The Paris climate agreement at a glance

From The Conversation.

On December 12, 2015 in Paris, the United Nations Framework Convention on Climate Change finally came to a landmark agreement.

Signed by 196 nations, the Paris Agreement is the first comprehensive global treaty to combat climate change, and will follow on from the Kyoto Protocol when it ends in 2020. It will enter into force once it is ratified by at least 55 countries, covering at least 55% of global greenhouse gas emissions.

Here are the key points.

Australian Household Debt Reaches Record Highs at $245,000

Average Australian household debt is four times what it was in 1988, rising from $60,000 to $245,000 after inflation, according to the latest AMP.NATSEM Income and Wealth report – Buy now, pay later: Household debt in Australia.

AMP-DebtThe ratio of household debt to disposable income has almost tripled, from 64 per cent to 185 per cent during the same time. Declining interest rates, low unemployment and a strong economy have driven Australians to take on more debt and at the same time cushioned the impact of repayments.

But if interest rates were to rise by 2.5 percentage points, interest payments for Australia’s most indebted households with mortgages would rise to at least 58 per cent of household income, up from the current 42 per cent. These households would need to find an extra $16,615 a year just to cover interest payments, which would increase from $43,926 to $60,541 a year. For households with mortgages and typical levels of debt, a 2.5 percentage point increase would mean debt repayments would rise from 16 per cent to 23 per cent of income, taking annual interest payments from $15,464 to $21,687, or an extra $6,223 per year.AMP-Debt-2

Other findings from the report include:
• Typical households headed by 30 to 50 year olds have been hit the hardest with their debt to income increasing from 149 per cent to 209 per cent during the past 10 years.
• For people aged over 65, mortgages make up almost a third of their household debt – up significantly from 20 per cent 10 years ago.
• For low-income households, debt is 43 per cent of their disposable income, almost doubling since 2004.
• The top 10 per cent most leveraged Australian households now have an average debt to disposable income ratio of 600 per cent.

Household debt in Australia has increased considerably
• In 1988, the average household could have paid off all its debt with the after-tax income it earned in eight months – it would now take almost two years.
• Australian household debt has grown at 5.3 per cent above inflation each year, outstripping income growth of 1.3 per cent.
• Australia’s most leveraged households have six times as much debt as their annual disposable income.

Australians are taking more debt into retirement
• Of the top 10 per cent most indebted households, it’s the over 65 year old households that have increased their level of debt the most – their repayments to income have almost doubled from 9 to 17 per cent.

First home buyers are taking on considerably more debt
• Rising house prices have seen first home buyers doing it tough with their debt levels at 3.6 times their annual disposable income, up from 3.1 since 2004.
• Typical first homebuyers would feel the greatest impact from rising interest rates – a 2.5 percentage point rise in rates would increase interest repayments as a percentage of disposable income from 21.2 per cent to 30.2 per cent or an extra $8,047 a year.

Lower income families have also taken on a lot more debt
• Among the top 10 per cent of indebted households, low-income households are in the most vulnerable position with their interest payments increasing from 40.8 per cent to 59.9 per cent of disposable income during the past 10 years.

The debt picture is precarious for the most leveraged households
• Australia’s debt boom has impacted all households, but it is the most indebted who have ramped up their leverage the most – for households with the top 10 per cent of debt levels, debt to income has increased from 4.4 to six times income, compared to the typical household which increased from 0.7 to 0.88 times income.

Australian households are among the most indebted in the world
• Australian households have the fifth highest debt levels in the world, with more average household debt than comparable economies like Canada.

Mortgage debt is highest for households headed by a 30-50 year old and over 65s have the most investor debt
• Home mortgages make up almost 63 per cent of debt for households headed by a person aged 30 to 50.
• Investor debt is highest for over 65 year old households at almost 60 per cent of their total debt.

Ninety per cent of Australian household debt is being used to buy a home or to build wealth through investing
• 56 per cent on mortgage and 36 per cent on investing (e.g. rental properties or shares).

Many Australian households experience financial stress
• A quarter of Australians currently experience financial stress from things like paying bills, raising emergency money or having to ask friends for financial assistance.
• Low income families experience six times the rate of financial stress than higher income families.

Single parents face significant financial stress
• Nearly two in three single parents are facing at least one financial stress, compared to just 13 per cent of couples who have children.
• Single parents are 10 times more likely to be experiencing at least three forms of financial stress compared to couples with children.

Regions with the highest typical repayment to income are in the outer suburbs of Sydney, Perth and Melbourne
• For households with the top 10 per cent of debt, it’s the inner city suburbs of Sydney, Perth and Melbourne with the highest repayment to income.

Tasmania and NSW households have the greatest share of mortgage debt
• As a share of debt, mortgage debt is highest in Tasmania, with almost 66 per cent of household debt tied to mortgages and New South Wales has the second highest level of mortgages at just over 58 per cent of total debt.
• The combined territories (Australian Capital Territory and Northern Territory) have the lowest share of mortgage debt at almost 50 per cent.
• Investor debt is highest in Australia’s territories, at 44 per cent, followed by Queensland and Western Australia at around 38 per cent each.

Of the most leveraged households (those with the top 10 per cent of debt) debt is 5.4 times household income in New South Wales, but Western Australia leads the way with debt levels at 6.1 times household income
• Highly leveraged households in the combined territories carry debt levels 5.7 times annual income and for Queensland households debt comes in at 5.5 times income.

Regions with the highest typical debt repayment burden are found in the outer ring suburbs of major capital cities
• Looking at households with typical repayments in each region, households in northern Perth are the most burdened with interest repayments at $15,100 per year or 14 per cent of disposable income. A 2.5 percentage point increase would push up repayments by $6,400 a year.

AMP publishes these reports to help the community make informed financial and lifestyle decisions and to contribute to important social and economic policy debate.

Asia Growth to Normalise, Not Collapse as Pressures Mount – Fitch

Fitch Ratings says that emerging Asia’s real GDP growth should slow to 6.3% in 2016 as regional economic pressures continue to add to a challenging outlook . That said, effective policy responses and sovereign buffers should provide a degree of protection, and the slowdown is better understood as a normalisation of growth rates and not an uncontrolled collapse. A hard landing in China is unlikely, and growth in India and in ASEAN should pick up. We forecast emerging Asia as remaining the fastest-growing emerging markets region in 2016.

Fitch’s latest Global Economic Outlook, published yesterday, forecasts global growth to pick up slightly in 2016. Issues linked to lacklustre trade and investment growth remain. But major advanced economies such as the US, Eurozone, UK and Japan seem to have emerged relatively unscathed from the slowdown in key emerging markets in 2015. We forecast global growth to accelerate to 2.6% in 2016 and 2.7% in 2017, from 2.3% in 2015.

In Asia-Pacific, the outlook remains challenging with added economic pressures from the continued slowdown in China’s growth, sluggish global trade growth, and an expected rise in US rates and resulting dollar strength. The expected slowdown in emerging Asia, however, is likely to be driven almost entirely by China. Fitch forecasts Indian growth to accelerate to 8% in the fiscal year ending March 2017, while emerging Asia excluding China and India should grow by 5.2% in 2016, up from 5% in 2015.

One potential downside risk to regional growth could come from high private-sector debt, which is still rising. Four Asian emerging markets have the highest ratios of bank private-sector credit to GDP of any Fitch-rated emerging markets – China, Malaysia, Thailand and Vietnam. Upward pressure on regional interest rates stemming from the US may weigh on domestic demand in more indebted economies.

Fitch maintains its view that the China slowdown is part of a broader structural adjustment necessary to achieve a more sustainable growth pattern. The data thus far from 2015 supports this picture, with weak exports and investments being offset by relatively robust consumption and a solid labour market. Importantly, the scenario of a very sharp slowdown in Chinese growth following the financial market volatility in the summer has not played out. This has reinforced the view that China is likely to muddle through during its structural-adjustment process – and avoid a hard landing.

The Chinese authorities maintain significant resources and capacity to avoid a disorderly deceleration. Fitch has raised its forecast 2017 growth rate for China to 6% from 5.5%, based on the latest Five-Year Plan which suggests a growth target of 6.5% for 2016-2020.

More broadly in Asia, sovereign rating outlooks are mostly stable despite the general outlook and mounting regional pressures. The risks of a financial crisis akin to 1997 are significantly mitigated. External balance sheets are stronger in the region; sovereigns rely less on foreign-currency funding than in 1996; and most countries now also benefit from flexible exchange-rate regimes.

Macroeconomic policy responses thus far have also helped to buffer credit profiles. This is especially the case in Indonesia and Malaysia, which stand out as relatively more exposed to external risk factors than other major economies in the region such as the Philippines and Vietnam.

Lending Finance Shows NSW Investment Property Momentum Falling

The last piece of the finance data, from the ABS shows lending finance for October 2015. Two things of note (despite the noise in the data, as we have already discussed), first, investment housing lending is on the slide (down 3%), offset by a rise in owner occupied lending (up 2%), so overall lending for housing contained to rise a little. Second lending for business rose (up 1.3%). Investment loans were down to 36% of all housing, and lending for commercial (other than for property investment) rose from 43.8 to 44.2%.

All-Lending-Oct-2015Data for NSW, which is original data (no adjustments for trend or seasonality), showed a 5% rise in construction finance for investors, offset by a 33% fall in investment for existing property.  From this, it looks like the investment property party may just be over.


US Lesson On Mobile Payments

Interesting interview from eMarketer, showing how customer centricity transforms mobile payments.

Panera Bread, the fast casual bakery-café with more than 1,900 locations in North America, was among the first wave of brick-and-mortar merchants to accept in-store and in-app payments with the Apple Pay mobile wallet in 2014. Blaine Hurst, Panera Bread’s chief transformation and growth officer, spoke with eMarketer’s Bryan Yeager about the adoption of Apple Pay and other mobile payments among the company’s customers.

eMarketer: Slightly more than a year has passed since Apple Pay launched. What does adoption look like among Panera Bread’s customers?

Blaine Hurst: I am very pleased with the in-app usage, which is in the 20% range [of total in-app transactions]. For in-store, we assumed that for people to change their habits you have to have a much better experience. We’ve paid with mag stripe-based cards for a long time and this is a better experience. Is it enough better to get me to stop using mag stripe cards and overcome that built-in reluctance to change?

It is difficult to get the consumer to change behavior without a material improvement in the experience.

eMarketer: Do you see traction with customers using Apple Pay in your app translating to greater in-store mobile payment usage?

Hurst: We do. When we launched with Apple Pay we saw there was a spike in both methods. Anything that creates new habits or requires us to create new habits, that habit then begins to spread in everything we do. I don’t think that happens overnight because consumers are so used to swiping mag cards, but I believe it will occur.

I don’t know how long it will take, but I think proximity payments where I don’t even have to take my phone out or my wallet, smartwatches, the impact of chip-and-pin cards—the combination of those things will begin to drive adoption of mobile-related payments.

Part of it is the merchants have to get on board. But with many merchants re-terminalizing to accept chip-and-pin anyway, it’s relatively easy to do [mobile payments] at the same time. That’s my No. 1 objective: If customers want to pay with their phone or their watch or chip-and-pin, I want them to be able to pay.

I’m open to any and all comers because this is about Panera Bread adapting to the consumer rather than the company trying to force the consumer in terms of how they pay.

eMarketer: What is Panera’s approach to training front-line staff like cashiers to help mitigate issues with customers using proximity mobile payments?

Hurst: We build it in as part of our overall training program and then whenever there is a new release like Google just did [with Android Pay], we then go back through and update the training. When we rolled out Apple Pay last year, we pushed pretty hard to make sure the cafés were ready for it because we assumed that we would go from few transactions to quite a few transactions. Not huge percentages, but when you start from zero, you’re going to see a pretty big [increase]. We do 8 million transactions a week, so even a small percentage [using mobile payments] is a lot.

eMarketer: How does loyalty and rewards factor into Panera Bread’s approach to mobile payments?

Hurst: Let’s just say we have been working with Apple on some of the loyalty integration since it began. And we are working with both our point-of-sale vendor and Verifone on that integration. We’re not announcing when and where it might be available, but I do believe the ability to include loyalty information as part of the transaction is very important to our guests, and I think it is one more step.

Today, Panera has almost 50% of our transactions where the consumer gives us their rewards number. Clearly, we do that in-app and we see about 70% of those transactions with the loyalty identifier. So we will continue to do that. We have a well-accepted, perhaps industry-leading program, with 20 million consumers signed up.

SocietyOne Has Now Lent $60m in Total Loans

According to Australian Broker, peer-to-peer (P2P) lender SocietyOne has announced a major milestone this week, surpassing $60 million in total loans, with year-to-date loan volume already tripling the company’s loan originations during 2014. However, the chief executive says it is the type of growth that really demonstrates the value of the P2P proposition.

Since its launch the P2P lender has have seen a big shift from non-conforming borrowers to high-quality borrowers. In fact, SocietyOne’s growth this year has been driven largely by high-quality borrowers leaving the major banks.

“Right at the very start, literally at day one, there was certainly a higher proportion of people who may not have met the bank scorecard. However, there has been a pretty steady trend over the last three years where the average Veda score of all applications on any given week continues to go up as more and more.

“People who have a banking relationship have started to ask themselves if they are paying more than they should be for their existing personal loan or more than they might otherwise like to for the carry forward balance on their credit card.”

According to data from SocietyOne, the median yearly income of their typical borrower is approximately $82,000 and their median credit score is 742. The most common job titles of their typical borrower are professional (34%) and manager (22%).

SocietyOne chief executive Matt Symons says this not only proves the value proposition of P2P lenders, but the opportunity they have to significantly disrupt the market.

“I think there are opportunities for marketplace lenders, like SocietyOne, which are just inherently more efficient and competitive to offer a range of borrowers a great deal. I think the big thing is that historically in Australia, everyone has paid the same price. What we have pioneered in Australia – as the first marketplace lender to launch in Australia three years ago – was risk-based pricing in consumer credit,” he told Australian Broker.

“It is great to see Australians taking back control of the sort of information that banks and other institutions have traditionally always had on all of us as consumers and getting the benefit of that themselves. It is that kind of revolution where the power is being put back into the hands of the customer to make better choices about what financial services products meets their needs.”

BIS Capital Proposals Revised Again, LVR’s and Investment Loans Significantly Impacted

The second consultative document on Revisions to the Standardised Approach for credit risk has been released for discussion.

There are a number of significant changes to residential property risk calculations . These guidelines will eventually become part of “Basel III/IV”, and will apply to banks not using their internal assessments (which are also being reviewed separately).

First, risk will be assessed by loan to value ratios, with higher LVR’s having higher risk weights. Second, investment property will have a separate a higher set of LVR related risk-weights. Third, debt servicing ratios will not directly be used for risk weights, but will still figure in the underwriting assessments.

There are also tweaks to loans to SME’s.

These proposals differ in several ways from an initial set of proposals published by the Committee in December 2014. That earlier proposal set out an approach that removed all references to external credit ratings and assigned risk weights based on a limited number of alternative risk drivers. Respondents to the first consultative document expressed concerns, suggesting that the complete removal of references to ratings was unnecessary and undesirable. The Committee has decided to reintroduce the use of ratings, in a non-mechanistic manner, for exposures to banks and corporates. The revised proposal also includes alternative approaches for jurisdictions that do not allow the use of external ratings for regulatory purposes.

The proposed risk weighting of real estate loans has also been modified, with the loan-to-value ratio as the main risk driver. The Committee has decided not to use a debt service coverage ratio as a risk driver given the challenges of defining and calibrating a global measure that can be consistently applied across jurisdictions. The Committee instead proposes requiring the assessment of a borrower’s ability to pay as a key underwriting criterion. It also proposes to categorise all exposures related to real estate, including specialised lending exposures, under the same asset class, and apply higher risk weights to real estate exposures where repayment is materially dependent on the cash flows generated by the property securing the exposure.

This consultative document also includes proposals for exposures to multilateral development banks, retail and defaulted exposures, and off-balance sheet items.The credit risk standardised approach treatment for sovereigns, central banks and public sector entities are not within the scope of these proposals. The Committee is considering these exposures as part of a broader and holistic review of sovereign-related risks.

Comments on the proposals should be made by Friday 11 March 2016.

Looking in more detail at the property-related proposals, the following risk weights will be applied to loans against real property:

  • which are finished properties
  • covered by a legal mortgage
  • with a valid claim over the property in case of default
  • where the borrower has proven ability to repay – including defined DSR’s
  • with a prudent valuation (and in a falling market, a revised valuation), to derive a valid LVR
  • all documentation held

If all criteria a met the following risk weights are proposed.

BIS-Dec-12-01For residential real estate exposures to individuals with an LTV ratio higher than 100% the risk weight applied will be 75%. For residential real estate exposures to SMEs with an LTV ratio higher than 100% the risk weight applied will be 85%. If criteria are not met, then 150% will apply.

Turning to investment property, where cash flow from the property is the primary source of income to service the loan

BIS-Sec-12-02Commercial property will have different ratios, based on counter party risk weight.

BIS-Dec-12-03 But again, those properties serviced by cash flow have higher weightings.

BIS-Dec-15-04Development projects will be rated at 150%.

Bearing in mind that residential property today has a standard weight of 35%, it is clear that more capital will be required for high LVR and investment loans. As a result, if these proposals were to be adopted, then borrowers can expect to pay more for investment loans, and higher LVR loans.

It will also increase the burden of compliance on banks, and this will  likely increase underwriting costs. Finally, whilst ongoing data on DSR will not be required, there is still a need to market-to-market in a falling market to ensure the LVR’s are up to date. This means, that if property valuations fall significantly, higher risk weights will start to apply, the further they fall, the larger the risk weights.

Finally, it continues the divergence between the relative risks of investment and owner occupied loans, the former demanding more capital, thus increasing the differential pricing of investment loans.

The Committee notes that the SA is a global minimum standard and that it is not possible to take into account all national characteristics in a simple approach. As such, national supervisors should require a more conservative treatment if they consider it necessary to reflect jurisdictional specificities. Furthermore, the SA is a methodology for calculating minimum risk-based capital requirements and should in no way be seen as a substitute for prudent risk management by banks.

Now, some will argue that in Australia, this will not impact the market much, as the major banks use their own internal models, however, as these are under review (with the intent of closing the gap somewhat with the standard methods used by the smaller players) expect the standard models to inform potential changes in the IRB set. Also, it is not clear yet whether banks who use lenders mortgage insurance for loans above 80% will be protected from the higher capital bands, though we suspect they may not. Non-bank lenders may well benefit as they are not caught by the rules, although capital market pricing may well change, and impact them at a second order level. We will be interested to see how local regulators handle the situation where an investment loan is partly serviced by income from rentals, and partly from direct income, which rules should apply – how will “materially dependent” be interpreted?


ACCC takes action against Woolworths for alleged unconscionable conduct

The Australian Competition and Consumer Commission has instituted proceedings in the Federal Court against Woolworths Limited, alleging it engaged in unconscionable conduct in dealings with a large number of its supermarket suppliers, in contravention of the Australian Consumer Law.

The ACCC alleges that in December 2014, Woolworths developed a strategy, approved by senior management, to urgently reduce Woolworths’ expected significant half year gross profit shortfall by 31 December 2014.

It is alleged that one of the ways Woolworths sought to reduce its expected profit shortfall was to design a scheme, referred to as “Mind the Gap”. It is alleged that under the scheme, Woolworths systematically sought to obtain payments from a group of 821 “Tier B” suppliers to its supermarket business.

The ACCC alleges that, in accordance with the Mind the Gap scheme, Woolworths’ category managers and buyers contacted a large number of the Tier B suppliers and asked for Mind the Gap payments from those suppliers for amounts which included payments that ranged from $4,291 to $1.4 million, to “support” Woolworths. Not agreeing to a payment would be seen as not “supporting” Woolworths.

The ACCC also alleges that these requests were made in circumstances where Woolworths was in a substantially stronger bargaining position than the suppliers, did not have a pre-existing contractual entitlement to seek the payments, and either knew it did not have or was indifferent to whether it had a legitimate basis for requesting a Mind the Gap payment from every targeted Tier B supplier.

The ACCC alleges that Woolworths sought approximately $60.2 million in Mind the Gap payments from the Tier B suppliers, expecting that while many suppliers would refuse to make a payment, some suppliers would agree. It is alleged that Woolworths ultimately captured approximately $18.1 million from these suppliers.

“The ACCC alleges that Woolworths’ conduct in requesting the Mind the Gap payments was unconscionable in all the circumstances,” ACCC Chairman Rod Sims said.

“A common concern raised by suppliers relates to arbitrary claims for payments outside of trading terms by major supermarket retailers. It is difficult for suppliers to plan and budget for the operation of their businesses if they are subject to such ad hoc requests.”

“The alleged conduct by Woolworths came to the ACCC’s attention around the time when there was considerable publicity about the impending resolution of the ACCC’s Federal Court proceedings against Coles Supermarkets for engaging in unconscionable conduct against its suppliers,” Mr Sims said.

“Of course, the allegations against Woolworths are separate and distinct from the Coles case.”

The ACCC is seeking injunctions, including an order requiring the full refund of the amounts paid by suppliers under the Mind the Gap scheme, a pecuniary penalty, a declaration, and costs.

These proceedings follow broader investigations by the ACCC into allegations that supermarket suppliers were being treated inappropriately by the major supermarket chains.

Unemployment Rate Trend Remains At 6%

According to the ABS, November 2015 data  shows that an increase in employment has contributed to the trend employment to population ratio rising over the year from 60.6 per cent to 61.3 per cent, while the unemployment rate has remained relatively stable over the year, decreasing from 6.2 per cent to 6.0 per cent.

Unemployment-Rate-Nov-2015The ABS reported that strong growth in employment has continued with 293,000 more people were employed in November 2015 than in November 2014; an increase of 2.5 per cent.

Over the past month, trend employment increased by 25,300 persons to 11,855,800 persons, which translates into a monthly growth rate of 0.21 per cent. This growth rate was above the monthly average over the past 20 years (0.15 per cent), and continues the trend in relatively strong employment growth that has been seen since December 2014.

The trend series smooth the more volatile seasonally adjusted estimates and provide the best measure of the underlying behaviour of the labour market.

The seasonally adjusted unemployment rate for November 2015 was 5.8 per cent (down 0.1 percentage points) and the labour force participation rate was 65.3 per cent (up 0.3 percentage points).

The seasonally adjusted number of persons employed increased by 71,400 in November 2015, while the number of persons unemployed decreased by 2,800.

The ABS seasonally adjusted monthly hours worked in all jobs series decreased slightly in November 2015, down 12.7 million hours (0.8 per cent) to 1,645.9 million hours, the ABS reported.

Two-thirds of Australians Use Social Media

Research conducted by Tumblr into the ‘Status of Social in 2015’ shows that of the 19m Australian internet users, 67% use a mix of Tumblr, Facebook, LinkedIn, Instagram, YouTube, Pinterest, Twitter, Vimeo and other social media channels.

Around 93% of these use social media more than once a week, while 72% use it daily. Key times of access are wake up (45%) and evening and bed (40/41%). 32% of users accessed social media whilst at work.

The main reason to visit is to find interesting content. 61% of Australians surveyed said they will only engage with content they love or are truly passionate about.

Whilst access methods vary, 70% use a mobile phone, 52% use desktop or laptop and 34% use a table (more than one answer is included).

Max Sebela from Tumblr said

“Our new Social Norms report shows just how much our behaviours are changing online. Australians have moved away from using social media as a way to connect with their loved ones, and are increasingly using these channels as an identity construct. The value placed on individual online personas is higher than it has ever been before, proving that the influential power of social media is only on the rise.

… It’s not just about creating but curating beautiful content that speaks to your personal identity.”