CUA Profit Up, But Mortgage Lending Down

CUA, the largest Credit Union, reported an annual Group Net Profit after Tax (NPAT) of $55.87 million for the 12 months to 30 June 2017, an 8.1 per cent increase on last year’s result. But within that, their banking business achieved a full-year NPAT of $49.65 million, down 6.4 per cent from the FY16 result of $53.03 million. This was a reflection of intense home lending competition in the first half, with $2.81 billion in new loans settled during the year ($1.64bn originated in the second half), down 4.0 per cent, despite retail deposits up 5.2 per cent to a record $8.76 billion and 13,409 additional CUA banking members, taking total members to 453,122.

After curtailing investor mortgage lending earlier in the year, they subsequently opened the door again, with fixed rate investor lending to new-to-CUA investor loan applications, where the application was accompanied by an owner-occupied loan application. Now, taking this further, CUA has dropped fixed rate investor interest rates by between 10 and 20 basis points. As a result, the basic fixed rate investor loans range from 4.34 per cent to 4.74 per cent for one-year to five-year terms, respectively. On a comparison rate basis, this is 5.32 per cent for one-year basic fixed rates and 5.16 p.a. for five-year basic fixed rates.  They says this will apply to “all applicable CUA fixed rate investor home loans” approved from 19 September. Around 41% of mortgages came via the broker channel, similar to last year.

CUA Chief Executive Officer Rob Goudswaard said the result was underpinned by net member growth of 13,409 members for the year, CUA’s strongest growth in recent years and almost 70 per cent higher than member growth in the prior 12 months.

“Over the past year, we helped nearly 10,000 members to buy or refinance their home or an investment property. We also assisted more than 12,000 members with things like buying a new car, taking a holiday or undertaking a renovation, setting a new CUA record for personal loans,” he said.

The financial result also reflected higher net interest income, record levels of personal loans and the benefit of CUA’s diversified business, with strong CUA Health NPAT of $7.51 million helping to offset the impact of challenging market conditions on the banking business.

“Investing in sponsorships, like the Brisbane Heat cricket team, is helping lift awareness of CUA, with market awareness of CUA increasing more than 4 per cent off the back of the Big Bash League (BBL) season,” Mr Goudswaard said.

“Positive member growth and a strong financial position means we can continue to work towards our goal of being available to our members ‘anywhere, anytime’ by investing in innovation and improved digital experiences.

“Enhancing our digital channels and innovating are essential to attracting new members and evolving our service to respond to changing member preferences. But more than that, our digital journey is about building deeper, more personalised relationships with our CUA members by bringing a human, interactive approach to digital banking.”

CUA significantly lifted its investment in community initiatives by almost 50 per cent this year to $2.28 million, up from $1.54 million. The investment supported diverse national and local community organisations.

Mr Goudswaard said CUA had increased its commitment to Red Nose and their quest to save the lives of babies and children, and to the indigenous financial literacy work of the First Nations Foundation, signing on as Mission Partner to both organisations for the next three years. CUA rolled out the first round of its Mutual Good Community Grants, helping support local not-for-profit groups to make a positive social impact in communities. CUA team members also stepped up their contribution to community, with more than 500 days devoted to volunteering.

The community investment represents 2.8 per cent of CUA’s Net Profit before Tax & Community (NPBTC) of $80.22 million, consistent with the organisation’s promise to invest up to 3 per cent of NPBTC to community over the coming years.

Mr Goudswaard said CUA’s strong financial performance meant it was also well placed to continue to invest in innovation and digital opportunities, with the potential to deliver significant improvements to how members engage with CUA for their banking, health and insurance needs.

“This year, we made a significant investment in innovation by joining global banking innovation collaboration, Pivotus Ventures. This enables CUA to supplement our involvement with the Australian fintech and startup communities by tapping into international banking expertise, to explore and develop new digital banking opportunities. We are already planning for a pilot of the first digital initiative from the international collaboration during FY18 – an app which will be an Australian first in personalising members’ digital interactions with CUA.

“Looking ahead, our innovation and digital priorities will build on the investment we’ve already made in our technology systems this year, which has included bringing Apple Pay, Android Pay and Samsung Pay to members, and building a new mobile banking app which will go live in the coming months. We are also looking forward to bringing our members the benefits of real-time payments when the New Payments Platform goes live.”

Mr Goudswaard said CUA’s success this year reflected its commitment to working together with members to support their financial needs through changes in their lives. He noted that Hatch – the initiative launched by CUA in April for parents planning, expecting or raising a baby – was already driving member growth and positive feedback.

“As a member-owned organisation, CUA’s profits are reinvested back into our business so CUA can help even more Australians to buy their own home, or support them to achieve their other financial goals, in the year ahead. We will do this while continuing to invest in building stronger communities and making a positive impact on important social issues,” Mr Goudswaard said.

CUA’s banking operations (ADI)

CUA’s banking business (or ADI) achieved a full-year NPAT of $49.65 million, down 6.4 per cent from the FY16 result of $53.03 million.

CUA issued $2.81 billion in new loans for FY17. Lending volumes improved in the second half of the financial year, with $1.64 billion in new lending in the six months to 30 June 2017. This was up on the $1.17 billion in lending for the first half, when CUA was impacted by extremely competitive market conditions. The result also reflected an active refinancing market. While owner occupier and investor home loans accounted for $2.53 billion of the new lending, CUA’s personal loan performance was a standout with a record $256.58 million in personal loans issued over the period – a 37.9 per cent increase on FY16 personal lending of $186.1 million.

Mr Goudswaard said the ADI’s net interest income of $239.22 million was up 2.9 per cent on last year’s result, reflecting interest revenue flowing from the growing CUA loan book. Capital adequacy increased slightly from 14.24 per cent to 14.28 per cent over the year, reflecting CUA’s strong capital position.

CUA Health

CUA has continued to invest in the growth of its wholly-owned private health insurance subsidiary, with CUA one of the few organisations in Australia to offer integrated financial, health and insurance solutions. CUA Health improved NPAT for the year to $7.51 million. CUA Health recorded premium revenue of $143.59 million, up 5.8 per cent. The insurer returned $122.41 million in benefits for its policy holders, equivalent to 85 cents in the dollar.

The strong result reflected lower claims activity across the industry, a new CUA Health strategy for its investments which delivered higher returns, and the success of the new suite of hospital and extras cover launched in November.

The strong performance will support CUA Health’s continued rollout of new initiatives to benefit members including proactive health, wellness and disease management programs, as well as improved information and search tools to help members choose their medical specialist. The fund is exploring options to introduce loyalty discounts and enhanced product features for 2018, to return even more value to members.

Credicorp Insurance

Credicorp Insurance posted a half-year NPAT of $1.13 million, down 1.0 per cent for the year. This subsidiary now provides general insurance to more than 13,700 members. The result reflected the lower levels of new lending in the banking business, with Credicorp policies typically taken out by borrowers applying for a new home loan or personal loan.


ME Bank Performing Well On The Back OF Strong Mortgage Growth

Industry super fund-owned bank ME has reported a full year underlying net profit after tax of $85.2 million, up 14% on the previous Financial Year.

ME CEO, Jamie McPhee, said “it was another strong performance and continued ME’s strong profit growth over the past five years”.

McPhee said NPAT growth largely reflected a 12% increase in ME’s home loan portfolio, with net interest margin falling 5 basis points to 1.50% and total expense growth of 3%. ME’s NPAT has grown at an annual compound rate of 28% since 30 June 2012.

We plotted the portfolio value of ME’s mortgage book using APRA data, relative to market growth, and owner occupied loans in particular are growing fast.

The relative percentage growth highlights the trends even more strongly.

“Growth has been the main story for ME in FY17 with home loan settlements up 36% to $6.2 billion, an increase in total assets of 7% to over $26.5 billion, customer deposits up 20% to $12.6 billion, and customer numbers up 15% to 420,000.”

McPhee said “the Bank’s performance is particularly positive in light of the external operating environment – softening credit growth, macro-prudential restrictions on home lending, regulatory imbalances that give the major banks a competitive advantage, and a banking industry ratings downgrade by S&P in May.”

Underlying return on equity increased 10 basis points to 8.3% continuing the trend towards the medium-term target of 10%, while the cost to income ratio reduced further from 65.8% to 63.5%.

ME’s statutory profit after tax, which includes the amortisation of realised losses on hedging instruments ($7.3 million), loss on sale of the business banking portfolio ($6.2 million), transition costs associated with a significant new technology partnership with Capgemini ($6.4 million) and legacy IT decommissioning costs ($3.4 million), was $61.9 million (FY16: $76.8 million).

ME’s commercial partnerships with its industry fund owners continue to bear fruit: ME’s member benefits program, which it uses to market directly to members of industry super funds and unions, is now generating 13% of the Bank’s home loan settlements.

ME’s brand overhaul in FY16 is supporting growth with awareness hitting a record high 55% in July 2017, up 15 points since the change was implemented.

The annual review has yet to be posted and the available financial performance information is very limited.

Mortgage Choice delivers 10.2% growth in cash profit

Mortgage Choice Limited announced its annual results for the financial year ended 30 June 2017. NPAT on a cash basis was $22.6 million – up 10.2% on FY16, although revenue was up 1.1% to $199 million. They have 654 credit representatives in Australia and 486 franchises. 88.5% or gross revenue came from Mortgage Choice Broking.  Settlements rose 1.2% to $12.3 billion and the loan book grew to $53.4 billion.

  • NPAT on a statutory basis was $22.2 million – up 13.5% on FY16.
  • Mortgage Choice’s core broking business recorded its best ever settlement result, with settlements totalling $12.3 billion.
  • Mortgage Choice’s loan book reached a record $53.4 billion – up 3.2% on FY16.
  • Financial Planning gross revenue surpassed $10 million in FY17 while Gross Profit grew 26% from FY16.
  • Funds Under Advice and Premiums In Force both rose significantly, up 60.3% and 26.0% respectively to $532.4 million and $24.2 million.
  • A fully franked final dividend of 9 cents per share was declared by the Board. Total dividend for the year was 17.5 cents per share – an increase of 1 cent on FY16.
  • 46 new Greenfield Franchises added to the network, the highest number recruited in one year.
  • 11.5% of total cash gross revenue derived through diversified services.

“Throughout FY17, the Group performed very well, with settlements volumes, total loan book and financial planning revenue all growing to record levels,” Mortgage Choice chief executive officer John Flavell said.

“Cash Net Profit After Tax grew by more than 10% for the second consecutive year, highlighting the ongoing strength of the business.

“FY17 was a year that saw increased complexity across all areas of retail financial services. The volume and velocity of policy and pricing changes for lending products, as well as wealth and insurance solutions, was unprecedented. This complexity drove more consumers to Mortgage Choice than ever before.

“Mortgage Choice delivered increased value to our customers by addressing more of their financial needs and creating simplicity in a complex environment.

“Our core broking business performed very well, with home loan settlements reaching $12.3 billion for the first time and our loan book grew 3.2%, reaching a new high of $53.4 billion at 30 June 2017.”

Mr Flavell said it wasn’t just the core broking business that performed well throughout FY17, with the Company’s diversified services also delivering impressive results.

“Throughout FY17, the gross revenue generated from our diversified services continued to grow,” he said.

“For the year, 11.5% of the Company’s cash gross revenue came from our diversified offering – up from 10.5% in FY16.

“Our Financial Planning division delivered its first full year profit, with Funds Under Advice and Premiums In Force rising 60.3% and 26.0% respectively to $532.4 million and $24.2 million.

“As this business matures and our advisers spend more time building relationships with our network of mortgage brokers, referrals naturally grow. Throughout FY17, the number of referrals from the core broking business increased by 13%.

“At Mortgage Choice, we want to be Australia’s leading provider of financial choices and advice, delivering exceptional customer value. To achieve this, we understand that we have to be able to cater to our customers’ growing financial needs and deliver expert advice across a full suite of services.

“To this end, at the beginning of FY17, the Company launched a new branded asset finance offering. The new service offering was embraced by the network, with more than 1,600 vehicle, plant and equipment loans financed in the first year alone.

“As we move into FY18, our asset finance offering will continue to gather momentum and deliver growth for the Company.

“Beyond the strong financial performance, FY17 was also a record year for network growth. 46 new Greenfield Franchises were recruited over the year and the number of Credit Representatives across the country increased to 654, well up from FY16.

“As these new recruits become more skilled and increase their productivity over the coming months and years, we will see continued growth in the business.”

“In addition, our shareholders will be very pleased with the dividend result. The ongoing strength of the Mortgage Choice business means we have been able to deliver a fully franked dividend of 17.5 cents per share for the year, a 1 cent increase on FY16,” he said.

Future growth

Heading into FY18, Mr Flavell said he is confident the business can continue to deliver exceptional results in an increasingly complicated market.

“Mortgage Choice’s continual investment in the business will help us to drive solid results today, tomorrow and over the longer term,” he said.

“We will focus on increasing efficiency for the current network, the continued growth of our network via targeted recruitment and a commitment to assisting new recruits run successful, profitable businesses.

“In addition, we will continue to accelerate our local area marketing activities to deepen the relationships we have with our customers. Throughout FY17, we implemented a series of grass-roots brand awareness initiatives that proved to be very successful. You may well have noticed a new Mortgage Choice retail store in your local area, seen more Mortgage Choice branded cars on the road, or heard more Mortgage Choice advertising on the radio. Heading into FY18, the momentum created will be carried forward.”

Mr Flavell said the Company had identified its four key business priorities for the year ahead. These priorities include:

• Increase and diversify franchisee revenue and asset growth;
• Distribution growth;
• Deeper customer relationships; and
• NPAT growth.

“I am confident the business can deliver to all of the aforementioned priorities whilst maintaining our focus on our 2020 vision,” he said.

“We are in a very exciting stage of the business. We are successfully transitioning Mortgage Choice into a diversified financial services company, which is providing additional value to our customers, franchisees, and our shareholders,” he said.

“Throughout FY17, we achieved a lot as a business. These achievements were realised against a backdrop of increasing complexity and various market challenges. Whilst we are expecting the market to remain complex, we are well positioned to provide expert advice to more customers for all of their financial services needs.”

AFG Reports 33% 2017 Profit Uplift

Australian Finance Group (AFG) reported a net profit after tax (NPAT) of $30.2 million for the 2017 financial year (FY2017). This excludes the impact of the recognition of AFG Home Loans (AFGHL) white label settlements relating to prior years (normalised NPAT). This is slightly ahead of the result forecast and an increase of 33% on FY2016.

They now have around 2,900 mortgage brokers, and process on average around 10,000s loan each month with 45 lenders on their panel.

AFG Chief Executive Officer David Bailey said the strong result has been driven by AFG’s core business of residential mortgages, commercial lending, and the continued strong growth in the own-branded AFGHL business.

“Today’s results are a testament to AFG’s strategy of continuing to focus on our core business and growth through earnings diversification. We are very pleased with our progression down this path.”

These results have been achieved in an environment of flat credit growth and significant regulatory changes impacting foreign investment and credit appetites of Australia’s lenders.”

Highlights include:

  • Reported NPAT of $39.1 million, normalised NPAT of $30.2 million
  • White label AFG Home Loans settlements of $2.7 billion
  • Combined residential and commercial loan book of $133 billion, growth of 11% over FY2016
  • Residential settlements of $34.3 billion
  • Commercial settlements of $2.8 billion
  • Final dividend 5.5 cents per share
  • Earnings Per Share (EPS) for FY2017 is 14 cents per share based on normalised NPAT
  • ROE of 31%

Company Outlook

The AFGHL business finished the full year 2017 with settlements of $2.7 billion. This result represents a 38% increase on FY2016 and evidences the success of our ongoing strategy to deliver competitive choice to Australian borrowers. The AFGHL loan book is now $5.5 billion, an increase of 44% from $3.8 billion in FY2016.

Overall, the company has a residential loan book of $126 billion that will generate ongoing trail commission. The AFG Home Loans securitised book has seen a 10% increase in settlements for FY2017 to finish the financial year at $1.15 billion, whilst maintaining a strong net interest margin.

Mr Bailey noted the company has achieved another strong year in the recruitment of brokers. From 2,650 active brokers in FY2016, numbers have increased by 8.5% to 2,875.

“In a clear sign of the health of the commercial lending market AFG Commercial asset financing settlements rose 20% to finish the year at $445 million,” he said.

“AFG Commercial mortgage settlements for the year were $2.84 billion, which represents just 0.7% of the overall $410 billion commercial lending market in Australia. The potential for growth is tangible.”

The small to medium enterprise (SME) segment of the market in particular is also one where AFG is optimistic. AFG is poised to harness this growth with the impending rollout of an Australian-first SME lending platform. The new platform, AFG Business, will enable our network of brokers to provide small business borrowers access to a broad range of options and deliver faster access to capital.”

Market conditions

The complexity of the Australian lending market has increased significantly in the past 12 months. “AFG began its listed life with around 1,450 products on its lending platform,” explained Mr Bailey. “That number has now increased to more than 3,400 at FY2107.

“The growth is a reflection of multiple changes by lenders to their Australian product suites. The introduction of new products, changes to LVR bands, numerous product splits with differing rates, repayment options according to loan type, and significant changes to investor and owner occupier pricing have been rolled out across our platform in the past 12 months. These ongoing changes have been delivered at an unprecedented pace and reaffirms the importance to a consumer of having an informed broker.

With more than 10,000 customers seeking the assistance of an AFG broker every month, the value consumers place on the mortgage broking channel continues to be clear. “The mortgage broking channel accounts for 53% of the Australian lending market and more than 20% of those mortgage brokers work with AFG,” said Mr Bailey.

2017 has also been marked by significant regulatory scrutiny of the Australian lending market. “AFG has been at the forefront of consultation with industry, government and regulators. The message we have had for all stakeholders has been clear – AFG has 45 lenders on its panel with more than 35% of borrowings going to lenders other than the four major banks, and we remain committed to ensuring choice and competition remains for Australian consumers.

“This competitive tension ensures consumers continue to have choice and most importantly benefit in terms of home loan price and service because of what brokers deliver on a daily basis across the Australian lending market,” he concluded.

Westpac Q3 Update – Capital Strong, But Mortgage Risks Higher

Westpac released their Q3 Capital update today. The CET1 ratio was 10% at 30 June 2017, and equivalent to 15.3% on a comparable international basis.  This is higher than expected helped by strong dividend reinvestment.  They said they would provide further guidance on their preferred CET1 range (8.75%-9.25%) once APRA finalises its capital adequacy framework review.

The Net table funding ratio was 108% and the liquidity coverage ratio was 128%. The bank is well placed on these key ratios.

Stressed exposures TCE decreased by 4 basis points to 1.10%. Most sectors, including commercial property, mining and New Zealand dairy improved.

Unsecured delinquencies rose in the quarter, up 12 basis points to 1.75% mostly due to APRA hardship reporting changes. Changes in the reporting of hardship have had an impact on the level of reported delinquencies, with mortgage 90+ day up 16 basis points and unsecured consumer lending the change lifted 90+ day by 49 basis points. Cyclone Debbie caused a further rise.

30+ day delinquencies were at 138 basis points, compared with 139 in March, and 130 in Sept 16. 90+ delinquencies were 69 basis points, compared with 67 in March. The number of properties in possession rose from 382 to 422, mainly due to a rise in WA and QLD.  The WA trend is visible, thanks to weaker economic conditions.  Actual losses for the 9 months was a low $57 million.

Westpac provided further details of the changes in their mortgage book, thanks to the regulatory intervention on IO loans. IO loans are at least 50 basis points higher than the equivalent P&I loan. Investment loans are at least 47 basis points higher than the equivalent OO loan.

They have imposed a maximum LVR of 80% for all new IO loans (including limit increases, term extensions and switches. They are no longer accepting external refinances from other financial institutions for OO IO.  There are no fees to switch from IO to P&I.

The say the flow of IO lending was 44% in 3Q17, with applications 36% of flows (down from 52% and 47% in 2Q17). Despite seeing settlements above 30% IO, currently, they say they should be below 30% by 4Q17 – September 17.

The 30% IO cap incorporates all new IO loans, including bridging finance, construction loans, lines of credit as well as limit increases on existing loans. The IO cap excludes flows from switching between repayment types, such as IO to P&I or from P&I to IO and also excludes term extensions of IO terms within product maximums (5 years for IO OO and 10 years for investor loans).

They also described their mortgage warehouse, with Westpac providing funding for over 20 Australian mortgage originators (both ADI and non-ADI). The bank’s warehouse limits have been stable at around $10bn, but asset balances have been more variable.



ANZ Q3 FY17 Trading Update

ANZ released their unaudited Statutory Profit for the Third Quarter to 30 June 2017 was $1.67 billion. Provisions were $243 million. Cash Profit of $1.79 billion up 5.3%. Profit before Provisions increased 0.3%.

Customer deposit growth of 2.3% with net lending asset growth of 2.0% during the quarter.

Revenue decreased 0.3% which in part reflected a normalisation of the Markets business performance after an unusually strong first half along with the sale of 100 Queen Street.

Expenses reduced 1% and continue to be well managed. As flagged the proceeds of the sale of 100 Queen Street are being reinvested in the business with approximately two thirds occurring in the second half, largely in the final quarter.

The Group Net Interest Margin (NIM) was stable, up several basis points excluding Markets. Australia Division NIM improved offsetting a decline in Institutional NIM. The Australian Bank Levy will impact the NIM in the fourth quarter being reflected within the cost of funds.

The reshaping of the Institutional Division asset base continued with Risk Weighted Assets (RWA) reducing a further $3 billion to $156 billion, with a cumulative reduction of $12 billion (-7%) during the Financial Year to date. The changing profile of the book has resulted in a decline in the Division’s provision charge and an improvement in the risk adjusted return (NII/Average Credit Risk Weighted Assets (CRWA)).

Above system growth in residential mortgages in Australia has been primarily driven by the Owner Occupier segment. The Division is tracking well in respect of meeting various macro prudential requirements regarding mortgage growth.

The total provision charge of $243 million was comprised of an Individual Provision (IP) charge of $308 million and a Collective Provision (CP) release. The release of CP was largely driven by continued reshaping of the Institutional portfolio along with some transfers to IP.

The Australian Prudential Regulation Authority Common Equity Tier 1 (CET1) ratio was 9.8% at 30 June, which incorporates 51 basis points of net organic capital generation offset by the Interim Dividend (59 bps) and adoption of the new RWA models for Australian Residential Mortgages. Proforma CET 1 was 10.5%.

Post the end of the third quarter ANZ completed the sale of the Retail and Wealth businesses in China and Singapore to DBS with Hong Kong expected to complete prior to the end of the second-half. All other transactions remain subject to regulatory approvals and completion.

1 Excludes Markets income
2 Source: ANZ analysis of APRA monthly banking statistics

Bendigo and Adelaide Bank FY17 Results

Bendigo and Adelaide Bank released their FY17 results today. It was perhaps stronger than expected and they have a good retail franchise. But they benefited from on-off mortgage loans repricing which helped margin and are now seeing lower mortgage volumes following the APRA guidance, so there remains much to do.

They reported an after tax statutory profit of $429.6m for the 12 months to 30 June 2017. The full year dividend was maintained at 68 cents fully franked.

Underlying cash earnings was $418.3 million, up 4.2% on the prior year.

They reported mortgage growth of 7.7%, with a strong NIM improvement of 8 basis points in the second half despite a 1 basis point fall across the year, achieving 2.26% half on half. They gave away deposit margin to grow their funding base.

Their exit margin was 2.34%. Keystart’s NII contribution was $11.3m.

Funding includes 80. 2 percent from deposits, with retail deposits up 4.7 per cent. The mix of call to term deposits swung a little to call (term down 1.1% and call up 2%).

Home lending showed a fall in approvals IH17 $8,711m approved compared with $5,419m in the 2H17.

They were impacted by APRA’s lending caps as shown by interest only flows

… and investor credit growth.

Settlements are sitting at ~$1bn per month. They say 45% of customers are ahead of minimum repayments, and 29% three or more repayments ahead.

Home loan 90+ days past due shows a persistent rise in WA (Keystart included from Jun-17 and is below the WA average). QLD was also higher.

Homesafe contributed $90.4m

Homesafe overlay reflects an assumed 3% increase in property prices for the next 18 months, before returning to a long term growth rate of 6%

Retail mortgage provisions are 0.02% in FY17, down from 0.03% at Jun-16.  Business arrears were lower, and there was a small rise in credit card arrears, to above 1.5% in Jun-17.  The specific provisions balance was $89.5m, reflecting 0.15% of gross loans compared with 0.22% a year ago.

The cost income ratio fell 2% to 56.1 per cent, on nearly flat expenses. They had 118 less FTE in FY17 and included redundancies of $4.2m.

They continued to invest in, and capitalise software.

The CET1 ratio is 8.27%, up 30 basis points from December 2016, and they say the “unquestionably strong” target will be achieved – but no details.

They continue progress towards advanced accreditation, and the investment has improved their risk management capability, whether or not they decide to switch (given APRA’s moving target!). Again, no details. Our own view is that the benefit of advanced has been significantly eroded by APRA.


NAB 2017 Third Quarter Trading Update

NAB gave their June 17 quarter update today.  There were no surprises, with an unaudited statutory net profit of $1.6 billion and unaudited cash earnings of $1.7 billion, up 2% versus March 2017 Half Year quarterly average and 5% versus prior corresponding period.

Andrew Thorburn, Group CEO said:

The major bank levy became effective from 1 July 2017 and is estimated to cost NAB approximately $375 million annually, or $265 million post tax, based on our 30 June 2017 liabilities.

Separately, in July, the Australian Prudential Regulation Authority (APRA) announced a CET1 ratio target of at least 10.5% by January 2020 for major banks to be viewed as ‘unquestionably strong’, with finalisation of international capital reforms not expected to require any further increases to Australian requirements. NAB expects to meet APRA’s new capital requirements in an orderly fashion given the existing capital position and the timelines involved.

Revenue was up 2%, with growth in lending and improved Group net interest margin (NIM) partly offset by lower Markets and Treasury income. They reported a higher Group NIM largely reflects loan repricing and more favourable funding conditions. Expenses were up 2%, or 1% excluding redundancies, due to increased investment spend.

The biggest impact was a reduction in the bad debt charges. Bad and doubtful debt charges (B&DDs) fell 12% to $173 million, reflecting improved asset quality trends and non-repeat of the collective provision overlay for commercial real estate raised in the March 2017 Half Year.

The ratio of 90+ days past due (DPD) and gross impaired assets (GIAs) to gross loans and advances (GLAs) of 0.80% declined 5 basis points (bps) from March 2017 mainly reflecting improved conditions for New Zealand dairy customers.

The Group Common Equity Tier 1 (CET1) ratio of 9.7%, compared to 10.1% at March 2017 mainly reflecting the impact of the interim 2017 dividend declaration and 17 bps for higher risk weights due to previously advised mortgage model changes.

The Leverage ratio was 5.3% (APRA basis), the Liquidity coverage ratio (LCR) quarterly average was 127% and the Net Stable Funding Ratio (NSFR) was 108%.

For this full year they remain confident of achieving more than $200 million in productivity savings and, excluding the impact of the bank levy, expect to deliver positive ‘jaws’.




AMP reports 1H 17 results

AMP reported their 1H17 results today. Underlying profit was A$533 million in 1H 17, up 4 per cent (1H 16: A$513 million), and net profit of A$445 million (1H 16: A$523 million).

The results reflect strong operating earnings growth from AMP Capital (+11%), AMP Bank (+10%) and New Zealand financial services (+5%).

Australian wealth protection earnings increased by 11% on 1H 16, reflective of the steps taken to stabilise the business in 2H 16. Australian wealth management earnings declined 1% from 1H 16, largely due to margin compression from MySuper transitions and a reset of the investment management agreement with AMP Capital.

Underlying investment income decreased A$11m to A$50m from 1H 16, due to lower shareholder capital resources and a 50 bp reduction in the assumed underlying after-tax rate of return.

Australian wealth management 1H 17 net cashflows were A$1,023m, up 76% from 1H 16. AMP’s retail and corporate super platform net cashflows were positively impacted by recent changes to superannuation contribution limits and large mandate wins.

AMP Capital external net cash inflows were A$2,439m, up from net outflows of A$153m in 1H 16. Inflows were driven by strong flows into fixed income and real asset (infrastructure and real estate) capabilities.

Underlying return on equity rose 2.6 percentage points to 14.5% in 1H 17 from 1H 16, largely reflecting the impact of capital management programs.

Completion of reinsurance program delivers on strategy, with new arrangements to release approximately A$500 million of capital from AMP Life (subject to regulatory approval) further reducing the capital intensity of the wealth protection business.

Sustained cost management on track to deliver 3 per cent reduction in controllable costs (ex AMP Capital) by FY 17.

Strong capital position with A$1.9 billion over minimum regulatory requirements. Interim dividend increased to 14.5 cents a share, franked to 90 per cent.

Wealth protection: reinsurance update

AMP today announced a series of new reinsurance agreements, delivering on its strategy to release capital from the Australian wealth protection business and reduce future earnings volatility. Releasing approximately A$500 million in capital from AMP Life (subject to regulatory approval), the new reinsurance agreements include:

A new quota share agreement with General Reinsurance Life Australia Limited (Gen Re) to cover 60 per cent of the NMLA retail portfolio, which was merged with AMP Life on 1 January 2017.

An extension to the existing agreement with Munich Reinsurance Company of Australasia Limited (Munich Re) to cover 60 per cent (up from 50 per cent) of the AMP Life retail portfolio.

A new surplus cover agreement with Gen Re to assist in managing risk and volatility in individual retail claims.

Recapture of 35 existing reinsurance treaties, simplifying AMP’s overall reinsurance arrangements.

The new reinsurance agreements will commence on 1 November 2017 and, when combined with the first tranche of reinsurance completed in 2016, effectively means 65 per cent of AMP’s retail life insurance portfolio will be reinsured for claims incurred from 1 November 2017.

Australian wealth management

Australian wealth management operating earnings, down 1 per cent to A$193 million, were resilient. The result demonstrates effective margin management during the final transitions to low-cost MySuper funds and amid significant activity across the superannuation industry. MySuper transitions completed in 1H 17 with margin compression expected to continue to be around 5 per cent this year.

Net cashflows were significantly higher in 1H 17, with stronger inflows from discretionary super contributions ahead of 1 July changes to non-concessional caps. The transition of corporate super mandates also supported inflows, with one mandate bringing more than 3,700 new customers to AMP. During the period, AMP paid A$1.3 billion in pensions to help customers through their retirement.

AMP’s flagship North platform performed well in 1H 17, with flows up 8 per cent and AUM up 13 per cent on FY 16. North now has more than A$30 billion in assets under management.

To offset the impact of margin compression, AMP is targeting additional revenue growth from its Advice and SMSF businesses, which is reported in the Other revenue line. AMP expects Other revenue to increase by 10 per cent in FY 17, with growth in Advice and SMSF revenues emerging in 2H 17 and accelerating into 2018. This will support the delivery of AMP’s target of 5 per cent overall revenue growth in Australian wealth management through the cycle.

AMP Capital

AMP Capital delivered strong growth in operating earnings, up 11 per cent to A$92 million, benefiting from good growth in fee income. External assets under management fees rose by 6 per cent to A$132 million and non-AUM based management fees also increased, benefiting from growth in real estate development fee revenue.

External net cashflows increased to A$2.4 billion, with significant cash inflows into fixed income and higher-margin real assets. Real assets proved popular with investors wanting exposure to leading infrastructure and real estate investments.

Delivering on its strategy to expand internationally, AMP Capital grew its number of direct international institutional clients from 199 at FY 16 to 252 in 1H 17 and now manages A$10 billion in assets on their behalf. In China, AMP Capital’s asset management joint venture, China Life AMP Asset Management (CLAMP), continues to grow rapidly with AUM increasing 22 per cent to RMB 141 billion (A$27.1 billion) in 1H 17. Total AUM for China Life Pension Company, the pensions joint venture in which AMP owns a 19.99 per cent stake, grew 8 per cent to RMB 408.2 billion (A$78.5 billion) in 1H 17.

At 30 June 2017, AMP Capital had A$3.5 billion of committed funds available for investment including funds raised in its Infrastructure Debt Fund III (IDFIII), which has attracted strong international interest.

AMP Bank

Strong growth momentum continued in AMP Bank, with operating earnings up 10 per cent to A$65 million, driven by 17 per cent growth in lending to A$18.8 billion.

AMP Bank delivered residential mortgage book growth of A$1.7b in 1H 17 to A$18.2b (an increase of 18% from 1H 16 and 10% from 2H 16), driven by strong growth in owner occupied lending. Growth in AMP Bank’s investment property and interest only lending segments was constrained, in response to regulatory requirements. They expect this trend to continue in 2H 17.

Above system loan growth was delivered through both the broker and AMP aligned adviser channels. Sales through the AMP aligned channel in 1H 17 were up 49% on 1H 16.

The cost to income ratio rose slightly to 29 per cent, with controllable costs increasing by A$4 million reflecting ongoing investment to support growth. Lending growth in the bank is expected to moderate in the second half as the market adjusts to new regulatory requirements.

Net interest margin declined 4 basis points from 1H 16 but improved 4 basis points on 2H 16.

Asset quality remains strong, with mortgages in arrears (90+ days) at 0.48% as at June 2017. Loan impairment expense to average gross loans and advances was 0.02% in 1H 17, reflecting the conservative underwriting standards

Australian wealth protection

Actions undertaken in 2016 to stabilise and reset the business are working and have delivered an improved result. Operating earnings rose 11 per cent, with improved experience offsetting lower profit margins.

The announcement of further reinsurance agreements, completing the strategic reinsurance program, lessens exposure to retail claims volatility and will further stabilise wealth protection earnings. AMP continued to support customers during their time of need, paying A$575 million in claims during the six months to 30 June.

New Zealand financial services

Operating earnings, up 5 per cent to A$65 million, reflect higher experience profits. AUM increased 6.9 per cent to A$15.5 billion on positive markets.

A strong focus on cost management supported a reduction in controllable costs by 3 per cent to A$38 million and improved the cost to income ratio by 1.4 percentage points to 27.2 per cent.

Australian mature

Operating earnings are up A$6 million from 1H 16 to A$75 million due to strong markets, lower controllable costs and improved experience.

Capital and dividend

AMP’s capital position remains strong, with level 3 eligible capital resources A$1,887 million above minimum regulatory requirements at 30 June 2017, down from A$2,195 million at 31 December 2016.

The reduction largely reflects capital returned to shareholders through an on-market share buy back and investment in business growth during the period. The new reinsurance agreements are expected to release up to an additional A$500 million from AMP Life (subject to regulatory approval).

The interim dividend has been increased to 14.5 cents per share, franked at 90 per cent. The 1H 17 dividend payout is within AMP’s stated target range of 70 to 90 per cent of underlying profit

CBA FY17 Profit Up 7.6%

CBA just released their FY17 results, with statutory NPAT $9,928m, up 7.6% on FY16. The cash NPAT was up 4.6% to $9,881m. Much of the lift is explained by a fall in loan impairment expense, down 12.8% to $1,095m, plus a one off from the Visa transaction.

However their net interest margin fell 3 basis points to 2.11%, despite recent mortgage book repricing. The underlying cost income ratio fell 60 basis points to 41.8%.

As a result, return on equity overall fell 0.5% to 16%, earnings per share was $5.74 (compared with $5.55 in FY16) and the dividend per share was $4.29, compared with $4.20 last year.

Operating income increased by 3.8%, ahead of operating expense growth of 2.4%, delivering positive jaws on an underlying basis.

Banking income grew 4.3% due to volume growth in home lending, business lending and deposits. Insurance income fell 1.1% due to loss recognition of $143 million.

CBA Invested almost $1.3 billion whilst maintaining underlying expense growth to 2.4%.

Higher wholesale funding costs and increased competition in home and business lending more than offset asset repricing, resulting in a 3 basis point decline in the net interest margin to 2.11%. In calculating the Group’s NIM, mortgage offset balances are now being deducted from average interest earning assets to reflect their non-interest earning nature, and to align with peers and industry practice. This results in changes to Group’s NIM for current and prior periods.

It was flat second half thanks to home loan repricing.

Looking across the divisions, the Retail Bank again contributed the lions share of the result, but with positive growth at the NPAT level in all divisions, other that IFS; all on a cash basis.

In the Retail bank, consumer arrears were controlled, though losses in WA climbed again, with 90+ days at 1.23%.

Some interesting mortgage related information was contained in the announcement.

The FY17 losses on their home loan book is 3 bpts. The portfolio dynamic LVR is 50%. Investment loans make up 33%, with new investment loans falling from 37% in Dec 16 to 32% in Jun 17. 77% of customers are paying in advance – this includes any amount ahead of monthly minimum repayment and includes offset facilities. They have a loan serviceability buffer of 2.25% above the customer rate, with a minimum floor rate (RBS: 7.25% pa, Bankwest: 7.35%). They have a maximum LVR of 80% for IO loans now. Interest Only loans have lower arrears.

John Symond exercised his put option which will require CBA to acquire the remaining 20% interest in Aussie Home Loans (AHL). The purchase price will be determined in accordance with the terms agreed in 2012 and the purchase consideration will be paid in the issue of CBA shares. They will consolidate AHL from completion of the acquisition which is currently expected to be in late August 2017.

Their focus on propitiatory loan origination has led to a fall in the proportion of loans via brokers.

More broadly, CommBank research on financial wellbeing shows one in three Australian households would struggle to access $500 in an emergency, and more than a third of Australians are spending more than they earn each month.

The Group’s Common Equity Tier 1 (CET1) ratio was 10.1% on an APRA basis, and 15.6% on an internationally comparable basis, maintaining CBA’s position in the top quartile of international peer banks for CET1.

CBA are confident they will meet APRA’s‘unquestionably strong’ CET1 ratio average benchmark of 10.5% or more by 1 January 2020.

Customer deposits contributed 67% of total funding and the Net Stable Funding Ratio (NSFR) was 107%.

The average tenor of the wholesale funding portfolio was 4.1 years and the average tenor of new issuance was 5.2 years.

Liquid assets increased from $134 billion in 2016 to $142 billion, and the Liquidity Coverage Ratio was 129%.

The Leverage Ratio was 5.1% on an APRA basis and 5.8% on an internationally comparable basis.

The banking levy is estimated at $258m (post tax), first payment due March 2018. The Group effective tax rate will be 30.3% after the levy.