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.

Credit Growth Strong In December; But By How Much?

The RBA released their Credit Aggregates to December 2016 today.  Total housing was a new record at $1.62 trillion.

The headline statement from the RBA says housing grew 0.5% in the month and 6.3% annually, personal credit fell 0.1%, down 1.3% annually, and business credit role 1.1% in December, making 5.6% annually. All these are well above inflation, and wage growth.

Within housing, investment lending continued to grow up 0.8%, compared with 0.4% for owner occupied lending, making annual changes of 6.2% and 6.4% respectively.  So, once again we see growth in the investment sector moving up, which is in line with our surveys.

The monthly data shows the spike in both investment lending for housing and other business lending. This dataset, says the RBA has been adjusted for series breaks, to reflect as accurate picture as possible.

Now, things get interesting if we look at the more detailed data, which does not include series adjustments, although they are seasonally adjusted. Clearly there was further switching between loan categories.

Total lending for housing rose to $1.62 trillion, up $14 billion in the month. This is a new record and is up 0.88% from last month. On these figures, owner occupied loans grew 0.9% ($9.4 billion) and investment loans grew 0.84% ($4.68 billion). We see variations in the personal credit series too, with borrowing up 0.1% in the month, by $0.15 billion to $144 billion; business credit rose by 1.29% or $11.2 billion to $879.8 billion. But there is no way we can reconcile the two data series, so actually, we just have to take the RBA’s word on the figures – hardly open and transparent. Perhaps they prefer to paint the lower “adjusted figure” to support their view all is well in the housing lending sector, but it is mighty strange to have such varied outcomes.

We also see the proportion of housing lending for investment purposes remained at 34.8% of all lending, still too high in our view and the proportion of lending to business rose a little to 33.2% of all lending. We are still over leveraged into housing generally, and to investment housing in particular.

The RBA noted:

All growth rates for the financial aggregates are seasonally adjusted, and adjusted for the effects of breaks in the series as recorded in the notes to the tables listed below. Data for the levels of financial aggregates are not adjusted for series breaks. Historical levels and growth rates for the financial aggregates have been revised owing to the resubmission of data by some financial intermediaries, the re-estimation of seasonal factors and the incorporation of securitisation data. The RBA credit aggregates measure credit provided by financial institutions operating domestically. They do not capture cross-border or non-intermediated lending.

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 $48 billion over the period of July 2015 to December 2016, of which $0.9 billion occurred in December 2016. 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”.

We will discuss the APRA monthly banking stats later.

Credit Grew In November 2016 Thanks to Commercial Flows

The latest trend finance data from the ABS shows that total lending flows were up in November 2016. Overall $72 billion of credit was written, up 2.3% from the previous month, thanks to momentum in the commercial sector.

Within that, secured lending for residential construction and purchase was $19.8 billion, down slightly from October, whilst finance for alterations and additions rose 0.13%. Personal finance grew just a little, at 0.07%.

Looking at total fixed business lending, this grew $1.4 billion, up 3.74% to $45 billion, comprising  a rise of $1.2 billion, or 5.26% to $23.2 billion for commercial lending other than housing investment, and $0.2bn for investment housing, up 1.6%, to $12.9 billion.

Revolving business credit flows grew 2.95% to $8.9 billion, and leasing rose 0.19% to 0.5 billion.

So we see a rise in investment housing lending to 39.5% of all housing lending flows, driven by strong growth in NSW mainly, and a slowing in owner occupied lending. We also see an overall rise in business lending, even after isolating investment lending. We need to see ongoing growth in non-housing related business investment if economic momentum is to be sustained.

Home Lending On The Rise

The latest housing finance data from the ABS underscores the renewed momentum in home mortgage lending, especially in the investment sector, and there was also a rise in first time buyers accessing the market.

  • The trend estimate for the total value of dwelling finance commitments excluding alterations and additions rose 0.6%. Investment housing commitments rose 1.7%, while owner occupied housing commitments was flat.  In seasonally adjusted terms, the total value of dwelling finance commitments excluding alterations and additions rose 2.2%.
  • In trend terms, the number of commitments for owner occupied housing finance fell 0.1% in November 2016 whilst the number of commitments for the purchase of new dwellings rose 0.7%, the number of commitments for the construction of dwellings rose 0.2%, and the number of commitments for the purchase of established dwellings fell 0.2%.
  • In original terms, the number of first home buyer commitments rose by 13.4% to 8,281 in November from 7,302 in October; the number of non-first home buyer commitments also rose. The number of first home buyers as a percentage of total owner occupier commitments rose from 13.7% to 13.8%.

Total commitments in trend terms was $32.7 billion, of which $19.8 billion was owner occupied loans, and $12.9 billion for investment purposes. 39.5% of new lending was for investment purposes, and we see the proportion of investment loans continuing to rise, it is already too high.

Looking at the month on month movements, the seasonally adjusted changes highlight the rise in the investment funding for new construction, with a 40% rise on last month. Owner occupied refinancing fell.

The more reliable trend analysis shows the monthly movements, with a strong surge in investment loans by individuals, and a stronger fall in owner occupied refinancing.

Looking at total loan stock (in  original terms) around 35% of all loans outstanding are for investment purposes, and the slide we saw late 2015 appears to be easing.

Turning to the first time buyer, original data, the number of first time owner occupied buyers rose compared with last month, and the overall mix also increased.

Combining the first time buyer property investor data from our surveys, we see a spike in overall first time buyer activity.

Last month, around 1,100 more first time buyers entered the owner occupied market than the prior month (12%), and around 150 more in the investment sector.  We also saw a rise in the fixed rate loans, as borrowers try to lock in lower rates ahead of expected rises.

So overall, still strong momentum in the housing sector, and powered largely by an overheated investment sector.