ME Bank profit up 34 per cent

Industry super fund-owned bank ME today reported an after-tax underlying net profit of $40.4 million for the six months to 31 December 2016, a rise of 34% on the previous corresponding period.

ME CEO, Jamie McPhee, said it was a strong result in the face of margin pressures that are expected to continue throughout the year.

Home loan settlements hit $3.2 billion for the six months, up 54% compared to the previous corresponding period, while ME’s home loan portfolio grew 9% to $20.6 billion. Total assets grew 6% to $24.6 billion.

ME’s statutory profit after tax, which includes the amortisation of realised losses on hedging instruments, a loss on the sale of the business banking portfolio and transition costs associated with a significant new technology partnership with Capgemini, was $29.3 million (HY16: $34.5 million).

Net interest margin declined 3 basis points to 1.46% relative to the previous corresponding period due to competition for new customers and higher funding costs; however, the impact on earnings was offset by increased home loan sales.

ME’s digital strategy incorporates increasing levels of process automation, including credit assessments and valuations, leading to further improvements in the cost to income ratio.

Customer numbers grew 8% to 393,416 and the bank passed the 400,000-mark in in early March 2017.

Net interest income increased 9% to $162.4 million with total income up by 3% to $187.1 million. Total operating expenses decreased from $118.9 million to $117.2 million.

ME remains very well capitalised at 31 December 2016, with a Common Equity Tier 1 ratio of 10.40% and a Total capital ratio of 14.84%.

McPhee said several strategic initiatives with its industry super fund partners were progressing well including providing customers with a single view of their banking and super accounts through a partnership with Link Group, which is scheduled to be launched with a major industry super fund in the second half of FY17.

As reported in Australian Broker,

Over half of the bank’s home loan settlements came through the broker channel, Lino Pelaccia, ME’s general manager of broker, told Australian Broker.

“The contribution from brokers is slightly up on the same time as last year due mainly to our continued expansion into the broker market,” he said.

“Increasing numbers of brokers are considering ME home loans, we continue to improve our broker services and service levels have remained very consistent over the last 12 months with new technology, and we continue to offer very competitive prices compared to other banks.”

Looking at the breakdown of settlements between owner-occupier buyers and investors, Pelaccia said the ratio will not change much given APRA’s current cap on growth in investment lending.

“We also note ME is well below that cap at the moment and so have some room to win more investor business before the end of the financial year,” he said.


Brokers write $339m in loans for CUA

From Australian Broker.

Credit Union Australia (CUA) has issued $1.06bn in mortgage lending for owner occupiers and investors in the six months prior to 31 December 2016.

Talking about the firm’s half yearly financial results released yesterday (8 March), Natasha Kelso, CUA national manager for broker, said that 32% of all mortgage lending during this period – around $339m – was via the broker channel.

This was down slightly from the share of broker-originated lending in the previous half yearly period which equated to around 40%, she said.

“It’s important to CUA that we provide new and existing members with a choice of channels in which to obtain a home loan. Brokers are an important part of that mix and CUA is exploring opportunities to increase our third-party relationships in 2017.”

The credit union’s focus on improving relationships with brokers throughout the latter half of 2016 included a national roadshow to educate brokers about CUA and its recent lending policy changes, she told Australian Broker.

“Following this roadshow, we’ve seen an increase in applications through the broker channel since November. This is now flowing through to higher volumes of new loans being settled in the first few months of 2017.”

CUA has also trialled a program to speed up the ‘time to yes’ for applications submitted through the broker channel, she said.

Furthermore, the credit union has also been progressively rolling out its new home loan origination platform to all CUE lenders and branches nationally since July.

“[This platform] is yet to be made available to the broker channel – this phase of the rollout is scheduled for early 2018, which will deliver a more streamlined, digital process for borrowers.”

Yellow Brick Road Turns A Profit

Yellow Brick Road says their H1 FY2017 result has delivered a maiden profit as a result of a focused and disciplined business approach and back to basics cost control.

Net profit after tax is $0.4m, a $4.5m improvement on H1 FY2016 (loss of $4.1m). The Company’s Underlying EBITDA (which excludes non-operating costs) was $3.1m, a $5.1m improvement on H1 FY2016 (loss of $2.0m).

The Wealth business gained strong momentum with revenue growth of 25%, including a 29% improvement in recurring revenues. Recurring revenue growth was derived from a 28% increase in underlying Funds Under Management (FUM) and a 20% increase in Premiums Under Management (PUM) since 30 June 2016.

The Lending business continues to perform strongly. Apart from an anticipated drop in settlement volumes from Vow Flat Fee lending (which is low margin and had minimal impact on the bottom line), all lending distribution channels – including other Vow lending – exceeded market growth.

A highlight was the YBR network’s 20% settlement growth. The drawn value of the Company’s underlying loan book grew 11% to $41b (30 June 2016: $37b) and the embedded value of the underlying loan book, capitalized on the Company’s balance sheet, grew 6% to $46.1m (30 June 2016: $43.3m). This strong performance has been achieved despite a tightening regulatory framework and with restrictions on offshore borrowers constraining market growth.

Central to this outcome has been a focus on delivering results that are sustainable so that the momentum and business efficiencies achieved benefit our shareholders’ long-term value. H1 2017 has also been a period of transition for the Company, with three new General Managers responsible for Yellow Brick Road Lending, Yellow Brick Road Wealth Management and Vow Financial appointed.

We have undertaken a managed reduction in operating overheads. The business is now operating with a sustainable, scalable cost base. The current level of overheads support an infrastructure that provides scalability to meet future business growth under a more efficient operating cost framework.

In H1 FY2017, high margin, scale income declined slightly. Scale income includes high margin revenue from white label (Vow or YBR branded) loans. White label settlement penetration of the Vow and YBR networks was less than anticipated. In response, to gain greater control and flexibility of our white label value proposition, and increase penetration, we have created a centralised group lending function to consolidate the capabilities and offerings of recent business acquisitions, Resi (August 2014) and Loan Avenue (May 2016) under common management. Importantly this provides us with:

  • The capability to source white label loans from a variety of funders on high margin and high profit share terms
  • Added flexibility to funnel business between funders to enhance the attractiveness of the Company’s branded products
  • An experienced channel team to match the right loan applications with the right lenders, which will increase conversion rates

ANZ Trading Update – NIM Under Pressure

ANZ released their trading update for 3 months to 31 December 2016. Whilst the information is selective, and unaudited, we see growth in home lending supporting retail banking, along with deposit growth, but group net interest margin “declined several basis points” (not specified) and capital ratios down a little.  Cost management was a highlight. Disposal of “non-core” assets will help the result.  The credit environment is marginally better than expected, they say.

The unaudited results show a statutory net profit of $1.6 billion up 8% compared to the quarterly average of the second half of FY16. Cash Profit was $2.0 billion up 31% (Adjusted Proforma up 20%) benefited from a good performance in Australia and New Zealand Retail and in Institutional along with a lower provision charge and the sale of 100 Queen Street.

Profit before Provisions was up 17% (Adjusted Proforma up 9%). Revenue was up 7% (Adjusted Proforma up 4%), expenses down 4% (Adjusted Proforma down 1%) driven by current and prior period productivity initiatives and tight cost management. Total risk weighted assets (RWAs) rose from $409 bn in Sept 16 to $412 bn in Dec 16.

However Group Net Interest Margin (NIM) declined several basis points (bps) reflecting lower earnings on capital and higher funding costs driven by improving liability mix from strong deposit growth.

In Australia, home lending volumes grew, whilst commercial lending volumes were more subdued. Deposit growth was strong.

Institutional banking benefited from favourable trading conditions on the back of movements in the USD and yield curve.

Gross Impaired Assets increased 1.8%.

The Total Provision charge was $283 million with the Individual Provision (IP) charge $325 million. A Collective Provision release of $42 million was assisted by portfolio composition improvement and exposures transferring to IP. There were no changes to management overlays.

APRA Common Equity Tier 1 (CET1) ratio was 9.5% at 31 December, compared with 9.7% in June 16. Excluding the payment of the 2016 Final Dividend (net of the Dividend Reinvestment Plan), CET1 increased 40 bps in the first quarter, primarily driven by organic capital generation of 48 bps which is substantially stronger than the Post Basel III 1Q average of 21 bps.

There was no capital benefit from asset disposals in the quarter.

Strong deposit growth and solid progress with the Group’s term wholesale funding plan has contributed to a further improvement in the Group’s liquidity and funding position. The Group’s average Liquidity Coverage Ratio (LCR) for the quarter was 137% (proforma 132% if adjusted for the $6.5 billion reduction in the Committed Liquidity Facility effective January 2017). ANZ’s Net Stable Funding Ratio (NSFR) is estimated to be in excess of 108%.

The Basel III leverage ratio is 5.1%.

Since the start of FY2017, ANZ has signed agreements to sell its 20% stake in Shanghai Rural Commercial Bank (SRCB), the UDC Finance business in New Zealand and ANZ’s Retail and Wealth businesses in five Asian countries. The transactions are expected to complete in the second half of FY2017 and 1H2018 subject to regulatory approvals. For the purposes of comparison, if the earnings from the businesses being sold were to be excluded from Cash Profit performance for 1Q17 it would show an increase of 33% (+31% including).

In FY2016 a number of actions were classified as Specified Items which formed part of the Group’s Cash Profit. This classification assisted investors and analysts to look through the impact of strategic initiatives to determine underlying business performance trends and included the disposal of Esanda, restructuring charges, a write down of the valuation for the investment in AmBank, and accounting methodology changes. In 2017 the classification of Specified Items will be limited to the impact of disposals.

These transactions outlined above will boost ANZ’s APRA CET1 position by ~$2.7 billion or ~70bps upon completion further improving ANZ’s capital flexibility.

Here is ANZ CEO Shayne Elliott speaking to BlueNotes on video after the announcement.



CBA 1H Results Strong … But

Commonwealth Bank of Australia announced its results for the half year ended 31 December 2016 today. CBA is well run, so they are a bellwether of the broader financial sector.  It was a solid result with asset growth, 3% lift in underlying income and good cost management, but shows the pressure created by regulatory capital uplifts, competition in home lending and consumer deposits, and arrears in mining exposed areas. They continue to make strong progress in digital banking, where they are a leader.  They do not believe there is evidence for a housing bubble. Wealth and Insurance in under some pressure, so retail banking is taking the load, thus system credit growth is critical.

They also announced further interest only investment mortgage rate price hikes which will lift NIM.

CBA reported a statutory net profit after tax (NPAT) of $4,895 million, which represents a 6 per cent increase on 1H16 period. This includes a $397 million gain on sale of the Group’s remaining investment in Visa Inc. and a $393 million one-off expense for acceleration of amortisation on certain software assets.

Cash NPAT was $4,907 million, an increase of 2 per cent on the prior comparative period.

Return on equity (cash basis) was 16 per cent.

Strikingly though the net interest margin was down 4 basis points to 2.11%, or 2.08% excluding treasury, down 5 basis points. This was expected.

The key drivers were:

  • Asset pricing: Increased margin of three basis points, reflecting the impact of home loan repricing, partly offset by the impact of competition on home and business lending.
  • Funding costs: Decreased margin of five basis points, reflecting an increase in deposit costs of three basis points due to the lower cash rate and increased competition, and an increase in wholesale funding costs.
  • Portfolio mix: Decreased margin of one basis point reflecting an unfavourable change in lending mix from proportionally higher levels of home lending.
  • Capital and Other: Decreased margin of two basis points driven by the impact of the falling cash rate environment on free equity funding, and a lower contribution from New Zealand.
  • Treasury and Markets: Increased margin of two basis points driven by a higher contribution from Treasury.

Average interest earning assets increased $23 billion on the prior half to $823 billion, driven by:

  • Home loan average balances increased $16 billion or 4% on the prior half, primarily driven by growth in the domestic banking business;
  • Average balances for business and corporate lending increased $5 billion or 3% on the prior half, driven by growth in business banking lending balances; and
  • Average non-lending interest earning assets increased $2 billion or 1% on the prior half.

Customer deposits accounted for 66% of total funding at 31 December 2016. Of the remaining, Short-term wholesale funding accounted for 42% of total wholesale funding at 31 December 2016. During the half, the Group raised $22 billion of long-term wholesale funding. The cost of new long-term funding improved marginally on the prior half as markets shrugged off any potential negative sentiment associated with the US
Presidential election result, a 25 basis points Federal Reserve rate rise, higher global bond yields, and Brexit.

Loan impairment expense increased 6% on the prior comparative period to $599 million. The increase was driven by:

  • An increase in Retail Banking Services as a result of higher home loan and personal loan losses, predominantly in Western Australia;
  • Lower home loan provision releases and higher growth in New Zealand lending portfolios;
  • An increase in Bankwest due to slower run-off of the troublesome book, reduced write-backs and higher home loan losses, predominantly in Western Australia; and
  • An increase in IFS as a result of losses in the PT Bank Commonwealth (PTBC) commercial lending portfolio; partly offset by
  • Lower individual provisions in Business and Private
    Banking; and
  • A reduction in Institutional Banking and Markets due to lower collective provisions and a higher level of writebacks.

Provisioning levels remain prudent and there has been no change to the economic overlay. Retail arrears across all products reduced during the current half reflecting seasonal trends.

Home loan arrears reduced over the prior half, with 30+ days arrears decreasing from 1.21% to 1.12%, and 90+ days arrears reducing from 0.54% to 0.53%. Unsecured retail arrears improved over the half with credit card 30+ days arrears falling from 2.41% to 2.28%, and 90+ days arrears reducing from 0.99% to 0.88%. Personal loan arrears also improved with 30+ days arrears falling from 3.46% to 3.14% and 90+ days arrears falling from 1.46% to 1.28%. However personal loan arrears continue to be elevated driven primarily by Western Australia and

As at 31 December 2016, the Basel III Common Equity Tier 1 (CET1) ratio was 15.4% on an internationally comparable basis and 9.9% on an APRA basis.

The Group’s CET1 (APRA) ratio decreased 70 basis points for the half year ended 31 December 2016. After allowing for the implementation of the APRA requirement to hold additional capital of 80 basis points with respect to Australian residential mortgages, effective from 1 July 2016, the
underlying increase in the Group’s CET1 (APRA) ratio was 10 basis points on the prior half.

The Group’s leverage ratio, defined as Tier 1 Capital as a percentage of total exposures, was 4.9% at 31 December 2016 on an APRA basis and 5.5% on an internationally comparable basis.

There was a small decline in the ratio across the December 2016 half year with growth in exposures partly offset by an increase in capital levels.

The BCBS has advised that the leverage ratio will migrate to a Pillar 1 minimum capital requirement of 3% from 1 January 2018. The BCBS will confirm the final calibration in 2017. LCR was 135% at 31 Dec 2016.

The Board determined an interim dividend of $1.99 per share, a 1 cent increase on the 2016 interim dividend.

Looking in more detail at the Australian home loan portfolio, the total book was worth $423 billion in December 16. They added $53 billion of loans in the past 6 months, with an value of $311,000 and at a serviceability buffer of 2.25%. 89% were variable rate loans. 37% were investor loans (up from 33% in the prior 6 months) and 43% originated via brokers, down from 46% in June 16, reflecting a 13% rise in branch application. 40% were interest only loans, up from 38% in the previous period.

They said 77% of customers are paying in advance by 35 months on average, but this includes offset facilities. Mortgage offset balances were up 19% in 1H17 to $36 billion.

In terms of underwriting criteria they use the following parameters:

  • Higher of customer rate plus 2.25% or minimum floor rate (RBS: 7.25% pa, Bankwest: 7.35% pa)
  • 80% cap on less certain income sources (e.g. rent, bonuses etc.)
  • Maximum LVR of 95% for all loans (For Bankwest, maximum LVR excludes any capitalised mortgage insurance.)
  • Lenders’ Mortgage Insurance (LMI) for higher risk loans, including high LVR loans
  • Limits on investor income allowances e.g. RBS restrict the use of negative gearing where LVR>90%
  • Buffer applied to existing mortgage repayments
  • Interest only loans assessed on principal and interest basis

Mortgage arrears (90 day+) are highest in WA, at 1% thanks to the mining downturn. WA mining towns are 1% of portfolio.  Portfolio is running at 0.53%.

Investment mortgage arrears are running at a lower default rate, despite differential pricing, with a skew towards higher income households.

CBA says housing fundamentals suggest slower growth ahead:

  • Population growth has slowed as net migration eased. The slowing is concentrated in WA and Qld. Growth in NSW and Vic remains robust
  • Housing supply is now running ahead of housing demand, any backlog has now been met.
  • The record residential construction boom has lifted employment and related parts of retail like hardware, furnishings and white goods. But leading indicators have peaked.

They say they are serious on the 10% benchmark for investor loans and  have not exceeded the APRA speed limit.

They say households would be vulnerable to a fall in asset values and/or a rise in interest rates and unemployment though low interest rates have allowed some pre-payments and net worth has improved thanks to household asset growth.

They says the typical housing bubble factors not evident in Australia:



CBA Lifts Investor Interest Only Mortgage Rates

Today the CBA has announced changes to some mortgage rates: interest only home loan rates for investors will rise by 12 basis points and Viridian Line of Credit (VLOC) products will increase by 4 basis points. The new interest only standard variable rate for investors will be 5.68% per annum, VLOC will move to 5.82% per annum.

These changes will be effective from 3 April. For customers who may want to switch to principal and interest repayments to avoid this increase, they can do so easily – online, over the phone or in branch – at no cost.

CBA supported 140,000 new home loans in the six months ended December 2016 and our standard variable rate (SVR) for owner occupiers of 5.22% per annum remains the lowest among the major banks.

They just released their 1H17 results, which show a statutory net profit after tax (NPAT) of $4,895 million, which represents a 6 per cent increase on 1H16 period. Cash NPAT was $4,907 million, an increase of 2 per cent on the prior comparative period. Return on equity (cash basis) was 16 per cent.

Strikingly though the net interest margin was down 4 basis points to 2.11%, or 2.08% excluding treasury, down 5 basis points.

We will provide more detailed commentary later.


Bendigo and Adelaide Bank 1H 17 – Pressure Continues

Bendigo and Adelaide Bank released their 1H17 results today. Regional banks continue to feel the pressure of low interest rates, competition for deposit funding, and home loan demand. The overall result, once you look at it, is pretty weak.  It was more to do with cost control and reduced provisioning  than margin growth, even if on higher volumes.

Their cash earnings were up 0.4% from 1H16 to $224.7m, and the statuary net profit was $209m, little changed from 1H16. Return on equity was 8.77%, down from 9.10% in IH16. Return on tangible equity was 12.63% down from 13.15% IH16 and 12.71% 2H16. The dividend was held at 34c, with a payout ratio of 70.8%.

Whist total assets were up by 3.5% on 1H16 to $70.9b, net interest margin dropped 6 basis points to 2.1%. It may be recovering a little now thanks to repricing of loans but volume may be slowing as a result. Home lending was 70.6% of loans. They are close to the 10% investment lending speed limit, so that will also trim growth.

The expenses ratio improved, as shown by the Jaws momentum.

The Keystart loan acquisition meant their mortgage lending book grew 13.9%, but 6.8% excluding the acquisition. Residential loan approvals rose, including via third party channels, but broker loans seem to be slowing post the recent repricing.

There was a 9% growth in offset portfolio loans since December 2015. They say 45% of home loan customers are ahead with their minimum repayments. 29% of customers are 3 or more repayments ahead.  Loan settlements are running at around $1.5m a month.

9% of loans are over 90% LVR.

The Bank benefited from rising property values in its Homesafe portfolio and remains sensitive to future price growth. They added (only) $2.5m of overlay in 1H17 increasing the total overlay to the value of the portfolio to $26.1m. Given the strong price growth in Sydney and Melbourne this seems low!

BDD were controlled, but residential arrears are rising a little. Great Southern is paying down as expected.

Bad debt provisions fell, partly thanks to a specific and large named, but now resolved risk.

Capital remains under pressure, with CET1 down to 7.97%. The move to advanced IRB (timing TBA) might help a bit, possibly.

All in all, they had to squeeze the lemon harder to drive a reasonable outcome, but we question whether the fundamentals are there for long-term sustainable and growing shareholder returns.

Suncorp 1H to Dec 2016 – Looking Better

Suncorp today reported net profit after tax (NPAT) of $537 million (HY16: $530 million) for the six months to 31 December 2016. Profit after tax from business lines increased 12.7% to $613 million (HY16: $544 million).

The Group has been working hard to get performance up, and despite pressure on banking margins, and adverse insurance claims from New Zealand, management of the insurance businesses is clearly tighter.

The result included natural hazard claims costs of $350 million (HY16: $362 million), Investment earnings of $79 million (HY16: $133 million), reserve releases of $131 million (HY16: $137 million) and a loss on sale of Autosure of $25 million.

After accounting for the interim dividend, the Suncorp Group’s Common Equity Tier 1 (CET1) is $448 million above the operating targets.

The General Insurance CET1 is 1.23 times the Prescribed Capital Amount and Bank CET1 is 9.20%. The Group has $230 million of franking credits available after the payment of the interim dividend.

Shareholders will receive an interim dividend of 33 cents per share fully franked (HY16: 30 cents) representing a payout ratio of 72% of cash earnings.

Insurance (Australia)

Insurance (Australia) NPAT increased 42.5% to $369 million due to top line growth, lower claims costs and disciplined expense management.
Gross Written Premium (GWP) growth of 6.2% was primarily driven by the CTP portfolio. Consumer Insurance benefited from industry stabilisation with Home and Motor GWP increasing 2.4% and 1.6% respectively.The Commercial Insurance market continues to be highly competitive with GWP growth of 0.4% reflecting a prudent approach to pricing and risk selection.

CTP GWP increased 27.3% due to Suncorp’s successful entry into the South Australian market and growth in New South Wales which was supported by improving claims metrics. Insurance (Australia) reserve releases of $149 million reflect the benign inflationary environment and Suncorp’s management of long-tail claims.

Banking & Wealth

The Banking & Wealth business delivered NPAT of $208 million reflecting improved operating expenses and strong credit quality. In response to some unsustainable competitor pricing, the Bank focused on profitable growth through the optimisation of price and volume.

Lending grew 2.5% over the past 12 months.

Total assets were $54.2 billion, of which home lending was $44.1 billion, half of which is in QLD. 65% of business came through intermediaries. High LVR loans are down significantly. Overall home lending grew below system.  Deposit to loan ratio was 67.2% up a little on a year ago.  During the half, the Bank funding mix changed with a 5.5% reduction in retail term deposits and an increase of 6.7% in at call deposits primarily driven by growth in personal transaction accounts.

Following a targeted campaign in December, the housing loan portfolio is expected to grow in the second half.

The net interest margin (NIM) of 1.78% was impacted by the lower cash rate and aggressive competition, however it remains within the target range of 1.75% to 1.85%.

Operating expenses improved by 5.8% resulting in a reduction in the cost to income ratio from 53.0% to 51.4%.

Gross non-performing loans improved by 14.3% over the past six months resulting in impairment losses of $1 million (less than 1bps), well below the target range of 10bps to 20bps of gross loans and advances.

The Bank has a tiered management limit structure for the LCR to ensure that an adequate buffer to the APRA prudential limit of 100% is held. The LCR is managed to market conditions and has been maintained comfortably above the prudential minimum since being introduced in January 2015. The average LCR for the half ending 31 December 2016 was 133%, ending the half at 130%.

The Bank is well placed to meet the proposed NSFR requirements, which will be introduced from January 2018. The Bank’s estimated NSFR at the end of the period was 106%.

Discussions continue with the APRA as part of progressing towards Advanced Accreditation. In parallel the Bank has undertaken changes to its processes and retail credit models as part of an industry wide alignment of the treatment of hardship. The Bank expects these changes to have some effect on reporting but no material impact to the risk or loss experience.

New Zealand

New Zealand NPAT of NZ$37 million was impacted by the Kaikoura earthquake and aftershocks (NZ$23 million) and new ‘over-cap’ claims from the 2010/11 Canterbury earthquakes (NZ$18 million) being notified by the Earthquake Commission (EQC).

Net incurred claims (NIC) were $372 million, up 22.8%, driven by the Kaikoura earthquake as well as several large commercial claims and strong unit growth in the consumer portfolios.

GWP growth of 4.8% was delivered primarily from the Home and Motor portfolios.

Included in the result was the New Zealand Life Insurance NPAT of NZ$18 million reflecting a 41.2% increase in underlying profits, and positive claims and lapse experience of NZ$5 million.


AMP Reports A Loss Of $344m

AMP reported their FY16 results today, a net loss of $344m compared with a profit last year of $972m last year. They also announced a share buy-back of up to $500m.  The final dividend was maintained at 14 cents a share, franked to 90 per cent making the FY 16 dividend 28 cents a share.

It is a complex business, with many moving parts, and an offshore expansion strategy in sharp contrast to the major retail banks!

The business took a hit from a $415 million loss in Wealth Protection reflecting negative claims experience and capitalised loss.

Underlying profit was A$486 million compared with A$1,120 million prior year, reflecting actions announced in October 2016 to stabilise Australian Wealth Protection.

The wealth management businesses performed better, (AMP Capital, AMP Bank and New Zealand).

International expansion in China, Europe and North America continues. China Life AMP Asset Management Company (CLAMP) is the fastest-growing investment manager in China, with assets under management (AUM) rising 55 per cent year on year.

They focusses on cost management: A$200 million, three-year efficiency program completed in 2016 and a new efficiency target set for 2017.

They have a strong capital position with A$2.3 billion surplus on 1 January 2017 following consolidation of life companies. Underlying return on equity 5.6 per cent, down from 13.2 per cent in 2015, reflecting Wealth Protection performance.

Business unit results

Australian Wealth Management
The impact of difficult trading conditions was partly offset by effective cost and margin management. AUM was up 5 per cent to A$121 billion following a strong end to the year. Total net cash flows of A$336 million (FY 15: A$2.2 billion) were lower, consistent with an industry-wide slow down amid market and regulatory uncertainty. Improving customer sentiment underpinned a lift in discretionary contributions in Q4 2016.

Targeted product enhancements supported strong cash flows on AMP’s flagship North platform, with net cash flows up 11 per cent on FY 15 and AUM up 30 per cent. Cash flows from AMP Flexible Super reduced as flows switched to North as expected. Corporate super cash flows were lower reflecting the lumpy nature of mandates. AMP’s developing omni-channel advice network, campaigns to capitalise on a more favourable market environment, corporate super pipeline and further product enhancements are expected to support cash flows in 2017 and beyond.

AMP deliberately reduced adviser numbers in 2016 by tightening the classification of authorised representatives. A higher-than-usual number of advisers also decided to retire or leave the industry in the face of challenging industry conditions and increasing education and professional requirements.

AMP Capital
AMP Capital’s strong performance reflected increased fee income driven by growth in real estate and infrastructure investments. Controllable costs increased as the business continued to invest in international growth and build its distribution capability.

External net cash flows were A$967 million (FY 15: A$4.4 billion) and were impacted by challenging market conditions in Australia and Japan, partly offset by good institutional flows into real estate and infrastructure asset classes. FY 16 finished with a strong origination pipeline, including A$3.1 billion of available investor commitments. In China, CLAMP’s AUM increased 55 per cent year on year.

Australian Wealth Protection
Performance was impacted by negative experience and the actions to stabilise the business announced in October 2016, including strengthened assumptions, which led to a one-off capitalised loss of A$484 million. Total experience losses for the year were A$105 million. Claims experience inQ4 2016, capitalised and other one-off losses, and the reduction in embedded value were all within guidance provided in October 2016. AMP group’s reported earnings were also impacted by aA$668 million charge for goodwill impairment as a consequence of declines in the potential recoverable amount of the Australian Wealth Protection business.

The consolidation of AMP Life and NMLA – a Part 9 transfer – released A$145 million in regulatory capital on 1 January 2017, while a reinsurance agreement for 50 per cent of the AMP Life portfolio (25 per cent of total exposure) released a further A$500 million of regulatory capital. These actions underpinned the board’s decision to return capital to shareholders through an on-market share buy-back. The process for a second tranche of reinsurance is now underway.

AMP Bank
Above system growth in residential mortgages at 13% and expansion in net interest margin contributed to 15 per cent growth in operating profit.

The bank is investing in operational capacity to support continued growth, with retail mortgage sales via the aligned adviser channel up 24 per cent on FY 15. The bank’s cost to income ratio fell to 29 per cent as the bank benefitted from increased scale.

New Zealand Financial Services
Performance was driven by improved margins in wealth management and experience profits in the life insurance business. Excluding the effect of the loss of transitional tax relief, operating earnings increased 14 per cent, with tight cost management improving the business’s cost to income ratio. AUM increased 9 per cent, reflecting positive market performance and net cash flows.

Australian Mature
Operating earnings of A$151 million reflected anticipated portfolio run off and lower bond yields, partly offset by cost control and better persistency

Capital management

AMP continues to actively manage capital with Level 3 eligible capital resources A$2,195 million above minimum regulatory requirements at 31 December 2016, up from A$1,917 million at 1 July 2016. Effective 1 January 2017, the consolidation of AMP’s two life companies (AMP Life and NMLA) increased excess regulatory capital by a further A$145 million.

The strengthened capital position also reflects the execution of the reinsurance agreement.

Capital released from reinsurance provides the capacity for capital to be returned to shareholders.An on-market share buy-back of up to A$500 million will begin in Q1 2017.

A FY 16 final dividend has been maintained at 14 cents per share, franked at 90 per cent, with the unfranked amount being declared as conduit foreign income. The total FY 16 dividend is 28 cents a share. This reflects the largely non-cash nature of the one-off losses incurred in Australian Wealth Protection. AMP’s dividend policy target range is 70 to 90 per cent of underlying profit. The dividend reinvestment plan will be neutralised by on-market purchases.

Cost program

AMP’s three-year business efficiency program completed in FY 16 with A$200 million in pre-tax recurring run rate cost benefits delivered in line with expectations.

AMP is committed to a 3 per cent reduction in controllable costs in 2017, excluding AMP Capital and allowing for continued investment in growth businesses and channel experiences. AMP Capital will be managed on a cost to income basis, which is appropriate for the profile and growth ambitions of this business.



Genworth FY16 Results Highlight Changing Market Conditions

Lender’s Mortgage Insurer Genworth released their results to December 2016 today. From it, we get insights into the changing nature of the housing market, and also a view of the pressure LMI’s are under.

Genworth reported a statutory net profit after tax (NPAT) of $203.1m, down 10.9% on prior year. After adjusting for the after-tax mark-to-market move in the investment portfolio of $9.1m, underlying NPAT was $212.2m down 19.8% on prior year. The loss ratio was 35.1%, compared with 24% last year. They remain strongly capitalised, and though claims are higher, they declared a final fully franked dividend of $14.00,  a FY16 payout ratio of 67.2%, but down from last half.

Banks are clearly writing less high LVR mortgages, thanks to APRA, and when households default, and are forced to sell, there is sufficient capital appreciation in most properties to avoid a LMI claim due to strong price rises.  The banks, can’t loose! (Remember the LMI protects the bank, not the borrower). However, in regions where prices are falling – for example in the mining belts of WA and QLD, and home prices are falling, claims are up. This does not bode well if home prices were to revere more widely.

Genworth was listed in 2014, but since then has completed share buy-backs to reduce the number of issued shares. Further restructure will simplify the corporate structure in 2017, with a view to driving efficiency. They are the only separately listed LMI in Australia, (the banks have their own LMI captives, and the other player in the market is less transparent).

We will look at the market data they provided first, then look at the drivers of their results more specifically.

Genworth had an in-force portfolio of approximately $324 billion at Dec 2016. Standard LMI accounted for 91% of the book, and Low Doc 5%. 26% of the book relates to Investment loans.

The seasoning picture is interesting.  This shows the evolution of Genworth’s 3 month+ delinquencies (flow) by residential mortgage loan book year, from issue.

The delinquency population by months in arrears aged buckets shows that over the past two years, the mortgagee in possession (MIP) as a proportion of total delinquency is trending down. This is because the strong property market has allowed stressed households to sell and release equity, with no LMI claim.

With regards to the current results, a range of factors influenced the lower outcomes.

New Insurance Written (NIW) fell 18.4% in FY16, to $26.6 billion. Moreover, NIW above 90% LVR decreased 39.8%, and 80-90% LVR fell 17.2%. This reflects changing appetite among lenders for higher LVR business, following regulatory intervention from APRA.

Lower Sales (Gross Written Premium – GWP) fell 24.8% compared to previous period due to the lower number of high loan-to-value (LVR) penetration in the market and a lower LVR mix of business.

The average price for Flow (GWP/NIW) decreased from 1.63% to 1.51% in FY16. However, they got some benefit from premium repricing in the second half.

Lower Revenue (Net Earned Premium) – NEP fell 3.6% reflecting lower earned premiums from current and prior book years.

Higher Net Claims Incurred – Net claims incurred increased by $46.1 m to $158.8m due to an increase in the number of delinquent loans relative to a year ago, and a higher average claim amount.  The performance in QLD and WA is “challenging”, reflecting increased delinquencies, especially in resource exposed regions. NSW and VIC were better performers.  Overall, the delinquency rate rose from 0.38% to 0.46%.

Whilst financial income (interest income and realised and unrealised gains/losses) increased by $18.1 m, to $126.0 m in FY16, the yield on the investment portfolio dropped 3.69%.

Regulatory capital fell from $2,600 m in 2015 to $2,213 m in 2016. CET1 decreased in FY16 mainly reflecting the $250 m of dividends, $202 m capital reduction and $86 m decrease in the excess technical provision, offset by $203 m NPAT. Tier 2 capital decreased following the redemption of $50 m of the $140 m notes issued. The PCA coverage ratio was consistent with FY15.