Retail Turnover Fell 0.5 per cent in May 2014 – ABS

The latest ABS Retail Trade figures show that Australian retail turnover fell 0.5 per cent in May 2014, seasonally adjusted, following a fall of 0.1 per cent in April 2014.

PricesTrendsMay2014The largest contributor to the fall was clothing, footwear and personal accessory retailing (-2.3 per cent), followed by department stores (-2.6 per cent), household goods retailing (-0.9 per cent) and other retailing (-0.4 per cent). These falls were partially offset by rises in food retailing (0.1 per cent) and cafes, restaurants and takeaway food services (0.1 per cent).

RetailVolumeTrendsMay2014In seasonally adjusted terms the state which made the largest contribution to the fall was Victoria (-1.1 per cent), followed by New South Wales (-0.5 per cent ), Western Australia (-0.3 per cent ), Queensland (-0.1 per cent ), the Australian Capital Territory (-0.3 per cent ) and Tasmania (-0.2 per cent ). These falls were partially offset by rises in South Australia (0.2 per cent ) and the Northern Territory (0.4 per cent ).  The trend estimate for Australian turnover was relatively unchanged (0.0 per cent) in May 2014 following a rise of 0.1 per cent in April 2014.

Building Approvals Fall Again In May – ABS

According to the ABS, in data released today, the number of dwellings approved fell 1.7 per cent in May 2014, in trend terms, and has fallen for five months.  However, the seasonally adjusted estimate for total dwellings approved rose 9.9% in May after falling for three months. Approvals for units increased. The seasonally adjusted estimate for private sector dwellings excluding houses rose 27.2% in May after falling for three months.  The seasonally adjusted estimate for private sector houses rose 0.5% in May after falling for three months.

BuildingNumberMay2014Dwelling approvals increased in trend terms in the Northern Territory (8.2 per cent) and Tasmania (6.5 per cent). Dwelling approvals decreased in trend terms in the Australian Capital Territory (9.5 per cent), Queensland (3.2 per cent), New South Wales (3.0 per cent), South Australia (1.6 per cent), Western Australia (0.5 per cent) and Victoria (0.2 per cent). In trend terms, approvals for private sector houses fell 0.2 per cent in May. Private sector house approvals rose in Queensland (0.3 per cent), Victoria (0.2 per cent) and Western Australia (0.2 per cent). In trend terms, approvals for private sector houses fell in New South Wales (2.1 per cent) and South Australia (0.6 per cent).

The value of total building approved fell 3.3 per cent in May, in trend terms, and has fallen for six months. The value of residential building fell 1.1 per cent, while non-residential building fell 7.6 per cent in trend terms.

BuildingValueMay2014However, the seasonally adjusted estimate of the value of total building approved rose 26.1% in May after falling for four months. The value of residential building rose 13.5% after falling for three months. The value of non-residential building rose 59.5% after falling for four months.

So depending on your point of view, building approvals are either up or down in May! DFA’s view is that the seasonally adjusted data is probably a better read, indicating that the effects of low interest rates and the demand for property in a rising price market is stimulating approvals.

Credit Card Lending Portfolio Data to May 2014

Continuing our analysis of the APRA monthly banking statistics, today we execute a deeper dive into the credit card portfolios. The $40.5 billion portfolio is relatively static, fluctuating by about $200m in recent months. As we highlighted, previously, CBA has the biggest share, and Citigroup is the 5th largest player.

ADIMay2014CardsTrends1We can show the relative share trends as a percentage of total book. CBA has 28% of the market, and Westpac 23% – together holding more than half the market. Macquarie is a small, but growing player, as we will see in a moment. Citigroup’s share dropped just a little.

ADIMay2014CardsTrends3So. lets look at the changes in more detail. Here are the movements by percentage change of individual portfolios. Thanks to Macquarie’s acquisition of HSBC’s Woolworths white label credit card portfolio for $362 million in May, we see a significant swing away from HSBC, to Macquarie, who more than doubled their portfolio in the transaction. HSBC released a statement saying it was still committed to the Australian market, but the Woolworth agreement would terminate, although they would continue to provide card services through to 2015.

ADIMay2014CardsTrends2Looking at the data another way, in portfolio dollar terms, we see CBA growing a little, whilst nab, ANZ and Citigroup fell in May. The Macquarie transaction also shows up clearly. Overall in May the total across all banks fell just over $200 million.

ADIMay2014CardsTrends4So, we see household card debit is quite constrained at the moment. We also see Macquarie extending its reach across retail banking, including mortgage lending, and credit cards.

RBA Leaves Cash Rate Unchanged; Again.

At its meeting today, the Board decided to leave the cash rate unchanged at 2.5 per cent. “Monetary policy remains accommodative. Interest rates are very low and for some borrowers have edged lower over recent months. Savers continue to look for higher returns in response to low rates on safe instruments. Credit growth has picked up a little, including most recently to businesses. Dwelling prices have increased significantly over the past year, though there have been some signs of a moderation in the pace of increase recently. The exchange rate remains high by historical standards, particularly given the declines in key commodity prices, and hence is offering less assistance than it might in achieving balanced growth in the economy. Looking ahead, continued accommodative monetary policy should provide support to demand and help growth to strengthen over time. Inflation is expected to be consistent with the 2–3 per cent target over the next two years”.

“A strong expansion in housing construction is now under way. At the same time, resources sector investment spending is starting to decline significantly.”

Home Lending Portfolio Analysis To May 2014

Following on for our analysis of the APRA monthly banking statistics, today we explore some of the detail in the home loan statistics. The data shows the net monthly movement by lending institution, split by owner occupation and investment lending. We dropped a few of the smallest players from the data to make the picture clearer. We see some interesting segmental trends. First, lets look at the major changes amongst the main lenders between April and May. The most significant element relates to the CBA portfolio where there appears to be a big swing to investment lending (is this changes in policy, or a data coding issue?). Westpac continues to grow its investment portfolio so, We think CBA may be hunting investment loans more aggressively, but its a big monthly swing.

ADIMay2014Trends2Now looking at the loan portfolios from January to May, we see again Westpac leading the investment lending, and we see CBA’s uptick in May, offset by a fall in owner occupation lending.

ADIMay2014Trends1Another way to look at the data is by percentage movement, this view shows the change at the portfolio level, the sum of investment and owner occupied loans. It is worth highlighting the Macquarie Bank growth,  much higher than system growth. Bendigo had quite a spike, and AMP had a bad March. What we do not know is how much is a data problem, and how much is a real response to business strategy and execution.

ADIMay2014Trends3We can also split the data by loan type. This the owner occupation trend, note that at a marker level, it fell slightly overall in May. We see the fall at CBA in May, the spike at Bendigo, the consistent growth at Macquarie and the AMP hiccup.

ADIMay2014Trends4Turning to the Investment Loan portfolio, the CBA spike shows clearly, the Macquarie Bank growth spurt, the growth at Members Equity, and strong overall spike in investment lending.

ADIMay2014Trends5We should await the next months data, because the CBA data movements would mask, or change the outcomes. Our own data suggest investment lending is not as strong as suggested by the APRA data.

BIS Banking Benchmarks – Where Australian Banks Stand

The BIS published their 84th annual report 2013-14 recently. As well as discussing the merits of central banks relying on low interest rates to try and drive recovery from 2007, and the risks in this strategy with regards to laying the foundations for GFC mark II thanks to expanding credit; there is some interesting data on relative bank performance across several countries. We will focus attention on this data, recognising of course that making cross country comparisons is fraught with dangers because of differences in reporting. That said there are some interesting points to consider. We look at Profitability, Net Interest Margins, Losses and Costs. In each case, I have sorted the countries by the relevant 2013 data, to highlight where Australia appears relative to its peers. The data shows the number of major banks in each country, and they have averaged the results, giving three cuts of data, 200-2007, 2008-2012 and 2013. All the BIS metrics are calculated relative to total bank assets.

Lets first look at relative profitability.  We see that Russia, China, Brazil and India all reported profitability higher than the Australian banks. However, Australia has the most profitable banks amongst advanced western countries, and is significantly more profitable than banks in Canada, Germany and UK. It is also worth noting that in Australia, banks are still not as profitable, relative to assets as they were before the GFC. But then, that is pretty consistent across the sample countries.

BISJune14-ProfitSo, what is driving relative profitability? Could it be net interest margins? Well, comparing margins relative to assets, Australia is somewhere in the middle, the highest margins are returned from Russia and Brazil, the lowest margins from Switzerland and Japan. Margins in Australia are however higher than Canada, Italy, UK and France. Higher margins, in my view reflect limited real competition, and we know that Australian banks have been repairing their margins by not passing on recent lower funding costs to borrowers, or savers. Small business customers are being hit quite hard. So, banks in Australia are more profitable thanks to higher margins, in a relatively benign environment competitively speaking.

BISJune14-NIMLets look at losses. Here Australian banks have some of the lowest loss rates in the sample. The UK and USA have higher rates of loss, as do the developing economies. Only Japan. Switzerland, Sweden and Canada have lower loss rates. Actually banks in Australia have reduced their provisioning and returned some of these earlier provisions to enhance profitably recently.

BISJune14-LossFinally, we look are operational costs. Here again Australian banks rank well, with some of the lowest costs as a proportion of assets of all countries. Many countries including the UK. Canada and USA have higher operating costs.

BISJune14-CostsSo, putting that all together, what can we conclude. Australian banks are some of the most profitable, thanks to efficient operations, low loss levels and relatively high margins. That strength should serve us well if the BIS scenario of rising interest rates comes true. However, we should not loose sight of the fact that the big four march together when in comes to pricing, products and fees. There is ample room for banks to become more competitive, and drive margins lower. Its unlikely though they will because they all enjoy the fruits of the current environment, at the expense of Australia Inc. The argument that shareholders benefit many be true, but it misses the point because that excess profitability dampens broader economic activity, thanks to higher ongoing costs.

APRA Reports ADI Housing Lending Is Up In May To $1.25 trillion

Alongside the RBA data, APRA released the latest monthly banking statistics for May, covering the Authorised Deposit Institutions (=Banks). Total housing loans was reported at $1.25 trillion, up from $1.245 trillion in April. The RBA number, which we reported already, was $1.36 trillion, the difference is the non-bank sector, at around $110 billion, around the same as last month.

Looking at the detail in the APRA data, we look first at housing lending. The big four maintain their market leading positions, with CBA the largest home loan lender.

ADIMay2014HousingLooking at the relative share of owner occupied to investment home loan lending, whilst some of the smaller players lend a greater proportion, Westpac is slightly behind Bank of Queensland, but the largest lender with the greatest proportion of investment loans. Nab has the lowest share of investment loans amongst the four majors.

ADIMay2014HousingRatioTurning to Securitisation, Members Equity leads out, with Bendigo, Westpac and AMP following.

ADIMay2014SecuritisationLooking at Credit Cards, CBA is in first place, with Citigroup in fifth.

ADIMay2014CreditCardsIn the business bank area, National Australia Bank is the largest business bank, with CBA following. The bulk of the lending is to the non financial corporation sectors.

ADIMay2014BusinessFinally here is a snapshot of total lending, showing that CBA is the largest lender.

ADIMay2014AllOn the deposit side of the equation, CBA also leads the share of total deposits.

ADIMay2014DepositsLooking specifically at household deposits, CBA leads the banks, with nab in fourth place, behind ANZ.

ADIMay2014Household-Deposits

Housing Lending Up, Again, in May – RBA

The RBA released their financial aggregates for May 2014 today. Housing lending now totals $1.36 trillion, up by $7.2 billion, a growth rate of 0.5% in the month, and 6.2% in the past 12 months. Investment lending grew at 0.8% in May, whilst owner occupied loans grew at 0.4%.

RBAMay2014HousingTypeInvestment lending is growing faster, at 8.3% compared with 5.2% for owner occupation over 12 months. These are all seasonally adjusted numbers.

RBAMay2014HousingTrendPersonal credit fell again, by 0.3% in the month, giving an annual rate of 0.3%, and business lending grew 0.2%, giving and annual rate of 2.7%. So, the focus on lending for housing continues.

Australian Household Loan To Income Ratios Are Worse Than In The UK

As we highlighted recently, the Bank of England is supporting the imposition of loan to income (LTI) ratios on banks in the UK, as a way to manage risks in the housing sector. So today, we start to explore loan to income data in Australia, captured though our rolling programme of household surveys. We start with some average national data, then look at the NSW picture in more detail. The UK recommendation, was to ensure that mortgage lenders do not extend more than 15% of their total number of new residential mortgages at Loan to Income ratios at or greater than 4.5. This recommendation applies to all lenders which extend residential mortgage lending in excess of £100 million per annum.

So whats the Australian data? We start by looking at the average LTI by postcode. The histogram shows the average LTI by household, calculated at a postcode level, and including all households with a mortgage. Income means the gross annual income, before tax or other deductions. We see that the LTI varies between 2.25 and 8. This is the ratio of household income to the size of the mortgage. We see a peak around 4.25-4.5 times, and a second peak at 6.25. Newer loans are more represented in this second peak.

Loan to income is a good indicator, because it isolates movements in house prices altogether from the data. The rule of thumb when I was working in the bank as a lender was to take 3 times the first income, and add one times the second income as a measure of the loan which was available to a household. Although rough, it was not too bad. Since then, lending rules have changed and criteria stretched. This ability to lend more has in turn led to higher house price inflation, thanks to supply/demand dynamics.

Australia-LTI-Average The current data from the UK shows that LTI’s there are spread between 0 and 6. Interestingly, we see that in their forward scenarios they suggest an emerging second peak around an LTI of 5 times. So LTI’s in Australia are more stretched than in the UK. The regulators here do not report LTI data regularly. This is a significant gap. LTI2We can map relative LTI average to post code. Here is the Sydney example, which highlights that there is a significant geographic concentration of high LTI loans in the western suburbs of Sydney.

Sydney-LTIThere is, further, a correlation between higher LTI loans and Mortgage Stress. Here is the stress data for Sydney.

NSW-Mortgage-StressThese are concerning indicators. In addition as we dig into the data we find that the second peak in the LTI data relates to younger buyers, often first time purchasers. They are highly leveraged into the property market, and are surviving thanks to the very low interest rates available today. If rates rise, this could be a problem. This suggests that the loan to income situation in Australia is more adverse than the UK scene. Whilst we note the UK regulator is acting, there is no macro-prudential intervention in Australia.  There should be.

Later we will present additional data across the other major centres, and examine in more detail those who are recent purchasers.

UK To Cap High Loan To Income Mortgage Loans

The UK Financial Policy Committee is is charged with taking action to remove or reduce systemic risks with a view to protecting and enhancing the resilience of the UK financial system. In their June 2014 report they highlighted that the recovery in the UK housing market has been associated with a marked rise in the share of mortgages extended at high loan to income multiples. Increased household indebtedness may be associated with a higher probability of household distress, which can cause sharp falls in consumer spending. Falls in consumption can in turn weigh on wider economic activity, increasing macroeconomic volatility in the face of shocks to income and interest rates. Furthermore, rapid growth in aggregate credit – which could be associated with a sharp increase in highly indebted households – is strongly associated with subsequent economic instability and the risk of financial crisis. Acting against excessive indebtedness will make the financial system more stable.

As a result, the FPC decided at its June meeting to recommend to the Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA) that they take steps to ensure that lenders constrain the proportion of new lending at loan to income (LTI) ratios at or above 4.5 to no more than 15% of the total number of new mortgage loans. This is because they believe the the aggregate effect of many firms undertaking such lending could pose a risk to financial stability.

They recommend:

“The PRA and the FCA should ensure that mortgage lenders do not extend more than 15% of their total number of new residential mortgages at Loan to Income ratios at or greater than 4.5. This recommendation applies to all lenders which extend residential mortgage lending in excess of £100 million per annum. The recommendation should be implemented as soon as is practicable.”

The PRA have now released a detailed consultation paper on implementing this recommendation. They are intending to implement the recommendation as soon as practicable. The proposed implementation date for these rules is 1 October 2014. The proposed rules would have the effect of limiting to no more than 15% of the total the number of mortgage loans completed by each lender at or greater than 4.5 times LTI. The limit is intended to restrict but not halt the extension of mortgage lending at such LTIs and can thus be thought of as a limit on the flow of very high LTI lending. The measure is designed to capture risks associated with excessive household indebtedness. Lenders will be required to report on this dimension. This relates to mortgages written, not offers made, or decisions in principle. Remortgages are buy-to-let mortgages are excluded. They provide data on the split by LTI in the UK, showing the trends.LTIThey also show scenarios for the potential impact of the policy. If house prices and mortgage approvals grow in line with the central scenario, the impact of the policy action is likely to be minimal. However, if there is more underlying strength in the housing market than in the central scenario, the proposed rule would be likely to restrict the availability of very high LTI mortgages to some households. The proposed policy might then reduce the level of GDP in the short term to the extent that it acts as a binding constraint on mortgage lending. However, even in the upside scenario considered in the June 2014 FSR, the size of the effect would be small (roughly 0.25%). The main benefits of the policy will be to reduce macroeconomic volatility and the likelihood and severity of financial instability.LTI2Two observations for the Australian market. First, we have no macro-prudential policies here despite the fact that they are recommended by several global bodies. Second, the LTI metric is recommended as the policy of choice, and in Australia we do not see regular reporting of LTI data from the banks via APRA or ABS.  Given the high income multiples here, we should be following the UK. In addition the regulators should start to capture and report LTI data.