Westpac Cuts Fixed Mortgage Rates Too

From The Advisor.

As of Wednesday (20 September), Westpac’s two-year fixed rate for owner-occupiers paying principal and interest (P&I) dropped by 11 basis points to 4.08 per cent (standalone rate) or 5.16 per cent comparison.

For those with a Premier Advantage Package, the new rate is 3.88 per cent (4.88 per cent comparison) for two-year fixed terms.

 

At Bank of Melbourne, Bank SA and St. George Bank, the new standard two-year fixed rate for owner-occupiers on P&I is 14 basis points below its former level, at 4.00 per cent (5.14 per cent comparison).

The group clarified to brokers that customers will receive the new lower rate on applicable loans if they have already rate-locked their fixed rate, and if the rate locked in is higher than the new rate, on the date the loan settles (provided that there is no further fixed rate change).

If the rate locked in is lower than the new rate, then they will not be impacted by this change (i.e., they will get the rate they locked it at).

Westpac’s move to drop its two-year fixed rates follow on from similar moves from Suncorp, ANZ, CUA, and MyState Bank. Suncorp Bank recently said that the rate drop follows on from “recent reductions to fixed rate funding costs”.

Genworth Gets NAB’s LMI Contract Extended

In a release to the ASX, Genworth, the listed Lenders Mortgage Insurer said that its contract with NAB to provide LMI had been extended for one year to 20th November 2018.

The contract represented 10% of Gross Written Premium in 2016.

Ms Georgette Nicholas, Chief Executive Officer and Managing Director of Genworth, said, “We look forward to continuing to build on our long-standing partnership with NAB under this extended agreement. We are focused on delivering risk and capital management solutions for our customers and we’re delighted that we have been able to continue to be the LMI provider for NAB’s broker business.

“Genworth remains committed to supporting Australians realise their dream of homeownership. Our focus continues to be on the provision of capital and risk management solutions to our lender customers, being a strong risk management partner and using our data and analytics to provide in sights to this changing market.”

The extended contract does not change the guidance provided that Gross Written Premium (GWP) will be down 10 to 15 per cent in 2017.

RBA Says The Next Chapter Is Coming

An interesting and wide ranging speech from RBA Governor Philip Lowe.

In short, the global economy is on the up, central banks are beginning to remove stimulus, and locally, wage growth is low, despite reasonable employment rates. Household debt is extended, but in the current low rates mostly manageable, but the medium term risks are higher.  Business conditions are improving.

He then discusses the growth path from here, including the impact of higher debt on household balance sheets. We will need to deal with the higher level of household debt and higher housing prices, especially in a world of more normal interest rates. In this environment, a small shock could turn into a more serious correction as households seek to repair their balance sheets.

The Current Chapter

The storyline of the current chapter is well known. It has had two main plot lines.

The first was a troubled global economy. A decade ago we had the global financial crisis and the worst recession in many advanced economies since the 1930s. A gradual recovery then took place, but it was painfully slow. Recently, things have improved noticeably and unemployment rates in some advanced economies are now at the lowest levels in many decades. Throughout this chapter, central banks have mostly worried that inflation rates might turn out to be too low, not too high. Interest rates have been at record lows. And workers in advanced economies have experienced low growth in their nominal wages. So it’s been a challenging international backdrop.

The second plot line was the resources boom. Strong growth in China saw strong growth in demand for resources. Prices rose in response, with Australia’s terms of trade reaching the highest level in at least 150 years (Graph 1). Then an investment boom took place in response to the higher prices, with investment in the resources sector reaching its highest level as a share of GDP in over a century. And now we are seeing the dividends of this, with large increases in Australia’s resource exports.

Graph 1
Graph 1: Terms of Trade

 

Overall, it has been a reasonably successful chapter in Australia’s economic history. Real income per person is around 20 per cent higher than it was in the mid 2000s and real wealth per person is 40 per cent higher. Australia is one of the few advanced economies that avoided a recession in 2008. And the biggest mining boom in a century did not end in a crash, as previous booms did. Our interest rates remained positive, unlike those in many other advanced economies. Since the mid 2000s, the unemployment rate has averaged 5¼ per cent, a better outcome than in the previous three decades. Inflation has averaged 2½ per cent. And over this period, GDP growth has averaged 2¾ per cent, higher than in most other advanced economies.

So, taking the period as a whole, it is a positive picture.

At the same time, though, as the chapter draws to a close, we do face some issues. I would like to highlight three of these.

The first is the recent slow growth in real per capita income. For much of the past two decades, real national income per person grew very strongly in Australia (Graph 2). We benefited from strong productivity growth, higher commodity prices and more of the population working. In contrast, since 2011 there has been little net growth in real per capita incomes. This change in trend is proving to be a difficult adjustment. The solutions are strong productivity growth and increased labour force participation.

Graph 2
Graph 2: PWL Real Net National Disposable Income per Capita

 

A second issue is the unusually slow growth in nominal and real wages. Over the past four years, the increase in average hourly earnings has been the slowest since at least the mid 1960s (Graph 3). This is partly a consequence of the unwinding of the mining boom but there are structural factors at work as well. The slow growth in wages is putting a strain on household budgets and contributing to low rates of inflation.

Graph 3
Graph 3: Average Earnings per Hour

 

A third issue is the high level of household debt and housing prices. Over recent times, Australians have borrowed a lot to purchase housing. This has added to the upward pressure on housing prices, especially in our two largest cities, where structural factors are also at work. Australians are coping well with the higher level of debt, but as debt levels have increased relative to our incomes so too have the medium-term risks. The very high levels of housing prices in our largest cities are also making it difficult for those on low and middle incomes to buy their own home.

So as we turn the final pages of this chapter, these are some of the issues we face. But as we turn these pages, we also see improvements on a number of fronts.

Business conditions, as reported in surveys, are at the highest level in almost 10 years. There are also growing signs that private investment outside the resources sector is picking up. We have been waiting for this for some time. For a number of years, animal spirits had been missing, with many firms preferring to put off making decisions about capital spending. It appears that some of this reluctance to invest is now passing. According to the June quarter national accounts, private non-mining business investment increased strongly over the first half 2017, to be around 10 per cent above the level at the start of 2016. Non-residential building approvals have increased to be above the levels of recent years and there is a large pipeline of public infrastructure investment to be completed (Graph 4). The decline in mining investment has also largely run its course.

Graph 4
Graph 4: Investment

 

There has also been positive news on the employment front. Over the past year, the number of people with jobs has increased by more than 2½ per cent, a positive outcome given that the working-age population is increasing at around 1½ per cent a year. Growth in full time employment has been particularly strong. The various forward-looking indicators suggest that labour market conditions will remain positive in the period immediately ahead.

Here in Western Australia, there are also some signs of improvement after what has been a difficult few years. The drag from declining mining investment is diminishing. Businesses are feeling more positive than they were a year ago and employment has been rising after a period of decline. At the same time though, conditions in the housing market remain difficult, with housing prices and rents continuing to fall in Perth. Weak residential construction has also weighed on aggregate demand over the first half of this year, although building approvals and liaison reports point to some stabilisation in the period ahead (Graph 5).

Graph 5
Graph 5: Western Australia - Economic Indicators

 

For Australia as a whole, the recent national accounts – which showed a healthy increase in output of 0.8 per cent in the June quarter – were in line with the Bank’s expectations. These, and other recent data, are consistent with the Reserve Bank’s central scenario for GDP growth averaging around the 3 per cent mark over the next couple of years. This is a bit faster than our current estimate of trend growth in the Australian economy, so we expect to see a gradual decline in the unemployment rate. This should lead to some pick-up in wage growth, although we expect this to be a gradual process given the structural factors at work that I have spoken about on previous occasions. We can also expect to see a gradual increase in inflation back towards the middle of the 2 to 3 per cent medium-term target range.

There are clearly risks around this central scenario. We would like to see the improvement in business investment consolidate and a continuation of job growth at a rate at least sufficient to absorb the increase in Australia’s workforce. Some pick-up in wage growth in response to the tighter labour market would also be a welcome development. So these are some areas to watch. But as things stand, the economy does look to be improving.

The Next Chapter

I would now like to lift my gaze a little and turn to the next chapter in our economic story. I would like to sketch out four of the possible plot lines, acknowledging that, as in all good stories, there are likely to be plenty of surprises along the way.

Shifts in the global economy

A first likely plot line, as it has been in previous chapters, is the ongoing shift in the global economy. Here, changes in technology and further growth in Asia are likely to be prominent themes.

In some quarters there is pessimism about future prospects for the global economy. The pessimists cite demographic trends, high debt levels, increasing regulatory burdens that stifle innovation and political issues. They see a future of low productivity growth and only modest increases in average living standards.

It’s right to be concerned about the issues that the pessimists focus on, but I am more optimistic about the ability of technological progress to propel growth in the global economy, just as it has done in the past. We are still learning how to take advantage of recent advances in technology, including the advances in the tools of science. In time we will do this and new industries and methods of production will evolve, some of which are hard to even imagine today. So there is still plenty of upside. The challenge we face is to make sure that the benefits of technological progress are widely shared. How well we do this could have a major bearing on the next chapter.

Beyond this broad theme, it is appropriate to recognise the important leadership role that the United States plays in the global economy. If the US economy does well, so does most of the rest of the world. The United States has long been a strong supporter of open markets and a rules-based international system. It has been the breeding ground for much of the progress in technology. And it has been a safe place for people to invest and an important source of financial capital for other countries. It is in our interests that the United States continues to play this important role. A retreat would make our lives more complicated.

Another important influence on the next chapter is how things play out in China. While growth in China is trending lower, the share of global output produced in China will continue to rise, as per capita incomes converge towards those in the more advanced economies (Graph 6). As this convergence takes place, the structure of the Chinese economy will change and so too will China’s economic relationship with Australia. Exports of resources will continue to be an important part of that relationship, but increasingly trade in services and other high valued-added activities, including food, will become more important. Notwithstanding this, there are risks on the horizon, with the Chinese economy going through some difficult adjustments. One of these is the switch from a growth model based on industrial expansion to one based more on services. Another is managing an increasingly large and complex financial system. Australia has a strong interest in China successfully managing these challenges.

Graph 6
Graph 6: OE GDP per Capita

 

Another shift in the global economy that could shape the next chapter is the growth of other economies in Asia. Developments in India and Indonesia bear especially close watching. Both of these countries, especially India, have very large populations, and per capita incomes are still quite low. In time, the effects of economic progress in these countries and others in the region could be expected to have a substantial effect on the Australian economy, just as the development of China has.

Normalisation of monetary conditions

A second likely plot line of the next chapter is a return to more normal monetary conditions globally. Since the financial crisis we have been through an extraordinary period in monetary history. Interest rates have been very low and even negative in some countries. Central banks have greatly expanded their balance sheets in order to buy assets from the private sector (Graph 7). This period of monetary expansion is now drawing to a close.

Graph 7
Graph 7: IFM Central Bank Balance Sheets

 

Some normalisation of monetary conditions globally should be seen as a positive development, although it does carry risks. It is a sign that economic growth in the advanced economies has become self-sustaining, rather than just being dependent on monetary stimulus. It would also lift the return to many savers who have been receiving very low returns on interest-bearing assets for a decade now.

On the other side of the ledger, periods of rising interest rates globally have, historically, exposed over-borrowing somewhere in the global system. Investment strategies that looked sensible when interest rates were very low tend not to look so good when interest rates are higher.

We can take some comfort from the major efforts over the past decade to improve the resilience of the global financial system. But at the same time, investors have increasingly been prepared to take more risk in the search for yield. Many continue to expect a continuation of low rates of inflation and low interest rates, despite quite low unemployment rates in a number of countries. So this is an area that is worth watching. If higher interest rates are the result of a surprise increase in inflation, financial markets could be in for a difficult adjustment.

A rise in global interest rates has no automatic implications for us here in Australia. Notwithstanding this, an increase in global interest rates would, over time, be expected to flow through to us, just as the lower interest rates have. Our flexible exchange rate though gives us considerable independence regarding the timing as to when this might happen.

Higher levels of debt

This brings me to a third plot line: that is, how we deal with the higher level of household debt and higher housing prices, especially in a world of more normal interest rates.

It is likely that higher levels of household debt change household spending patterns. Having increased their borrowing, households are less inclined to let consumption growth run ahead of growth in incomes for too long. Higher levels of debt also mean that household spending could be quite sensitive to increases in interest rates, something the Reserve Bank will be paying close attention to.

To date, households have been coping reasonably well with the higher debt levels. The aggregate debt-to-income ratio has trended higher, but the ratio of interest payments to income is not particularly high, given the low level of interest rates (Graph 8). Housing loan arrears remain low, although they have increased a little recently, especially here in Western Australia.

Graph 8
Graph 8: Household Mortgage Debt Indicators

 

Over recent times, one issue that the Reserve Bank has focused on is the build-up of medium-term risks from growth in household debt persistently outpacing that in household income. Our concern has been that, in this environment, a small shock could turn into a more serious correction as households seek to repair their balance sheets. We have been working with APRA through the Council of Financial Regulators to address this risk. The various measures are having a positive impact in improving the resilience of household balance sheets.

A broadening of the drivers of growth

The fourth likely plot line is a broadening of the drivers of growth in the Australian economy. How the next chapter in our economic history turns out depends partly on our ability to lift productivity growth across a wide range of industries. The resources sector will, no doubt, continue to make an important contribution to the Australian economy, but it is unlikely that it will shape the next chapter in our economic history as it did the current chapter. With another major upswing in the terms of trade unlikely and the working-age share of our population having peaked as the population ages, improving productivity will be key to growth in our national income.

The drivers of growth are changing: they increasingly depend on our ability to produce innovative goods and services in a rapidly changing world. In this world, it is difficult to make precise predictions about where the jobs and growth in our economy are going to come from in the future. But it seems clear that we will be best placed to take advantage of whatever possibilities arise if businesses and our workforce are innovative and adaptable.

Australia is fortunate to have a natural resource base that provides an important source of national income, and this will remain the case. But in this next chapter we will need to look more directly to the skills of our workers and our businesses to drive economic growth. If we are to take advantage of the opportunities that are offered by technology and growth in Asia, we need a flexible workforce with strong skills in the areas of problem solving, critical thinking and communication. Investment in human capital will be one of the keys to success. We also need a competitive business environment that encourages innovation. How well the next chapter turns out will depend on how we do in these areas.

So, in summary these are some of the themes we might expect to see in the next chapter – the impact of technology and the growth of Asia; the normalisation of monetary conditions; the effects of higher levels of household debt; and the capability of our workforce and businesses to be flexible, innovative and adaptable.

This is, obviously, not a complete list. There are clearly other factors that could have a major influence on the storyline, including how geopolitical tensions are resolved and how we adjust to climate change. And no doubt there will be surprises as well.

But overall, I remain optimistic about how this next chapter might unfold. While we have our challenges, some of which I have talked about, we also have some advantages. We have a strong institutional and policy framework, a skilled, growing and diverse population and a wealth of mineral and agricultural resources. We have strong links to Asia, the fastest growing part of the global economy. We also have a flexible economy with a demonstrated capacity to adjust to a changing world.

These factors should give us confidence about our future. But we can’t rest on this and there are a number of significant risks. The world is a competitive place and the global economy is continuing to go through some challenging adjustments. If we are to do well in this world, we need to keep investing in both physical and human capital. We also need to keep investing in policy reform.

Finally, I have said relatively little about monetary policy today. This is partly because there are other forces that are likely to be more important in shaping the next chapter of the Australian economy. Monetary policy has an important role to play in supporting the economy as it goes through the current period of adjustment. It can also help stabilise the economy when it is hit by future shocks. Monetary policy can make for a more predictable investment climate by keeping inflation low and stable. Having a competent, analytical, transparent and independent central bank can also be a source of confidence in the country. But beyond these effects, monetary policy has little influence on the economy’s potential growth rate.

Over recent times, the Reserve Bank Board has not sought to overly fine-tune things. We have provided support and allowed time for the economy to adjust to the new circumstances. In its decisions, the Board has been careful to balance the benefit of providing this support with the risks that can come from rising household debt. As things currently stand, we look to be on course to make further progress in reducing unemployment and moving towards the midpoint of the medium-term inflation target. This would be a good outcome.

RateSetter Passes $150m in loans

Peer-to-peer lender RateSetter has now reached the $150m mark in loans facilitated thanks to a rapid influx of lenders into the platform.

They provide data on their portfolio via their web site, great disclosure (mainstream players take note!).  From this we see that debt consolidation and home improvement were the two main purposes, and the average debt consolidation loan was ~$20,000.

The average rate varies by term.

The term of loan distribution varies across the age bands.

Commentary from Australian Broker says that Millennial investors have helped to drive this growth, especially in RateSetter’s one-month market where these younger demographics make up 72% of the lender’s investors since the firm launched in 2014. This is followed by the one-year market where Millennials make up 40% of all investors.

“Far from wasting money on avocado toast, these young investors are seizing the opportunity to make their money work hard. For a variety of reasons they may want ready access to their money, so the one-month market gives them a stable, attractive return of around 4% p.a and easier access to cash if they need it,” said RateSetter CEO Daniel Foggo.

Investment in the platform has risen by 50% over the last five months alone after RateSetter hit the $100m loan milestone in March. There are now more than 7,700 investors registered with the platform, making RateSetter the largest P2P lender in Australia.

Foggo said that RateSetter had reached the $150m milestone sooner than anticipated because it provided added competition to the banking sector.

“We are giving everyday Australians a genuine alternative to traditional investment options; offering far more attractive returns across both our short term and longer term markets.

“Our growth has also been supported by banks doing a fantastic job of destroying the trust their customers once held. An increasing number of younger investors are showing they trust new economy services, including peer-to-peer lending, rather than traditional institutions, to act in their interests and help them achieve their financial goals.”

While younger investors seek more short-term lending options, older investors have more of a bias towards longer-term alternatives. A full breakdown of RateSetter’s data can be found below:

For the one-month market, the average amount invested has increased from $3,777 two years ago to $11,483 today.

“RateSetter’s savvy investors are making their money work hard. Instead of leaving it in accounts offering poor returns, they are seizing the opportunity to earn a decent rate of return, even if it’s only for a month”,” Foggo said.

“Younger Australians realise that they won’t get ahead by leaving their cash in a low interest rate bank account, so they are prepared to take a small amount of risk to earn better interest rates.”

CBA Sells Life Insurance Businesses

Commonwealth Bank today announced the sale of 100% of its life insurance businesses in Australia (“CommInsure Life”) and New Zealand (“Sovereign”) to AIA Group Limited (“AIA”) for $3.8 billion (the “Transaction”). The sale agreement also includes a 20-year partnership with AIA for the provision of life insurance products to customers in Australia and New Zealand.

CommInsure Life and Sovereign customers will retain all the current benefits of their existing policies. The Transaction and partnership announced today will allow customers to have continued access to high quality life insurance products through Commonwealth Bank and life and health insurance products through ASB, with the addition of AIA solutions to our offerings. Customers will benefit from AIA’s innovation in life insurance including a focus on digital engagement, the benefits and synergies of global scale and specialisation, and their strong bancassurance experience.

AIA is the largest independent publicly listed pan-Asian life insurance group and has well established life insurance businesses in Australia and New Zealand. The combined operations from this transaction will make AIA the market leader in both Australia and New Zealand.

Commonwealth Bank Chief Executive Officer Ian Narev said: “Providing our customers with access to high quality products and services for all their financial needs is core to our vision of securing and enhancing financial wellbeing. We have said for some time that while distributing life insurance is a fundamental part of that strategy, we were open to different models for doing so. The combination of AIA’s leading insurance capability and scale and Commonwealth Bank’s broad distribution, and our complementary values and commitment to customer focus and innovation, mean that a partnership between us will create an even better experience for our customers, in a more efficient way for our shareholders.”

AIA Group Chief Executive and President, Ng Keng Hooi, said: “The acquisition of CBA’s life insurance businesses and the new 20-year bancassurance partnership with CBA will strengthen AIA’s protection market leadership and expand our distribution capabilities in these markets. We look forward to welcoming our new customers and colleagues, and working with CBA to deliver innovative insurance products and services that meet the growing financial protection needs of customers across Australia and New Zealand.”

The Transaction will deliver important strategic benefits to Commonwealth Bank, contributing to the Group’s vision to secure and enhance the financial wellbeing of customers whilst creating value for shareholders.

The sale price is $3.8 billion, a multiple of 16.9x FY17 pro forma earnings and 1.1x the embedded value of CommInsure Life and Sovereign. A pre-completion dividend is also expected to be received by Commonwealth Bank (amount subject to the timing of completion, business performance and regulatory approvals).

Under the terms of the partnership, Commonwealth Bank will continue to earn income on the distribution of life and health insurance products.

The Transaction is expected to release approximately $3 billion of Common Equity Tier 1 (“CET1”) capital and result in a pro forma uplift to the Group’s FY17 CET1 ratio of approximately 70 basis points on an APRA basis. Due predominantly to the carrying value of goodwill, the Transaction is expected to result in an indicative after tax accounting loss on sale of approximately $300 million, net of separation and transaction costs.

The Transaction and partnership do not include general insurance and the CommInsure brand will be retained. The Transaction is subject to certain conditions and regulatory approvals in Australia and New Zealand and is also conditional upon the transfer of Commonwealth Bank’s equity interest in BoComm Life Insurance Company Limited (“BoComm Life”) out of CommInsure. Commonwealth Bank is considering a range of strategic alternatives for the BoComm Life equity interest, which would be conditional on approval from the China Insurance Regulatory Commission. The Transaction is expected to be completed in calendar year 2018.

 

Long Term Debt Trends – Where Australia Sits

The BIS data-sets on financial trends across countries is a fertile place to go for interesting charts. They recently released several updated series. The one I found most interesting was the ratio of private sector debt from banks, compared with GDP, or formally “Credit to Private non-financial sector from Banks, total at Market value – Percentage of GDP – Adjusted for breaks”. All series on credit to the non-financial sector cover 44 economies, both advanced and emerging. They capture the outstanding amount of credit at the end of the reference quarter. Credit is provided by domestic banks, all other sectors of the economy and non-residents.

Here is a plot from 1971 to present day. I selected some of the more telling data from the 44 available (omitting those in the central range for example).

We see that the strongest rise in the ratio has been in Hong Kong, followed by Denmark, then New Zealand and Australia. Also, look at the impact a recession had on the ratios for Ireland and Spain.

Households and Businesses here hold more debt relative to GDP, and we have moved from the bottom of the range in 1971, accelerating more strongly than many to our current heavily debt ridden state. This degree of leverage highlight the risks in the system, and of course will get worse if growth rates stay low while lending for housing continues at ~6% growth each year. And we know that much of the debt sits with households.

The USA, by comparison is pretty steady over the range, and well below Canada and Denmark.

 

The Great Property Rotation

Today we commence a short series on the results from our latest household surveys, as we examine the drivers of property demand by household segment.

These results, from our 52,000 sample to September 2017 reveals that a significant rotation is underway, with first time buyers seeking to buy, supported by recent enhanced first home owner grants, while property investors are now significantly less likely to transact. We will examine the underlying drivers, initially across the segments, and then later in more detail within a segment.

The segmentation we use is based on the master property definitions as described in our segmentation cookbook. It is essential to look across the segments, as cohorts have significantly different imperatives, which at an aggregate level are lost.

We start with an indication of which segments are most likely to transact over the next year (either buying or selling property).  We can trace the trends since 2013, as displayed below, and until recently both portfolio investors (holding multiple properties for investment purposes) or solo investors (holding one or two properties) led the field. But we are now seeing a marked slow down in investors intending to transact. For example, in 2015, 77% of portfolio investors were intending to transact, today this is down to 57%, and the trend in down. Solo investors are down from a high of 49% to 31%, and again is trending lower. Later we will examine the drivers behind these trends.

In contrast, the proportion of Down Traders is 49%, has been rising a little. Demand remains quite strong, and has overtaken demand from solo investors.  We also see a rise in demand from those seeking to refinance, with around 31% expecting to transact, in 2013, this was 13%. Finally, we see an uptick in First Time Buyers looking to buy, support, as we will see later by the FHOG available. First Time Buyers are also saving harder, with 82% saving, up from a low of 71% in 2014.

Given the rotation we have described, there is a slowing of demand for more finance (relatively speaking) from both Portfolio and Solo Investors, while demand from First Time Buyers, Up Traders and those seeking to Refinance is greater.

Overall the home price growth expectations is lower, and trending down. We see that Up Traders now more bullish than Portfolio or Solo Investors.

Finally, we see that usage of mortgage brokers continues to vary by segment, with those seeking to refinance most likely to use a broker, (77%), then First Time Buyers (64%) and Portfolio Investors (50%)

Next time we will look in more detail and the drivers within each segment.

The results from this analysis will also flow into the next edition of our flagship report The Property Imperative, due out next month.

 

PC Inquiry can address banking competition problems – COBA

The customer owned banking sector today identified significant problems with banking competition in Australia and made three key recommendations to the Productivity Commission (PC) Inquiry to address the issue.

In their submission they highlighted the better rates on offer from Customer-owned banks, reflecting lower returns to stakeholders, but of benefit to customers.  They also show better rates for depositors.

COBA’s Submission to the Productivity Commission Inquiry into Competition in the Australian Financial System recommends:

1. Policymakers and regulators give greater consideration to the impact on competition of the regulatory compliance burden and ensure that regulation is targeted, proportionate, risk-based and, where possible, graduated.

2. The Government introduce an explicit ‘secondary competition objective’ (SCO) into APRA’s legislative mandate, including with an accountability mechanism.

3. Interventions are needed to empower consumers to switch between banking products but interventions to promote switching should be cost-effective and based on rigorous market studies of banking product markets and consumer behaviour.

COBA’s Director – Policy, Luke Lawler, said:

“The enduring solution to concerns about the banking market is action to promote sustainable competition.

“We don’t have sustainable banking competition at the moment. A lack of competition can contribute to inappropriate conduct by firms, and insufficient choice, limited access and poor quality products for consumers.

“The regulatory framework over time has entrenched the dominant position of the largest banks.

“Promoting a more competitive banking market does not require any dilution of financial safety or financial system stability.

“A ‘secondary competition objective’ (SCO) for APRA would raise the relative ‘priority’ of competition compared to APRA’s ‘other considerations’. It would remain secondary to APRA’s primary responsibilities of financial stability and safety. The SCO would include reporting obligations to ensure accountability against the objective.

“The SCO would formalise the relative ‘prioritisation’ of competition and ensure that it becomes ingrained into APRA’s day-to-day regulatory processes.

“APRA’s peer regulator in the UK, the PRA, was given an SCO in 2014 and the outcome is a ‘material change of gear’ where ‘competition is gaining airtime and traction at all levels’ and ‘there are numerous instances where competition considerations have influenced policy outcomes.’

“We do not doubt that APRA already gives some consideration to competition but we judge this to be inadequate and inconsistent.

“Examples of APRA’s failure to give due consideration to competition concerns include: lack of urgency in addressing the market distortions caused by the unfair funding cost advantage enjoyed by the major banks due to the implicit guarantee continuing wide gap in mortgage risk weight settings between the major banks and smaller banking institutions, and implementation of macro-prudential measures affecting investor lending that rewarded major banks which had expanded their investor lending portfolios most aggressively before the cap was applied.

“Customer owned banking institutions offer the full range of consumer retail banking products and services, including highly competitive home loans, credit cards, personal loans and deposit products. Many of these products are market leading and award winning.

“As the providers of these products, customer owned banking institutions strongly support cost-effective measures to empower consumers to switch.

“COBA recommends rigorous market studies of retail banking product markets, taking into account consumer behaviour and behavioural biases, to identify the barriers to switching and to design interventions to reduce these barriers in the most cost-effective way.

“We welcome the Government’s decision to provide resources to the ACCC to establish a dedicated Financial Services Unit to undertake regular in-depth inquiries into competition issues in the financial system. We also support the Government’s decision to include competition in ASIC’s mandate. We recommend clarity of responsibility between these two regulators for carrying out market studies and designing interventions to promote switching.”

Mortgage Arrears at Five Year High

From Australian Broker.

The number of Australian residential mortgages that are more than 30 days in arrears has shot up to a five year high, according to Moody’s Investors Service.

The ratings agency recorded a 30+ delinquency rate of 1.62% in May this year with record high rates in Western Australia, the Northern Territory and South Australia. Arrears were also up in Queensland and the Australian Capital Territory while levels decreased in New South Wales, Victoria and Tasmania.

“Weaker conditions in states reliant on the mining industry, high underemployment, and less favourable housing market and income dynamics will continue to drive delinquencies higher. Regions with exposure to the resource and mining sectors dominated the list of areas with the highest delinquencies in May 2017,” analysts said.

Eight of the 10 regions with the highest 30+ day delinquency rates were found in either Western Australia or Queensland and are locales indirectly or directly related to mining and resources.

“The ten regions with the lowest mortgage delinquencies in Australia in May 2017 were all in Sydney and Melbourne, where housing market and economic conditions were the most supportive for mortgage borrowers.”

Ratings agency Standard & Poor’s (S&P) Global Ratings also recorded an increase in the higher number of delinquent housing loans underlying Australian prime residential mortgage-backed securities (RMBS).

This rate rose from 1.15% in June to 1.17% in July according to the agency’s monthly report RMBS Arrears Statistics: Australia. This latest percentage was lower than the July average for the past decade, S&P analysts said.

Delinquent loans underlying the prime RMBS at the major banks made up almost half of all outstanding loans and increased from 1.08% to 1.11% from June to July. For the regional banks, this level rose from 2.30% to 2.35%.

Arrears for prime RMBS at non-bank financial institutions actually dropped from 0.49% to 0.47% over the month while non-bank originator RMBS arrears declined from 0.88% to 0.85%.

“The pronounced improvement in nonbank originator prime RMBS arrears since their peak of 2.99% in January 2009 reflects a general improvement in the overall collateral quality of this sector. This is evidenced by a fall in low documentation loans from 22% in December 2009 to 15% in June 2017 across their prime portfolios. Higher loan-to-value (LTV) ratio loans – ie, those exceeding 75% – in this sector have declined to 28% as of July 2017 from around 50% in 2009.”

NAB Goes LTI

From The Adviser.

The NAB Group, including Advantedge, has changed its credit policy so that applications for interest-only and principal and interest loans will only be approved if they pass a loan-to-income ratio test.

NAB and its subsidiary companies (including wholesale funder and white-label provider Advantedge), have changed their home lending credit policies in reaction to the regulators’ concerns about Australia’s household debt-to-income ratio.

The lender has announced that is has changed its home lending credit policy so that only borrowers with a certain loan-to-income (LTI) ratio will be approved for loans.

The new ratio, which aims to determine the “customer’s indebtedness to the loan amount” takes the total limit of the loan and divides it by the customer’s total gross annual income (as disclosed in the application).

Ratios greater than eight will be declined, according to the new policy, for applications assess on or after 16 September 2017.

Applications with conditional approval prior to this change will reportedly be honoured for the 90-day validity period.

A spokesperson for NAB commented: “NAB is committed to lending responsibly, and ensuring our customers can meet their home loan repayments today and into the future.

“Regulatory bodies have raised concerns about Australia’s household debt-to-income ratio, which has risen significantly over the past decade.

“With this in mind, NAB, including Advantedge, made changes to our home lending credit policy for interest only lending in July this year, introducing a Loan-To-Income ratio calculation to better assess a customer’s ability to manage their home loan. We have now expanded this policy to apply to all new home loan applications.”

Connective Home Loans, which is affected by the new policy, has told brokers that they should complete a manual calculation on its Serviceability Calculator to determine whether the LTI is less than the relevant threshold.

It warned: “If the LTI is greater than eight, brokers are not to proceed with the application unless the customer’s financial position has changed.”

LTI ratios ‘most powerful and effective for controlling risk’

Some members of industry have been calling for LTI limits to be instated in Australia for some time.

Earlier this year, Digital Finance Analytics principal Martin North, said that LTIs could help address risk in the mortgage market.

Mr North told The Adviser in March: “My own view is that the Reserve Bank and APRA have been very slow to come to the realisation as to how much risk is actually in the housing market…

“I think they should be looking much more firmly at debt servicing ratios and loan-to-income ratios.

“Those are the measures from a macroprudential sense around the world that are being recognised as the most powerful and effective when it comes to controlling the risk in the market,” he said, recommending that Australia could learn from the UK, “where they have very significant rules around loan-to-income”.