Dizzy $1.67 Trillion In May

The RBA credit aggregates for May 2017  show continued growth in housing lending, whilst business investment remains anemic.

The adjusted 12 month growth trends tells it all. Investment loans still running ahead of owner occupied lending, business credit slowing and other personal lending falling.  Total credit grew 5% in the year (compared with 6.4% last year), Housing credit grew at 6.6%, compared with 6.9% a year ago, and business credit grew at 3.1% compared with 7% a year ago. These are worrying trends, and makes future economic growth less certain. However, bank profits will be bolstered thanks to ongoing mortgage growth, and the benefit of the recent mortgage repricing, under the alibi of regulatory pressure. Just remember households have to repay this debt at some point, and interest rates will grind higher. Risks continue to rise.

The more noisy, monthly series shows housing grew at 0.6% compared with 0.5% last month, whilst business grew 0.2% compared with 0.4% last month.

Growth in the aggregates show the proportion of investment loans fell just a little, while business lending as a proportion of all lending fell again.

Here are the month on month moves. Owner occupied lending rose $7.8 billion (0.72%) and investment lending rose $1.6 billion (0.28%), both seasonally adjusted.

The RBA says more loans – $1.4 billion –  were switched from investment to owner occupied loans, so the true state of play remains uncertain. $53 billion switched is a big number.

Following the introduction of an interest rate differential between housing loans to investors and owner-occupiers in mid-2015, a number of borrowers have changed the purpose of their existing loan; the net value of switching of loan purpose from investor to owner-occupier is estimated to have been $53 billion over the period of July 2015 to May 2017, of which $1.4 billion occurred in May 2017. These changes are reflected in the level of owner-occupier and investor credit outstanding. However, growth rates for these series have been adjusted to remove the effect of loan purpose changes.

It also appears the non-bank sector is growing (take the RBA aggregate from the APRA number earlier reported). $1.67 billion, less $1.56 billion = 0.11 trillion.



Bank Fee Income Growing More Slowely

The latest RBA Bulletin includes a section on Bank fees. In 2016, domestic banking fee income from households and businesses grew at a relatively
slow pace of 1.7 per cent, to around $12.7 billion.

Deposit and loan fee income relative to the outstanding value of products on which these fees are levied was slightly lower than in the previous year.

Banks’ fee income from households grew by 1.5 per cent in 2016. This represented a slowing in growth from the previous year, reflecting lower
growth in fee income from housing lending and credit cards.

Growth in fee income from credit cards slowed in 2016 to slightly below the average since 2010, but remains the largest component of fee income from households. The growth in fees was supported by continued take-up of credit cards bundled with home loan packages. There were also more instances of fees being charged, with some banks no longer waiving fees for transferring a credit card balance to a new card provider.

Total fee income from businesses increased by 1.9 per cent in 2016, around the slowest pace for a decade. Slower growth was recorded for fee income from both small and large businesses. By product, growth in fee income
was driven by increases in business loan fees and merchant service fee income from processing card transactions. Fee income from deposit accounts also increased slightly, while fee income from bank bills and other sources declined. The increase in business loan fees mainly
reflected higher reported fee income from small businesses.

Growth in merchant service fee income was mainly attributable to increased transaction volumes, particularly for credit cards due to wider
acceptance of contactless payments. Increased use of platinum and business credit cards, which attract higher interchange fees, also contributed to growth in merchant service fee income from small businesses. Nevertheless, growth in merchant service fee income was evenly spread across small and large businesses.

Total fee take was $12.6 billion, still a substantial sum, but small beer compared with the $31 billion grabbed by the superannuation industry.

Financials Are Under Pressure

The latest data on the S&P/ASX 200 Financials shows the 25 plus stocks in the index have collectively moved lower – and at a faster pace than the market. Though a little bounce today.

A range of factors are in play, including the bank tax, rising concerns about the banks exposure to property, and the risks of higher defaults in a low growth higher risk environment.

The bank credit default swap rate is higher, indicating higher funding costs and risks, and the yield curve is not helping.

Underlying this are the recent result rounds which showed that whilst volume may be up, net interest rates are not, and the pressure to slow loan growth, and lift margins will impact the competitive landscape and future volume growth.

Sell in May, and go away, possibly is good advice!

The Property Imperative Weekly – May 20th 2017

The latest edition of our weekly roundup of property, finance and economics review is available. We discuss the latest economic news, recent developments in the bank tax debate and the latest mortgage pricing and volume data.

Watch the video or read the transcript.

This week, the latest updates from the ABS showed that the trend unemployment rate stuck at 5.8%, thanks to a large rise in part-time employment. In fact, employment was up by a very strong 37,400 in April after increasing by a massive 60,000 in March but the total hours worked was reported to have fallen by 0.3% in April and was down by 0.1% over the past two months. This may be because of changes in the ABS sampling. Many commentators suggest the true position in worse, but we do know that unemployment was above 7% in South Australia, and the number of older people seeking work also rose.

The latest wages data, showed that the seasonally adjusted Wage Price Index rose 0.5 per cent in the March quarter 2017 and 1.9 per cent over the year, according to ABS figures. This makes a bit of a joke  of the strong wages growth rates predicated in the recent budget.

The seasonally adjusted, Wage Price Index has recorded quarterly wages growth in the range of 0.4 to 0.6 per cent for the last 12 quarters. However, private sector wages rose 1.8 per cent whilst public sector wages grew 2.4 per cent, so public servants are doing better than the rest of the population.

The pincer movement of higher inflation and lower wage growth now means that average wages are falling in real terms, especially for employees in the private sector.  Not good for those with mortgages as rates rise flow though. This aligns with our Mortgage Stress data.

There was further heated debate about the Bank levy, with the Treasurer saying on ABC Insiders that the impost was a permanent measure and linked to the strong profits and competitive advantage the big four have thanks to the “too-big-to-fail” implicit guarantee from the government. He again said the costs of the tax should not be passed on to customers.

On the other hand, the banks put their own slant on the issue, saying that the costs would be passed on, and the levy was bad policy. Ex Treasury Boss Ken Henry, now the Chairman of NAB, suggested there should be an inquiry into the proposed tax and said it looked like something from the eighties, before all the free market reform.

The banks made submissions to the Treasury complaining about the short timeframes, and seeking a delay in implementation.  ANZ suggested a delay till September 2017 to allow sufficient time for design of the legislation and also recommended the tax should be applied to the domestic liabilities of all banks operating in Australia with global liabilities above $100 billion. They concluded “There is no ‘magic pudding’. The cost of any new tax is ultimately borne by shareholders, borrowers, depositors, and employees”.

But the real debate should be framed by the excess profits the big banks make, and the unequal position the big four have thanks to the implicit government guarantee, meaning they can out compete regional and smaller lenders. In fact, the value of this subsidy is significantly higher than the 6 basis points being imposed. These are the very high stakes in play, and the outcome will significantly impact the future shape of banking in Australia.  In fact, you could argue the big four receive the largest subsidies of any industry in the country – way more than, for example, the entire car industry.

In addition, the Australian Bankers Association is caught trying to represent the interest of the big four, and other regional players, including some who have supported the tax on the basis of it helping to level the competitive landscape. The ABA issued a statement to say there was no division, but there clearly is. Not pretty. Some have suggested the smaller players should create their own separate lobby group.

The latest lending data from the ABS showed that the mix of lending is still too biased towards unproductive home lending, at the expense of lending for commercial purposes. Overall trend finance flow in trend terms rose 1.3% to $70 billion, up $691 million. The total value of owner occupied housing commitments excluding alterations and additions rose 0.1% in trend terms, to $20.1 billion, up $26 million. Within the fixed commercial lending category, lending for investment housing fell 0.3%, down $44 million to $13.2 billion, whilst lending for other commercial purposes fell 2%, down $416 million to $20.3 billion. 39% of fixed commercial lending was for investment housing and this continues to climb.  Most of the investment in housing was in Sydney and Melbourne.

The more detailed housing finance data showed that the number of owner occupied first time buyers rose in March by 20.5% to 7,946 in original terms, a rise of 1,350.  In original terms, the number of first home buyer commitments as a percentage of total owner occupied housing finance commitments rose to 13.6% in March 2017 from 13.3% in February 2017.

The DFA surveys saw a small rise in first time buyers going to the investment sector for their first property purchase. Total first time buyers were up 12.3% to 12,756, still well below their peak from 2011 when they comprised more than 30% of all transactions. Many are being priced out or cannot get finance.

Lenders continued to tighten their underwriting standards for interest only loans, with CBA, for example, ending discounts, fee rebates and dropping the LVR to 80%, having in recent months imposed no less than three rate rises on the sector. ANZ tightened their lending parameters too, with the maximum interest only period reduced from 10 years to five years, tightening LVRs and imposing other restrictions.

Overall we think the supply of investor loans will reduce, and that smaller lenders and non-banks will not be able to meet the gap, so we are expecting loan growth to slow further, and the price of loans to rise again.

We also saw auction clearances stronger last weekend, so this confirms our survey results, that households still have an appetite for property, despite tighter lending conditions. Recent stock market falls and greater market volatility will play into the mix now, so we think there will be a tussle between demand for property, especially for investment purposes and supply of finance.

Brokers may well get caught in the cross-fire, and the recent UBS report suggesting that brokers are over-paid for what they do, will not help.  Others have argued UBS got their sums wrong, and denounced the report as “ridiculous”.

It is still too soon to know whether home price growth is really likely to turn, but the strong demand still evident in Sydney and Melbourne suggests momentum will continue for as long as credit is available at a reasonable price. So I would not write off the market yet!

And that’s it from the Property Imperative Weekly this time. Check back for next week’s summary.

Bank Switching Is A Pain

According to the Customer Owned Banking Association, Australians are willing to switch home loans but believe the process is too painful, there’s too much paperwork and it’s not worth the effort.

These are some of the key findings of a national poll of 1000 Australians by BLACKMARKET Research on what drives competition in the banking market.

“This poll shows Australians want competitive home loans, but they’re being let down by the switching system,” COBA CEO Mark Degotardi said.

“Polls like this tell us there’s a problem – people want to switch but find it too hard to do so, so they simply give up. That’s not genuine banking competition.

“We believe one of the reasons is the amount of time between a consumer asking to switch and their current home loan provider completing the paperwork.

“All stakeholders need to have a closer look at this issue to see if switching can become more efficient.

“If people want to switch from a major bank to a customer owned banking institution, we find it hard to understand in 2017 how it can take up to three months in some cases.”

The BLACKMARKET Research poll of 1000 Australians found:

  • 36% of people say are they are fairly/very likely to change home loans in the next 12 months
  • More than one-third of people say they haven’t switched because the process is painful
  • One in five gave the reason of paperwork or it not being worth the effort for not switching

The poll also found many customers were happy with their current provider, including four out of five customer owned banking customers.

“Customer owned banking is doing well, with market leading customer satisfaction and net promoter score ratings,” Mr Degotardi said.

“Part of the reason is our highly competitive and award winning products, including our home loans that have average standard variable home loan rates 0.64%* lower than the big four banks.

“If consumers shop around they will see there’s real value in switching to a customer owned alternative.”

*14 February, 2017: Comparison calculated using data sourced from the Canstar Online Database for standard variable rate products, which are available to owner occupiers borrowing $400,000 at an 80% LVR. Package, basic, and introductory rates are excluded.

Home Lending Roared Away In December

The ABS data on home finance for December 2016 confirms what we already knew, lending momentum was strong. But now we see that the number of OO first time buyers were down, whilst investment lending was strongly up.

Overall lending flows were up 0.8% in trend terms to $33.2 billion, with owner occupied loans up 0.23% ($20 billion) and investment loans up 1.68% ($13.2 billion). As a result, investment loans were 39.79% of all loans written in the month! Much of this went to the NSW market, where demand is hot, and prices are up.

Within the owner occupied data, refinancing of existing loans fell, down 1.23% to $6.38 billion, whilst other OO lending grew 0.93% to $13.6 billion. The largest percentage swing was borrowing for new dwellings, up 1.49%.

Given rates are now on the rise, we expect refinance volumes to continue to slide.

Looking at the original first time buyer data, there was 7% fall in the number of first time buyer OO loans written, down to 7,690; whilst investment loans by first time purchasers (not captured by the ABS as a separate category) is estimated to be up 1.4% to 4,236 based on the DFA household survey data. Many purchasers are going straight to the investment sector.  The average loan was $319,000 for FTB and $384,000 for other borrowers.

Finally, the original stock data shows overall loan growth on ADI’s books rose 0.67 (which if repeated for a year would equate to 8%!), way above inflation, so no wonder household debt is still building. The investment loan book grew 0.63% or $3.4 billion, whilst the OO book grew 0.7% or $7.0 billion. The total ADI book was worth 1.56 trillion and investment loans made up 34.91% of the book in December.

Prime mortgage arrears rise 25% from a year ago

From Mortgage Professional Australia.

Prime mortgage arrears are up 25% from a year earlier, but remain relatively low, a report by S&P Global Ratings shows.

However, the number of prime home loan delinquencies fell in November 2016 from the previous month.

A total of 1.15% of the mortgages underlying Australian prime RMBS were more than 30 days in arrears in November, as measured by Standard & Poor’s Performance Index (SPIN), down from 1.16% in October.

Arrears fell month on month for most originator categories apart from regional banks, which recorded an increase in arrears to 1.88% from 1.85% a month earlier.

Nonbank financial institutions have maintained the lowest arrears, at 0.63%, followed by nonbank originators, at 0.95%, then other banks, at 0.96%. Major bank arrears were unchanged month on month in November.

APRA Says Banks Home Lending Up In December … But

APRA has released their monthly banking statistics, which shows the portfolio movements of the major banks. Total lending for housing was up 0.68% to $1.52 trillion, with owner occupied lending up 1% to $987 billion and investment lending up 0.06% to $537 trillion. But there are adjustments in these numbers which make them pretty useless, especially when looking at the mix between investment and owner occupied loans.

The trend here is quite different from the RBA data also out today, which showed growth of 0.8% for investment loans and 0.4% for owner occupied loans (and includes non-banks in these totals). A quick look at the monthly movements shows that there was a significant ($3bn+) adjustment at ING, which distorts the overall picture. No explanation from APRA, and this movement is much bigger than the $0.9 billion net figure the RBA mentioned in their release.

For what it is worth, here is the sorted 12 month growth trend by lending, showing the 10% “hurdle”. ING is to the right of the chart thanks to their adjustment.

But the point is, we really do not know where we stand as i) data quality from the banks is still poor, and ii) the regulators are unable to provide a reconciled and transparent picture of lending. Given the debate about housing affordability, we need better and consistent data to aid the debate.