What Does The Recent Bank Results Tell Us About Mortgage Defaults?

We have now had results in from most of the major players in retail banking this reporting season. One interesting point relates to mortgage defaults.  Are they rising, or not?

Below are the key charts from the various players. Actually, there are some significant differences. Some are suggesting WA defaults in particular are easing off now, while others are still showing ongoing rises.

This may reflect different reporting periods, or does it highlight differences in underwriting standards? Our modelling suggests that the rate of growth in stress in WA is slowing, but it is rising in NSW and VIC; and there is a 18-24 month lag between mortgage stress and mortgage default. So, in the light of expected flat income growth, continued growth in mortgage lending at 3x income, rising costs of living and the risk of international funding rates rising, we think it is too soon to declare defaults have peaked.

One final point, many households have sufficient capital buffers to repay the bank, thanks to ongoing home price rises. Should prices start to fall significantly, this would change the picture significantly.

Bank of Queensland

ANZ

CBA

Genworth

Westpac

CBA 1Q18 Trading Update

CBA released their latest trading update today, with a rise in profit, and volumes as well as a lift in capital. Expenses were higher reflecting some provisions relating to AUSTRAC, but loan impairments were lower. WA appears to be the most problematic state.

Their unaudited statutory net profit was approximately $2.80bn in the quarter and their unaudited cash earnings was approximately $2.65bn in the quarter, up 6% (on average of two FY17 second half quarters). Both operating income and expense was up 4%.

Operating income grew by 4%, with banking income supported by improved margins. Home lending growth was managed within regulatory limits.

Trading income was broadly flat. Funds management income decreased slightly, with lower margins partly offset by the benefit of positive investment markets, which contributed to AUM and FUA growth in the quarter.

Insurance income improved reflecting fewer weather events and the non-recurrence of loss recognition.

Group Net Interest Margin was higher in the quarter driven by asset repricing and reduced liquid asset balances, partly offset by the impact of the banking levy, higher funding costs and competition.

Expense growth of 4% includes provisions for their current estimates of future project costs associated with regulatory actions and compliance programs – including those related to the Australian Transaction Reports and Analysis Centre (AUSTRAC) proceedings. On 3 August 2017, AUSTRAC commenced civil penalty proceedings against CBA. CBA is preparing to lodge its defence in response to the allegations in the Statement of Claim and at this time it is not possible to reliably estimate any potential penalties relating to these proceedings. Any such potential penalties are therefore excluded from these provisions.

Loan Impairment Expense (LIE) of $198 million in the quarter equated to 11 basis points of Gross Loans and Acceptances, compared to 15 basis points in FY17.

Corporate LIE was substantially lower in the quarter. Troublesome and impaired assets were lower at $6.1 billion, with broadly stable outcomes across most sectors.

Consumer arrears were seasonally lower but continued to be elevated in Western Australia.

Prudent levels of credit provisioning were maintained, with Total Provisions at approximately $3.7 billion.

68% of their balance sheet is funded from deposits.

The average tenor of wholesale funding extended a little. The Group issued $9.5 billion of long term funding in the quarter, including a 30 year US$1.5bn issue –a first for an Australian major bank.

The Net Stable Funding Ratio (NSFR) was 107% at September 2017.

The Liquidity Coverage Ratio (LCR) was 131% as at September 2017, with liquid asset balances and net cash outflows moving by similar amounts in the quarter. Liquid assets totalled $132 billion as at September 2017.

The Group’s Leverage Ratio was 5.2% on an APRA basis and 5.9% on an internationally comparable basis, an increase under both measures of 10 basis points on June 17.

The Group’s Common Equity Tier 1 (CET1) APRA ratio was 10.1% as at 30 September 2017. After allowing for the impact of the 2017 final dividend (which included the issuance of shares in respect of the Dividend Reinvestment Plan), CET1 increased 55 basis points in the quarter.

Credit Risk Weighted Assets (RWAs) were lower in the quarter, contributing 16 basis points to CET1, partially offset by higher IRRBB9(-13 bpts) driven by interest rate movements and risk management activities.

The maturity of a further $350m of Colonial debt compressed CET1 by 8 basis points in the quarter. The final tranche of Colonial debt ($315m) is due to mature in the June 2018 half year, with an estimated CET1 impact of -7 basis points.

In September 2017 the Group announced the sale of its Australian and New Zealand life insurance operations to AIA Group Ltd. The sale is expected to be completed in calendar year 2018 and is expected to result in a pro-forma uplift to the CET1 (APRA) ratio of approximately 70 basis points.

Westpac FY17 Up 3%; Margin Down – Banking on Property

Westpac has released their FY17 results. They are literally banking on property. They do not expect home prices to fall significantly and they expect mortgage lending to continue to grow.

Statuary net profit was $7,990 million, up 7% on 2016, and cash earnings up 3% to $8,062.

This is a bit lower than expected, impacted by lower fees and commission, pressure on margins, the bank levy and a one-off drop to compensate certain customers.  Despite strong migration to digital, driving 59 fewer branches and a net reduction of ~500 staff, expenses were higher than expected. There has been a 23% reduction in branch transactions over the past two years in the consumer bank. Treasury had a weak second half.

Around 70% of the bank’s loan book is one way or another linked to the property sector, so future performance will be determined by how the property market performs.

Provisions were lower this cycle, and at lower levels than recent ANZ and NAB results. WA mortgage loans have higher mortgage arrears.

The balance sheet is strong on all the critical ratios. They are “essentially done” they say.

Cash earnings per share is up 2% to 239.7 cents and the cash return on equity is 13.8%. There was no change to the dividend.

Net interest margin was 2.09%, 4 basis points lower, compared with FY16, reflecting higher wholesale funding costs, bank levy and some asset repricing. The bank levy cost $95m pretax, or 2 basis points, or 2 cents per share.

Margin improved in the second half, thanks to loan repricing and improved wholesale funding. Mortgage repricing contributed 7 basis points in 2H17.

The cost of refunding customers who were entitled to certain product discounts, but may not have been aware that they needed to specifically request them was $118 million this year, equivalent to 1.5% of earnings. This is a one-off hit.

Non-interest income was down 9%, with $209m fall in trading income and $97 million in fees and commissions.

Growth in the consumer bank (mainly mortgages) was the strongest.

Costs were up 2% to $4,604 million, and the expense ratio 42%, including productivity savings of $262 million. They still want to get below 40%, eventually. Compliance costs rose.

Total provisions fell from $3.6 billion in 2016 to $3.1 billion in FY17.

Impaired assets to gross loans were down 10 basis points to 0.22%. Their impairment charge was was down 24% over the year to $853 million, which equates to 13 basis points, down 4 basis points on last year.

Westpac is a significant property aligned bank with 62% of the loan book related to Australian mortgage lending, which showed strong growth, with net flows of $13 billion in 2H17. There were more fixed rate loans, and less interest only loans. The value of the book was up 3% in the 2H17, to $427.2 billion.  Mortgage offset balances are $38.1 billion.  Commercial property lending is 6.48% of total lending, or $49.6 billion. So overall property exposure is close to 70% of the bank! $6.9 billion are in the residential apartment sector. Inner city consumer mortgages for apartments is $14.1 billion.

They reported $18.6bn of switching from IO to P&I mortgages in 2H17.

Investor loans lending is growing and is 46.8% of flow, and 39.8% of the portfolio. Around 54% of mortgage flows are via proprietary channels, while the portfolio sits at 57%. So broker flows have lifted to 46%.

WA delinquencies remain higher than other states, but are falling slightly. Westpac says they think delinquencies in WA have peaked.

There are more properties in possession in QLD than WA, mostly in regional mining areas.

This data on vacancy rates highlights the issue with investment property in WA!

The CET1 ratio is 10.6%, above the APRA target.

In FY18, they expect lower lending growth (but they think mortgages will still grow), margin will be impacted by more mortgage switching from interest only to principal & interest and there will be a $50m headwind from ATM and transaction fees. They will target cost savings of 2-3% and await the final APRA guidance on capital weights and mortgages.

Genworth 3Q Update Highlights Regional Risks

Lender Mortgage Insurer, Genworth a bellwether for the broader mortgage industry,  has reported statutory net profit after tax of $32.1 million and underlying NPAT of $40.5 million for the third quarter ended 30 September 2017.

While the volume of new business written was down 9.8% on 3Q16 to $5.5 bn, the gross written premium was down only 3.9% to $88.6 million. Underlying NPAT was down 14.5% to $40.5 million.

The total portfolio of delinquencies rose 4.4% to 7,146, and the loss rate overall was 3 basis points. The regional variations are stark.

The loss ratio however fell, 8.3 pts to 37%, thanks to (DFA suggests) equity linked to rising home prices. New South Wales and Victoria continue to perform strongly. However, the performance in Queensland and Western Australia remains challenging and delinquencies are elevated due to the slowdown in those regional and metropolitan areas that have previously benefited from the growth in the resources sector.

The 2008 book year was affected by the economic downturn experienced across Australia and heightened stress among self-employed borrowers, particularly in Queensland, which was exacerbated by the floods 2011. Post PostPost-GFC book years seasoning at lower levels as a result of credit tightening. Underperformance for 2012-14 books have been predominantly driven by resource reliant states of QLD and WA following the mining sector downturn however has started to show signs of stabilising over recent months.

There is considerable variation in economic activity across the country with continued growth in New South Wales and Victoria offset by weaker activity in Queensland and, in particular, Western Australia.

Investment income of $15.6 million in 3Q17 included a pre-tax mark-to-market unrealised loss of $12.0 million ($8.4 million after-tax). As at 30 September 2017, the value of Genworth’s investment portfolio was $3.4 billion, 89 per cent of which continues to be held in cash and highly rated fixed interest securities.

As at 30 September 2017, the Company had invested $214 million in Australian equities in line with the previously stated strategy to improve investment returns on the portfolio within acceptable risk tolerances. After adjusting for the mark-to-market movements, the 3Q17 investment return was 2.88 per cent per annum, down from 3.51 per cent per annum in 3Q16.

The Company has completed the on-market share buy-back to a value of $45 million and intends to continue the buy-back for shares up to a maximum total value of $100 million, subject to business and market conditions, the prevailing share price, market volumes and other considerations.

Genworth previously advised that its customer, the National Australia Bank Limited, extended its Supply and Service Contract for the provision of Lenders Mortgage Insurance (LMI) for NAB’s broker business. The term of the contract has been extended by one year to 20 November 2018.

Genworth expects 2017 NEP to decline by approximately 10 to 15 per cent. The full year loss ratio guidance has been updated to be between 35 and 40 per cent (based on the current premium earning pattern). Any change to the premium earning pattern may result in a change to these expectations

Suncorp Update To 30 Sep 2017

Suncorp provided its statutory quarterly update today under Australian Prudential Standard 330.  The bank appears to be travelling well, with a growing loan book across both home and business lending.  Bad debts are low, though there was a rise in past due in the QLD and NSW mortgage books. Capital is under pressure because of the loan growth.

They say that total lending grew 2.4% over the quarter, primarily due to strong home lending supported by improved capability, simplified processes and improved retention. The home lending portfolio grew by $1.1 billion. Year-on-year investor lending grew  7.6% and new interest-only lending of 29% was achieved for the quarter.

More than half of all lending is located within Queensland ($28.9 billion of $54 billion).$44 billion are retail loans and Business Lending, including Agribusiness was $9.8 billion.

Credit quality performance remains strong with impairment losses of $5 million, or 4 basis points of gross loans and advances (annualised). Higher arrears reported in the second half of the 2017 financial year relating to changes in hardship operational practices and processes are stabilising, as the temporary impacts of the revisions have normalised.

They say retail lending past due loans grew by $7 million over the quarter, reflecting slightly higher home lending past due loans in QLD and NSW.

The Bank has maintained its measured approach to managing funding and liquidity risk ensuring a strong and sustainable funding profile that supports balance sheet growth. This includes the successful issuing of a $1.5 billion capital effective Residential Mortgage-Backed Security
(RMBS) transaction, which further supports stability as reflected in the Net Stable Funding Ratio (NSFR) position, estimated to be 113% as at 30 September 2017.

Following the payment of the final 2017 financial year dividend to Suncorp Group, Banking’s Common Equity Tier 1 ratio of 8.77% reflects a sound capital position within the operating range of 8.5% to 9.0%.

The main risks are a declining property market or higher than anticipated cyclone claims.

 

NAB FY17 Result Cash Earnings $6,642 million

National Australia Bank reported its FY17 results today. Cash earnings were up 2.5% to $6,642 million, which was below expectation, and the statutory profit was $5,285m. The cash return on equity was 14%, down 30 basis points on last year. CET1 Capital was 10.1%, up 29 basis points.

NAB now has its main footprint in Australia, (and New Zealand). NIM improved, although the long term trend is down. Wealth performance was soft, and expenses were higher than expected, but lending, both mortgages and to businesses, supported the results.  They made a provision for potential risks in the retail and the mortgage portfolio, with a BDD charge of 15 basis points but new at risk assets were down significantly this last half.

Ahead, they flagged considerable investment in driving digital, and major cost savings later into FY20.

Of the $565.1 billion in loans, 58% of the business is mortgages, 40% business loans and 2% personal loans. 84% of gross loans are in Australia, and 13% in New Zealand. 10.9% of gross loans, or $61.9bn are commercial real estate loans, mainly in Australia.

So, the key risk, or opportunity, depending on your point of view, is the property sector. Currently portfolio losses are low at 2 basis points but WA past 90-day mortgages were up. If property prices start to fall away seriously, new mortgage flows taper down, or households get into more difficulty (especially if rates rise), NAB will find it hard to sustain its current levels of business performance.

Looking in more detail, Group Net operating income was 2.7% higher YOY and 1.8% higher in the second half.

Group net interest margin was 1.88%, up from 1.82% in 1H. They improved their lending margin by 7 basis points. The bank levy cost 3 basis points.

But long term NIM trends are lower.

Operating expenses rose 2.6% YOY

B&DD Charges rose to $416m, and was 0.15% of GLAs.

New impairments were $452m Sep 17, down from $690m in Mar 17.

The collective provisions were up, $2,798m in Sep 17.

NAB CET1 ratio is 10.1% under APRA, but 14.5% under their claimed Internationally Comparable CET1 ratio. It was hit by the move to higher mortgage risk weights in 2H. This added around 17 basis points.

51% of funding is from stable customer deposits.  The Liquidity Coverage Ratio was 123%.

The net stable funding ratio was 108% at Sep 17.

Looking in more detail at the segments:

The net interest margins for Consumer Banking and Wealth is 2.10%.

NIM for Business and Private Banking was higher.

Corporate and Institutional Banking NIM also improved.

NIM in the NZ business was also higher in 2H17.

Turning to the critical Australian Mortgage portfolio we see that housing revenue grew..

.. and NIM improved in 2H17.

They highlight prudent customer behaviour – on average customers are 30 monthly payments in advance; 73% of all customers are at least 1 month in advance but this includes offset accounts.

They said the average LVR at origination was 69% and the dynamic LVR is 43%

NAB uses interest rate buffers and applies a floor rate (7.25%) or buffer (2.25%) to new and existing debt, plus granular expense evaluation across 12 customer expense criteria using the greater of customer expense capture or scaled Household Expenditure Measures.

The strongest growth came from their Broker and Advantedge channels, with 4,637 brokers under NAB owned aggregators. 42% of draw-downs were attributed to brokers in Sep 17.  One third of the portfolio is broker originated.

They reported some switching from interest only loans to principal and interest loans, including contractual conversion.

The proportion of new interest only lending is falling. The 30% Interest Only flow cap includes all new IO loans and net limit increases on existing IO loans. The cap excludes line of credit and internal refinances unless the internal refinance results in an increased credit limit (only the increase is included in the cap).

90-Day past due date are sitting at ~0.6%, but WA is 1.2% (similar to other lenders, WA is were higher risks reside at the moment).  QLD is around 1.0%. 9% of loans are in WA, 17% in QLD. Current loss rates are 2 basis points (12 month rolling Net Write-offs / Spot Drawn Balances).

Looking ahead, the bank is targetting more than $1bn in cost savings by FY20 by driving simplification and automation, with a flatter organisational structure, and savings from procurement and third party costs. However, FY18 expenses are expected to increase by 5-8% due to higher investment spend, then targeting broadly flat expenses to FY20.

They highlight the transition to mobile, with more transactions now via mobile than internet banking.

Further investments will be made here. 6,000 jobs will go in the next 3 years, while 2,000 new digital jobs will be created.

Bendigo and Adelaide Bank Feel The Cold Hand Of The Regulator

Bengido and Adelaide Bank’s CEO provided a brief trading update as part of the FY17 AGM. There are some interesting comments on the FY18 outlook.

First they have been forced to “slam on the breaks” on mortgage lending to ensure they comply with APRA’s limits on interest only loans and investor loans. As a result their balance sheet will not grow as fast as previously expected.

On the other hand, this should help them maintain their net interest margins, their previous results had shown a steady improvement and strong exit margin.  They are forecasting 2.34%.

The recent ATM fee changes will have a negative impact, with costs rising ~2% although the amount is not stated from their ~1,700 ATM’s.

Finally, the slower loan book growth means they will be in a better capital position, and will be able to meet APRA’s “unquestionable strong” metric, on a standard basis, and perhaps 50 basis points above. The journey towards advanced accreditation appears still uncertain, but they believe there will be a more “level playing field”.

Macquarie Group Announced 1H18 Net Profit of $A1,248 million

Macquarie Group has announced a net profit after tax of $A1,248 million for the half-year ended 30 September 2017 (1H18), up 19 per cent on the half-year ended 30 September 2016 (1H17) and up seven per cent on the half-year ended 31 March 2017 (2H17).

Once again the Group has exceeded market forecasts, thanks to strong growth in performance fees from its annuity style businesses, this despite a fall in net interest income. Impairments fell. Their outlook for FY18 is also stronger.  More of their business is offshore than in Australia, so as the economic pace picks up in USA and Europe, they should benefit.

They gave their normal comprehensive briefing:

Net operating income of $A5,397 million for 1H18 was up three per cent on 1H17, while total operating expenses of $A3,693 million were down one per cent on 1H17.

Macquarie’s annuity-style businesses (Macquarie Asset Management (MAM), Corporate and Asset Finance (CAF) and Banking and Financial Services (BFS)), which represented approximately 80 per cent of the Group’s 1H18 performance, generated a combined net profit contribution of $A2,094 million, up 28 per cent on 1H17 and up 30 per cent on 2H17.

Macquarie’s capital markets facing businesses (Commodities and Global Markets (CGM) and Macquarie Capital) delivered a combined net profit contribution of $A568 million, down 18 per cent on 1H17 and down 25 per cent on 2H17.

International income accounted for 62 per cent of the Group’s total income.

Macquarie’s assets under management (AUM) at 30 September 2017 was $A473.6 billion, down two per cent from $A481.7 billion at 31 March 2017, largely due to net asset realisations in Macquarie Infrastructure and Real Assets (MIRA)5 and unfavourable currency movements in Macquarie Investment Management (MIM), partially offset by positive market movements.

Macquarie also announced today a 1H18 interim ordinary dividend of $A2.05 per share (45 per cent franked), up on the 1H17 interim ordinary dividend of $A1.90 per share (45 per cent franked) and down from the 2H17 final ordinary dividend of $A2.80 per share (45 per cent franked). This represents a payout ratio of 56 per cent. The record date for the final ordinary dividend is 8 November 2017 and the payment date is 13 December 2017.

Key drivers of the change from 1H17 were:

  • A one per cent increase in combined net interest and trading income to $A1,892 million, up from $A1,874 million in 1H17. The movement was mainly due to volume growth in the loan and deposit portfolios and improved margins in BFS, and a reduced cost of holding long-term liquidity in Corporate. This was partially offset by reduced interest income from Macquarie Capital’s debt investment portfolio and higher funding costs associated with an increase in principal investments, including the acquisition of Green Investment Group (GIG), as well as lower trading income in CGM as a result of lower market volatility.
  • A 17 per cent increase in fee and commission income to $A2,568 million, up from $A2,203 million in 1H17, due to increased performance fee income in MAM and higher fee income from the US debt capital markets business in Macquarie Capital due to increased client activity.

  • This was partially offset by reduced Life Insurance income in BFS after Macquarie Life’s risk insurance business was sold to Zurich Australia Limited in September 2016; lower mergers and acquisitions fee income in the US and Asia in Macquarie Capital; and reduced CGM brokerage and commissions income, mainly in equities due to continued low volatility across global equity markets and reduced brokerage commission rates due to the trend towards lower margin platforms.
  • A one per cent decrease in net operating lease income to $A469 million, down from $A476 million in 1H17, due to improved underlying income in CAF from the Aviation, Energy and Technology portfolios offset by foreign exchange movements.
  • Share of net profits of associates and joint ventures accounted for using the equity method of $A103 million in 1H18 increased from a loss of $A8 million in 1H17, primarily due to the improved underlying performance of investments held in Macquarie Capital.
  • Other operating income and charges of $A365 million in 1H18, down from $A673 million in 1H17. The primary drivers were lower principal gains in Macquarie Capital and CGM and the non-recurrence of the gain on sale of Macquarie Life’s risk insurance business to Zurich Australia Limited in 1H17 by BFS, partially offset by lower charges for provisions and impairments across most operating groups.
  • Total operating expenses of $A3,693 million in 1H18 decreased one per cent from $A3,733 million in 1H17, mainly due to reduced project activity in BFS, reduced employment expenses from lower average headcount, partially offset by transaction, integration and ongoing costs associated with the acquisition of GIG in Macquarie Capital.

Impairments fell from $280m (1H17) to $142m 1H18.

Staff numbers were 13,966 at 30 September 2017, up from 13,597 at 31 March 2017.

The income tax expense for 1H18 was $A448 million, a two per cent increase from $A438 million in 1H17. The increase was mainly due to higher profit before tax. The effective tax rate of 26.4 per cent was down from 29.4 per cent in 1H17 and broadly in line with the 2H17 rate of 26.9 per cent, reflecting the geographic mix and nature of earnings.

Total customer deposits increased three per cent to $A49.4 billion at 30 September 2017 from $A47.8 billion at 31 March 2017. During 1H18, $A8.2 billion of new term funding7 was raised covering a range of tenors, currencies and product types.

Macquarie’s financial position comfortably exceeds APRA’s Basel III regulatory requirements, with Group capital surplus of $A4.2 billion at 30 September 2017. This surplus was down from $A5.5 billion at 31 March 2017, following payment of the FY17 final dividend and FY17 Macquarie Group Employee Retained Equity Plan buying requirement, the ECS buyback and business growth, partially offset by 1H18 profit and movement in reserves. The Bank Group APRA Basel III Common Equity Tier 1 capital ratio was 11.0 per cent (Harmonised: 13.3 per cent) at 30 September 2017, down from 11.1 per cent (Harmonised: 13.3 per cent) at 31 March 2017.

The Bank Group’s APRA leverage ratio was 6.1 per cent (Harmonised: 6.9 per cent), LCR was 153 per cent and NSFR was 109 per cent at 30 September 2017.

The Basel Committee has delayed the finalisation of proposals to amend the calculation of certain risk weighted assets under Basel III. Any impact on capital will depend upon the final form of the proposals and local implementation by APRA.

APRA has delayed until at least 1 January 2019 the implementation of a new standardised approach for measuring counterparty credit risk exposures on derivatives (SA-CCR) and capital requirements for bank exposures to central counterparties. APRA has also announced that it does not expect to finalise a new market risk standard until at least 2020, with implementation from 2021 at the earliest.

APRA provided guidance around CET1 capital ratios for Australian banks to be considered ‘unquestionably strong’ and intends to release further details on how the new requirements will be implemented later this year. APRA has indicated11 that the implementation of the proposal will incorporate changes to the prudential framework resulting from the finalisation of Basel III. Based on existing guidance, Macquarie’s surplus capital position remains sufficient to accommodate any additional requirements.

To provide additional flexibility to manage the Group’s capital position going forward, the Board has approved an on-market buyback of up to $A1 billion, subject to a number of factors including the Group’s surplus capital position, market conditions and opportunities to deploy capital by the businesses. This buyback has received the necessary regulatory approvals.

Operating group performance

  • Macquarie Asset Management delivered a net profit contribution of $A1,189 million for 1H18, up 39 per cent from $A857 million in 1H17. Performance fee income of $A537 million, from Macquarie European Infrastructure Fund 3 (MEIF3), Macquarie Atlas Roads (MQA) and other MIRA-managed funds and co-investors, was up from $A170 million in 1H17. Base fees of $A795 million were broadly in line with 1H17 as investments made by MIRA-managed funds, growth in the MSIS Infrastructure Debt business and positive market movements in MIM AUM were partially offset by asset realisations by MIRA-managed funds, net flow impacts in the MIM business and foreign exchange impacts. Investment-related income was broadly in line with 1H17 and included gains from sale and reclassification of certain infrastructure investments. Assets under management of $A471.9 billion decreased two per cent on 31 March 2017.
  • Corporate and Asset Finance delivered a net profit contribution of $A619 million for 1H18, up 19 per cent from $A521 million in 1H17. The increase was mainly driven by increased income from prepayments, realisations and investment-related income in the Principal Finance portfolio and lower provisions for impairment, partially offset by lower interest income as a result of the reduction in the Principal Finance portfolio. The Asset Finance portfolio continued to perform well. CAF’s asset and loan portfolio of $A35.5 billion decreased three per cent on 31 March 2017.
  • Banking and Financial Services delivered a net profit contribution of $A286 million for 1H18, up 10 per cent from $A261 million in 1H17. The improved result reflects increased income from volume growth in the loan and deposit portfolios and improved margins. 1H17 included the gain on sale of Macquarie Life’s risk insurance business net of expenses including impairment charges predominately on equity investments and intangible assets, and a change in approach to the capitalisation of software expenses in relation to the Core Banking platform. BFS deposits12 of $A46.4 billion increased four per cent on 31 March 2017 and funds on platform13 of $A78.9 billion increased nine per cent on 31 March 2017. The Australian mortgage portfolio of $A29.9 billion increased four per cent on 31 March 2017, representing approximately two per cent of the Australian mortgage market.
  • Commodities and Global Markets delivered a net profit contribution of $A378 million for 1H18, down 23 per cent from $A490 million in 1H17. The result primarily reflects reduced income from the sale of investments, mainly in energy and related sectors, and lower volatility across the commodities platform resulting in reduced client activity and trading opportunities. This was partially offset by strong client flows and revenues from interest rates and foreign exchange, improved results across the equities platform, and lower operating expenses reflecting reduced commodity-related trading activity, reduced average headcount and associated activity, and realisation of benefits from cost synergies following the merger of Commodities and Financial Markets and Macquarie Securities Group. Macquarie Energy improved its Platts ranking to become the No. 2 US physical gas marketer in North America.
  • Macquarie Capital delivered a net profit contribution of $A190 million for 1H18, down seven per cent from $A205 million in 1H17. The result reflects reduced investment-related income and lower M&A fee income in the US and Asia, partially offset by higher fee income from debt capital markets in the US and lower provisions and impairment charges. During 1H18, Macquarie Capital advised on 152 transactions valued at $A73 billion including being defence adviser to DUET Group in response to the $A13.4 billion acquisition by Cheung Kong Infrastructure; acquisition of 100 per cent ownership interest in RES Japan, a Japanese subsidiary of Renewable Energy Systems Group, rebranded as Acacia Renewables and focused on developing a pipeline of onshore wind energy projects; and financial advisor and equity investor in the restructuring and acquisition of the 907MW Norte III combined cycle gas plant in Juarez, Mexico. During 1H18, Macquarie completed the acquisition of the UK Green Investment Bank plc from HM Government for £2.3 billion. The Green Investment Bank, rebranded as Green Investment Group, is one of Europe’s largest teams of green energy investment specialists, with expertise in project finance and development, construction, investment and asset management of green energy infrastructure.

Macquarie advised today that ex. RBA Chief Glenn Stevens will be appointed to the Macquarie Group Limited and Macquarie Bank Limited Boards as an independent director, effective 1 November 2017.

ANZ FY17 Results – Look Under The Hood!

ANZ today announced a Statutory Profit after tax for the Full Year ended 30 September 2017 of $6.41 billion up 12% and a Cash Profit of $6.94 billion up 18% on the prior comparable period. Half the uplift was related to one-off items. More of the business going forwards will be based on its Australian and New Zealand Retail businesses (a.k.a. mortgage lending!).

ANZ’s Common Equity Tier 1 Capital Ratio was 10.6% up 96 basis points (bps).

Return on Equity increased 159 bps to 11.9% with Cash Earnings per Share up 17% to 237.1 cents.

The Final Dividend is 80 cents per share, fully franked, reflecting a payout ratio of 68% of Cash Profit, moving closer to ANZ’s target fully franked full year payout ratio of 60‐65%.

At one level this is a strong result, as the contribution from asset sales flows into the business, such that Australia and New Zealand which now accounts for 53% of capital, up from 44% two years ago. As a result, they generated strong organic capital growth and the APRA CET1 capital ratio now stands at 10.6%, up from 9.6%, so they already meet APRA’s ‘unquestionably strong’ 2020 capital target. Organic capital generation of 229 bps over the year was over 50% greater than the average (140 bps)
of the past five years.

The Group has a strong funding and liquidity position with the Liquidity Coverage Ratio at 135% and Net Stable Funding Ratio at 114%.

The total provision charge of $1.2 billion equates to a loss rate of 21 bps, a decline of 13 bps over the year. Gross impaired assets over the same period decreased 25% to $2.38 billion with new impaired assets down 11%.

But at another level, the net interest margin is down 8 basis points on last year to 1.99%, with a fall of 2 basis points in 2H, despite the mortgage book repricing and loan switching. The Australian margin fell from 275 basis points in FY16 to 268 basis points in FY17.  There was a 4 basis point impact in 2H17 as a result of the bank levy.

Credit impairments as a percentage of average GLAs down from 0.34% to 0.21% as they de-risk the business (institutional and Asia), but grow the Retail business in Australia and New Zealand, with an emphasis on  owner occupied home lending.

Full time staff fell from 46,554 to 44,896, so the cost base has reduced and is down year on year in absolute terms for the first time in 18 years. Costs rose in Australia by 2.7%.

Australian individual provisions remained at 0.33% of Gross Lending Assets, higher than the 0.22% in New Zealand but significantly lower than Asia retail.

This also exposes them to the risks of a property downturn and higher mortgage defaults. 90-Day defaults overall remained similar to last year, but with a spike in WA and a fall in VIC/TAS. (Excludes non-performing loans).

The Australian home loan portfolio grew by 7% to $265 billion. Investor loans were 32% of flow. 56% of loan flows were originated via brokers, and 51% of the portfolio were broker sourced, up from 49% in FY16. There was a rise in fixed rate lending. The portfolio is now 45% of total group lending and 64% of the Australian lending. 31% of the portfolio are interest only loans, and 27% of flow in September half to date. They say they will meet the APRA target. There was a small rise in loans with an LVR of higher than 95% in the Sept 17 period.

Investment loan delinquencies are rising, whereas they have traditionally be lower than OO loans.

They have tightened underwriting standards, including:

  • The maximum interest only period reduced from 10 years to 5 years for investment lending to align to owner occupier lending
  • Reduced LVR cap of 80% for Interest Only lending
  • Interest only lending no longer available on new Simplicity PLUS loans (owner occupier and investment lending)
  • Minimum default housing expense (rent/board) applied to all borrowers not living in their own home and seeking RILs4 or EMAs5
  • Restrict Owner Occupier and Investment Lending (New Security to ANZ) to Maximum 80% LVR for all apartments within 7 inner city Brisbane postcodes.
  • Restrict Investment Lending (New Security to ANZ) to Maximum 80% LVR for all apartments within 4 inner city Perth postcodes

ANZ’s captive Lenders Mortgage Insurer reported stable loss ratios of 2.4 basis points.

They warn “household debt and savings have both increased, however the ability for households to withstand economic shocks has diminished a little”. “In 2018 we expect the revenue growth environment for banking will continue to be constrained as a result of intense competition and the effect of regulation including a full year of impact of the Australian bank tax.”

Bank of Queensland FY17 Results

Band Of Queensland today announced cash earnings after tax of $378 million for FY17, up 5 per cent on FY16. Statutory net profit after tax increased by 4 per cent to $352 million.

There was a one-off $16m uplift thanks to asset sales, but the stronger results were really thanks to lower bad and doubtful debts.  Otherwise, pretty much as expected. The question is, can the NIM improvement be maintained in the ultra-competitive market, despite a small lift in past 90 day mortgage defaults?

Return on equity was 10.4%, just slightly better than FY16, but this included the $16m profit from asset disposals.

Net interest margin fell to 1.87%, but was better in 2H.

Loan growth was significantly lower in FY17, although better in 2H.

The BOQ Board has maintained a fully franked final dividend of 38 cents per ordinary share and announced a fully franked special dividend of 8 cents per ordinary share.

Second half cash earnings after tax increased 16 per cent on the first half result, supported by a $16 million profit on the disposal of a vendor finance entity. On an adjusted basis (excluding the vendor finance entity disposal), FY17 cash earnings after tax increased 1 per cent to $362 million and second half cash earnings after tax in creased 7 per cent on the prior half to $187 million.

Lending growth improved in both the housing and commercial loan portfolios.

The Virgin Money Reward Me home loan portfolio has grown ahead of expectations.

Broker settlements increased to 28%, and interest only loans was 40% in 2H16, and 39% in 1H17, but trending down, they say! 8% of loans are higher than 90% on a portfolio basis, and 19% in the 81-90% band.

These include Virgin Money home loans.

BOQ’s niche businesses continue to grow. BOQ Specialist, BOQ Finance and other commercial lending target segments have all delivered good results.

During the year, capability has been built in the niche segment of corporate healthcare, leveraging industry expertise and contacts through BOQ Specialist. Loan balances in the niche business banking segments of agribusiness, corporate healthcare & retirement living and hospitality & tourism have grown by $309 million to $1.5 billion.

BOQ Finance also made another strong contribution. The Cashflow Finance acquisition made during the year added another dimension to the business’ suite of finance products.

BOQ’s asset quality remains sound with further improvement across a range of metrics. This is the outcome of a deliberate approach to improve risk management over the past five years. Impaired assets as a percentage of gross loans were down to 44 basis points, while loan impairment expense was just 11 basis points of gross loans during the year.

However, there was a small rise in 90 days past due mortgage arrears.

BOQ has delivered on its 1 per cent underlying expense growth target with underlying expenses of $510 million. This target was achieved while still investing in the business. BOQ is continuing to invest in digitising processes, which will have the dual benefit of improving customer experiences and improving business efficiency.

BOQ’s strong capital position further improved. The CET1 ratio was up 10 basis points over the half to 9.39 per cent.

This position will be further strengthened by 20 to 25 basis points following business and regulatory changes expected to occur in the first half of FY2018. In response to these changes and BOQ’s position, the Board has determined that returning some of this excess capital to shareholders is the most appropriate course of action at this time.

A special dividend of 8 cents per ordinary share has been announced by the Board, along with suspension of the dividend reinvestment plan for the final and special dividends on ordinary shares. This will be reinstated on 24 November 2017.