CBA and ASIC agree in-principle settlement over BBSW

Commonwealth Bank (CBA) announces it has reached an in-principle agreement with the Australian Securities and Investments Commission (ASIC) to settle the legal proceedings in relation to claims of manipulation of the Bank Bill Swap Rate (BBSW).

As part of the in-principle settlement, CBA will acknowledge that, in the course of trading on the BBSW market in Australia on five occasions between February and June 2012, CBA attempted to engage in unconscionable conduct in breach of the ASIC Act. CBA will also acknowledge it did not have adequate policies and systems in place to monitor the trading and communications of its staff in order to prevent that conduct from occurring.

Subject to Federal Court approval of the settlement, CBA has agreed to pay a $5 million penalty, a payment of $15 million to a financial consumer protection fund and a $5 million payment towards ASIC’s costs of the litigation and its investigation. The impact of this settlement will be reflected in CBA’s 2018 Financial Year results.

CBA has also agreed to enter into an enforceable undertaking with ASIC, under which an independent expert will be appointed to review controls, policies, training and monitoring in relation to its BBSW business.

CBA and ASIC will make an application to the Federal Court for approval of the settlement

CBA Q3 Trading Update – Pressure At The Coal Face

CBA released their 3Q18 trading update today. They announced an unaudited statutory net profit of approximately $2.30bn, in the quarter and unaudited cash net profit of approximately $2.35bn in the quarter. This is down 9% on an underlying basis compared with 1H18.

We see some signs of rising consumer arrears, and a flat NIM (stark contrast to WBC earlier in the week!).  Expenses were higher due to provisions for regulatory and compliance.

The APRA imposed increase Operational Risk regulatory capital by $1 billion (RWA of $12.5 billion) was effective 30 April 2018 and the pro-forma impact on the CET1 ratio as at 31 March 2018 is a decrease of 27 basis points, to 9.8%.

Underlying operating income decreased by 4%. Excluding the impact of two fewer days in the quarter (approximately $100m), net interest income was broadly flat. Volume growth was offset by a slight decline in Group Net Interest Margin due to customer switching from interest only to principal and interest home loans, as well as higher basis risk. Other banking income was lower driven by lower treasury and trading performance, and seasonally lower card fee income.

Underlying operating expense increased by 3%, driven by increased provisions for regulatory and compliance project spend.

CBA says the credit quality of the Group’s lending portfolios remained sound. Loan Impairment Expense of $261 million in the quarter equated to 14 basis points of Gross Loans and Acceptances, compared to 16 basis points in 1H18.

Consumer arrears were seasonally higher in the quarter.  There has been an uptick in home loan arrears, influenced by a small number of customers experiencing difficulties with rising essential costs and limited income growth.


Troublesome and impaired assets increased to $6.6 billion. A small number of credits drove the increase in troublesome exposures over the quarter, with impaired assets stable.

Prudent levels of credit provisioning were maintained, with Total Provisions at approximately $3.8 billion. Overall collective provisions rose.

Funding and liquidity positions remained strong, with customer deposit funding at 68%

The average tenor of the long term wholesale funding portfolio at 5.1 years. The Group issued $10.2 billion of long term funding in the quarter.

The Net Stable Funding Ratio (NSFR) was 111% at March 2018, up from 110% at December 2017.  The Liquidity Coverage Ratio (LCR) increased to 133% as at March 2018, driven by higher liquid assets (up approximately $5 billion in the quarter to $144 billion13).

The Group’s Leverage Ratio was 5.2% on an APRA basis and 5.9% on an internationally comparable basis, 20 basis points lower than December 2017, primarily reflecting the impact of the 2018 interim dividend.

CET1 (APRA) ratio at 10.1%, up 37 bpts since Dec 17 after allowing for payment of the 2018 interim dividend

After allowing for the impact of the 2018 interim dividend (which included the issuance of shares in respect of the Dividend Reinvestment Plan), CET1 increased 37 basis points in the quarter. This was driven by capital generated from earnings, partially offset by higher Risk Weighted Assets.

Credit Risk Weighted Assets were higher in the quarter (-18 basis points), reflecting a combination of volume and foreign exchange movements, credit quality and regulatory changes.

The final tranche of Colonial debt ($315m) is due to mature in the June 2018 quarter, with an estimated CET1 impact of -7 basis points.

The Group will adopt AASB 9 on 1 July 2018. The impact will be recognised in opening retained earnings. The Group’s estimate of the pro-forma impact of AASB 9 as at 1 January 2018 is an increase in collective provisions of approximately $1,050 million (before tax) and a reduction in the CET1 ratio of approximately 26 basis points. This reflects the revised treatment of the General Reserve for Credit Losses as advised by APRA.

On 1 May 2018, APRA released the findings of the Prudential Inquiry into CBA. APRA requires CBA to increase Operational Risk regulatory capital by $1 billion (RWA of $12.5 billion). This adjustment is effective 30 April 2018, being the date the Group entered into an Enforceable Undertaking with APRA which states that CBA may apply for the removal of the adjustment only on meeting certain conditions. The pro-forma impact on the CET1 ratio as at 31 March 2018 is a decrease of 27 basis points, to 9.8%.

The sale of the Group’s Australian and New Zealand life insurance operations is expected to be completed in the December 2018 half year (subject to regulatory approvals) resulting in an uplift to the CET1 ratio of approximately +70 basis points.

 

 

Fintech Athena Home Loans Direct Model Funded

From The Adviser.

A new fintech Athena Home Loans founded by two former NAB executives has received $15 million from major investors to facilitate its entry into the Australian mortgage market. This was reported in the AFR on Monday.

Cloud-based digital mortgage platform Athena Home Loans has closed a Series A raise of $15 million with investment backing from Macquarie Bank, Square Peg Capital, Apex Capital and Rice Warner.

Athena, founded by former NAB executives Nathan Walsh and Michael Starkey, pulled in a $3 million seed round in June 2017 and has now set its sights on disrupting the $1.7 trillion Australian mortgage market.

Speaking to The Adviser, co-founder and CEO Nathan Walsh noted that Athena plans to bypass the banks, offering super fund-backed mortgages directly to borrowers through its cloud-based digital portal.

“We know that the big banks are very constrained by customer pain points that are caused by ageing technology in the manual, paper-based processes, and we know there’s a real opportunity to improve on that,” Mr Walsh said.

Chief operating officer Michael Starkey claimed that Athena’s super fund-backed investment model would also allow it to offer lower interest rates than its competitors.

“By investing in home loans directly with Athena, super funds can cut the spread between what mortgage borrowers pay and investors receive,” Mr Starkey said.

“In countries such as the Netherlands, where pension systems are similarly advanced, the impact of this model is already evident.”

Mr Walsh added: “The potential savings for a typical Australian family switching from the big four banks to Athena could be as much as $100,000 over the life of the average loan.”

Mr Walsh also noted that Athena aims to settle $100 million in home loans this year, which the CEO said equated to approximately 200 home loans.

The Athena chief went on to say that the online lender plans to ramp up its offerings once it is established in the marketplace.

“We see a big opportunity [for brokers] here,” Mr Walsh continued.

“Next year, [it’s] game on; we really see a big opportunity. It’s a big market and we’re very keen about giving all Australians access to a better deal on their home loan.”

No immediate plans for the broker channel

Mr Walsh revealed to The Adviser that while Athena has no immediate plans to originate home loans through the broker channel, it could be an option in the future.

“[We’re] a direct model, so consumers are going direct to [Athena] and opening accounts directly, but we do know that, clearly, mortgage brokers are an important part of the market and we’ll consider that in our roadmaps for the long term,” the CEO said.

“[We] are considering those options, so I think those are probably things for future discussions.

“At this stage, we’re really focusing on our launch, which is targeting our direct channel.”

Compliance with responsible lending obligations

Mr Walsh also insisted that Athena would ensure it’s complaint with responsible lending obligations, saying that a “huge part” of the build phase has been “the ongoing process of design, legal and compliance review, to really make sure that we’re stepping through each stage of that journey.”

The CEO said: “[We want to] make sure we’re providing those really important protections, but at the same time, managing the complexities so it is a process that borrowers feel comfortable using digital channels. And that’s a really big part of the design thinking that’s gone into building that.”

Square Peg co-founder joins Athena board

As part of Square Peg Capital’s investment, co-founder Paul Bassat is set to join the Athena board.

“We are thrilled to be joining Athena’s journey,” Mr Bassat said.

“This is a great example of the type of team we love to back — smart, driven and focused on solving an important problem.

“The win-win model that Athena offers to investors and borrowers has huge potential to disrupt the way home loans are originated, serviced and funded in Australia.”

Morrison’s budget tax plan is another missed opportunity

From The Conversation.

Even though this year’s budget is pretty good politics and reasonable economics, on almost every front, it is a missed opportunity to be bold.

Last year’s budget was a bank-bashing bombshell, with 4-5% of profits for five of Australia’s biggest banks yanked away, not for financial stability reasons, but because, as Treasurer Scott Morrison hinted at the budget press conference, people don’t like the banks very much.

With that populist mission accomplished, this year’s budget is more mundane.

The much-vaunted return to surplus is now planned for 2019-20 at just 0.1% of GDP. In 2017-18 we are told to expect a deficit of 1% of GDP ($18.2 billion). That’s before the forecast 3% real GDP growth from 2018-19 onward kicks in. An heroic assumption.

Compare that to an actual of 2.1% in 2016-17. That topline forecast is not insane, but it is certainly bullish. One is tempted to ask the Treasurer whether he would bet a year’s salary that real GDP will be above 3% compared to below that. I suspect he wouldn’t.

A new personal income tax plan

Having previously introduced, but not wholly managed to get through the Senate, a 10-year plan to reduce the company tax rate from 30% to 25%, this year the government has a seven-year “Personal Income Tax Plan”.

Under the “PIT plan” (pun absolutely intended) the number of tax brackets will be reduced from five to four. By 2024-25 the tax-free threshold will remain at $18,200 and a 19% tax rate will apply up to income of $41,000, at which point the 32.5% rate will kick in. The top marginal rate of 45% will apply to incomes above $200,000.

One good thing the plan does address (at least in part) is “bracket creep,” where wage growth coupled with fixed tax thresholds, leads taxpayers to pay more. Under the new plan, 94% of Australians will pay no more than a 32.5% marginal tax rate. That compares to 63% of Australians who pay that rate or less, under existing policy settings.

In terms of tax relief, it’s relatively modest. A person earning $50,000 will be $530 better off in 2018-19. Because of changes to the Low and Middle Income Tax Offset, this falls to $215 for someone earning $120,000 (and less still beyond that).

Now $530 post-tax dollars, for someone on $50,000 a year, isn’t nothing. But it doesn’t really make up for wage growth so sluggish (2.2% on average last year) that it barely keeps up with inflation.

This is all part of the government’s newly announced, but thoroughly leaked, mantra that taxes should be no more than 23.9% of GDP. The rationale is, as the budget papers put it “so we do not unfairly burden Australians, nor allow taxes to chase ill-disciplined spending”.

In some sense that’s a fair point, but the 23.9% is completely unscientific. It appears to be the average of what tax as a share of GDP was during the Howard government, which has left most economic commentators wondering “so what?”

The black economy and superannuation

There’s a “crackdown” on the black economy with a $10,000 limit on cash transactions. Who knows how that will be enforced. Perhaps our good friends the banks will start complying with anti-money laundering provisions.

In any case, I prefer a $0 limit on cash transactions by transitioning over three years to a cashless Australia. That would likely raise $5-6 billion a year every year, maybe more.

The sneakiest thing of all is taxing tobacco 12 weeks earlier when it leaves the warehouse, rather than at present upon entry into Australia. That will boost tax receipts once, and once only, in 2019-20 by $3.27 billion. Without that timing trick the return to surplus would be pushed back a year to 2020-21.

Having attacked retirement savings last year, the government is now “reuniting Australians with lost super”. Hard to be against that, but hard to get too excited either. Exit fees on superannuation accounts will also be banned, which is a very good idea and should help consolidation of accounts.

One step better would be making it a net zero cost to transfer all banking arrangements (mortgage, accounts, credit cards, etc) from one bank to another, through a mandate on banks and a subsidy for customers. That would help with competition in the banking sector, which has come under recent scrutiny.

Another small but sensible initiative is increasing the Pension Work Bonus from $250 to $300 per fortnight, which permits pensioners to earn up to that amount without affecting their pension eligibility.

On a more disappointing note there is a reasonably large amount of fanfare but very little substance about “backing regional Australia”. There is $200 million for a third round of the Building Better Regions Fund to support infrastructure on top of the $272 million from the Regional Growth Fund.

That’s fine but falls well short of a systematic plan for regional infrastructure and does not address regional unemployment, particularly youth unemployment, in a meaningful way. Tackling that would require the kind of place-based policies like targeted wage subsidies and reduced payroll taxes that I have advocated before.

There are a host of so-called “integrity measures” to do with taxation. There’s the oft-talked about tightening of thin capitalisation rules, whereby companies load worldwide debt onto an Australian entity to increase interest charges in Australia, instead of in low taxing jurisdictions like Ireland. This is in addition to other attempts to get multinationals to pay more tax. These are more likely to get multinationals to pay lawyers more, but it’s now customary padding in every budget.

The forecasts are pretty rosy in this year’s budget, but they always are. Overall, it’s a hard budget to hate, and a hard budget to like. But it is a classic political pre-election budget.

Author: Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW

House prices in Melbourne and Sydney tipped to fall

From The Real Estate Conversation.

Housing prices are tipped to fall by as much as four per cent, a major reversal of the previously rosy forecast, according to SQM Research.

The Sydney and Melbourne property markets are overvalued by as much as 45 per cent, based on its comparison of nominal aggregate incomes to housing prices.

This overvaluation is expected to wind down over an extended period of time.

According to the managing director of SQM, Louis Christopher, there were several major indicators that caused SQM to revise its forecast.

“Leading indicators such as auction clearance rates, total aggregated property listings and asking prices suggest further deterioration in market conditions in recent weeks,” Mr Christopher said.

The number of property listings in Sydney has risen by 34 per cent this year.

“They are now at similar levels recorded in 2011, a point in time when. Sydney dwelling prices fell three per cent for the year,” he said.

Despite that, Sydney’s auction clearance rates have fallen to the low-to-mid 50 per cent range, Mr Christopher observed.

“The clearance rate may have dropped further to below 50 per cent in late April,” he said.

Retail Turnover Slows In March

Further evidence of the stress on households as the ABS data on retail turnover showed no growth in March, in seasonally adjusted terms following a 0.6 per cent rise in February 2018.

Ben James, ABS Director of Quarterly Economy Wide Surveys, said: “While there was a rise in food retailing of 0.7 per cent in March 2018 all other industries fell – cafes, restaurants and takeaways (-0.8 per cent) led the falls, but other retailing (-0.6 per cent), household goods retailing (-0.3 per cent), department stores (-0.5 per cent) and clothing, footwear and personal accessory retailing (-0.2 per cent) also fell.”

In seasonally adjusted terms, there were falls in New South Wales (-0.1 per cent), Queensland (-0.2 per cent), Western Australia (-0.1 per cent) and Tasmania (-0.3 per cent). Retail trade in Victoria (0.2 per cent), the Australian Capital Territory (1.5 per cent), South Australia (0.2 per cent) and the Northern Territory (0.1 per cent) rose.

Our preferred trend estimate for Australian retail turnover rose 0.3 per cent in March 2018, following a rise (0.3 per cent) in February 2018. Compared to March 2017, the trend estimate rose 2.6 per cent.

By state, NSW rose 0.3%, VIC. 0.5%, QLD 0.1%, SA 0.1%, WA 0.00%, NT 0.3% and ACT 0.4%.


Online retail turnover contributed 5.1 per cent to total retail turnover – up from 3.7 per cent a year ago – in original terms in March 2018.

In seasonally adjusted volume terms, turnover rose 0.2 per cent in the March quarter 2018, following a rise of 0.8 per cent in the December quarter 2017. The rise in volumes was led by food (0.7 per cent), household goods (1.2 per cent) and clothing, footwear and personal accessories (1.1 per cent).

MEBank Apologises for Failing to Adequately Warn of Rate Change

From The Adviser.

MEBank has apologised to customers and said that it is working to reimburse around 2,500 mortgagors affected by a “system error” that led to some borrowers being charged a higher interest rate without adequate notice.

On 17 April 2018, Members Equity Bank (ME) announced that it would be increasing its variable home loan interest rates.

Under the changes, ME’s standard variable rate for existing owner-occupier principal and interest (P&I) borrowers with an loan-to-value ratio (LVR) of 80 per cent or less increased by 6 basis points to 5.09 per cent p.a. (comparison rate of 5.11 per cent p.a.).

Variable rates for existing investor principal and interest borrowers increased by 11 basis points, while rates for existing interest-only borrowers increased by 16 basis points.

According to ME CEO Jamie McPhee, the changes were brought in as a result of increasing funding and compliance costs.

Speaking last month, Mr McPhee said: “Funding costs have been steadily increasing over the last few months primarily due to rising US interest rates that have flowed through to higher short-term interest rates in Australia.

“In addition, ME continues to transition its funding mix to ensure the requirements of the Net Stable Funding Ratio will be met, and this is also increasing our funding costs.

“At the same time, industry reforms and increasing regulatory obligations are increasing our compliance costs.”

He continued: “This was not an easy decision, but rising costs have forced us to reset prices to maintain a balance between borrowers, depositors and our industry super fund shareholders and their members, all while ensuring we continue to grow and provide a genuine long-term banking alternative.

“We will continue to assess market conditions and make changes to prices to maintain this balance if necessary.”

While the bank did publicise the rate change two days before it was due to take effect, usual practice is for a mortgagor to be notified 20 days in advance of an interest rate change.

According to the bank, however, a “system error” led to customers being charged the new rates on 19 April without the adequate time warning.

A ME spokesperson said that the “proper process” is for ME to write to customers to notify them their repayments are going up “but not to increase their repayments until at least 20 days after they get that notification”.

“Unfortunately on this occasion, due to a system error, we increased the home loan repayments immediately for about 2,500 owner-occupier and investor customers — about 1 per cent of our home loan accounts.”

The bank reportedly detected the “error” the following day (20 April) and “immediately intervened to ensure no additional customers were affected”, the spokesperson said.

“We are now working on reimbursing and communicating with those impacted customers as a matter of urgency. We are clearly very sorry for the error and the impact it has had on customers,” the CEO said.

The way banks have been disclosing interest rate changes and remediating customers for bank errors has been thrown into the spotlight recently, thanks to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

Auction Volumes Lower

From CoreLogic.

The combined capital cities saw fewer homes taken to auction this week, with a total of 2,280 held, down on last week when 2,577 were held.

The lower volumes saw an improved preliminary clearance rate over the week, returning a 63.5 per cent success rate, increasing on the week prior’s final clearance rate which was the lowest weighted average result seen over the year-to-date with 60.3 per cent of properties selling.

2018-05-07--auctionstats

Once again the combined unit market outperformed houses, returning a 67.7 per cent clearance rate, while a lower 61.7 per cent of houses sold.  A similar trend is evident in CoreLogic indices which show the unit market outperforming house values as housing demand slides towards the more affordable segments of the market.

Although the preliminary clearance rate has shown a positive rise over the week, the trend in auction clearance rates, based on the more complete final results, clearly shows a downwards trend in clearance rates.  Auction markets remain more buoyant than December last year, when Sydney clearance rates reached a low point of 52 percent, however the weaker auction results suggest housing market conditions are likely to remain relatively soft.

2018-05-07--auctionclearancerate

Looking at results over the corresponding year-to-date period last year, the capital city auction market was performing quite differently, with an average of 10 per cent more homes selling over the same period last year, while weekly volumes continue to show similar trends.

Melbourne returned a preliminary clearance rate of 63.5 per cent this week across 1,137 auctions, down on last week when 1,334 auctions took place and a higher 63.9 per cent cleared. In Sydney, 774 auctions were held this week with 66.9 per cent selling, increasing on last week when only 55.8 per cent of auctions were successful across a slightly higher 829 auctions.

Results were varied across the smaller auction markets this week, with Canberra and Perth recording a slight increase in week-on-week volumes, while the remaining markets saw fewer auctions take place. In terms of clearance rates, Canberra was the strongest performer this week with 74.2 per cent of homes selling, while only 18.2 per cent of Perth homes sold.

ANZ culls sales incentives for planners

From Financial Standard.

ANZ will no longer factor in sales incentives while calculating bonuses for its financial planners and boot them out if they fail an audit twice, the bank announced today.

As ANZ attempts to revive its advice business after Royal Commission hearings and ahead of IOOF acquisition, chief executive Shayne Elliott admitted the bank had failed some of its financial advice customers.

“We know it has taken too long for changes to occur, so where we see solutions we will act. That’s why we are getting on with these initiatives now,” he said.

On April 23, it was revealed ANZ kept a “leaderboard” that ranked advisers on the revenue they brought in.

It changed its revenue-centric adviser remuneration on April 12 – less than two weeks before the RC’s questioning of ANZ chief risk officer and head of digital and wealth Australia, Kylie Rixon. The bank then limited revenue-based measures to only 15% of compensation criteria and abolished the leader board, Rixon said.

Today, ANZ said it has removed all sales incentives for bonuses and will now only asses performance on customer satisfaction, risk and compliance standards and ANZ values.

To keep its adviser pool clean of inappropriate planners, ANZ is promising to boot out planners if they fail an audit twice.

It is also placing higher expectations on the qualifications of its advice professionals after last month, senior counsel assisting Rowena Orr revealed that only 35% of all financial advisers have completed a bachelor degree or above.

Financial planners looking to work with ANZ will now need to have a relevant undergraduate degree and industry certification.

The bank said it will push existing planners to enrol in further training by January, 2019.

ANZ is promising to compensate 9000 clients who received unappropriated advice from ANZ professional, by the end of the year.

Earlier last month, ANZ footed a $50 million bill in compensating its fee-for-no-service bungle for its Prime Access Clients, also copping an enforceable undertaking from ASIC.

At the time, ASIC said the compensation program was “nearing completion”.

ANZ anticipates $50 million in legal costs stemming from the Royal Commission for the year ending September , it revealed in an earnings report.

The bank’s wealth business is set to be acquired by IOOF.

On April 24, IOOF announced that it has cleared all regulatory hurdles in acquiring OnePath’s pension and investments and four aligned dealer groups.

The deal was announced in September 2017 and at the time IOOF would pay about $975 million.

On May 2, Financial Standard reported that IOOF had updated the market on ANZ’s 1H18 financial results, ahead of the acquisition.

ANZ’s 1H18 results reveal that cash profits in its wealth division slid by 24% to $44 million. ANZ said this was because of a non-recurring lenders mortgage reinsurance profit share being included in the 1H17 results, strengthening of claims provisioning in 1H18 and lower new business volumes in ANZ Financial Planning.

The bank is also offering a no-cost advice review to all its financial planning customers who “may have concerns about their current financial position”, it announced today.

Westpac 1H18 Result Stronger Than Expected

Westpac released their 1H18 results today. It was an interesting counterpoint to recent announcements, with stronger NIM, including from Treasury. They CET1 ratio fell a little, but they are still well placed. There were no signs of particular stress in their mortgage books, and they also were able to lift margin by reducing rates on some deposits, though they did signal higher funding at the moment. They also underscored the migration to digital channels which is well in hand, and customer led.

Statuary profit net profit was $4,198m up 7%, on the prior corresponding period (1H17), and cash earnings was up 6% to $4,251m.

Cash return on equity (ROE) 14.0%, at top end of the 13 – 14% range Westpac is seeking to achieve. The dividend was unchanged at 94 cents per share,

The Federal Government bank levy cost Westpac $186 million pre-tax for the six months. The levy will be paid out of retained earnings and is equivalent to 4 cents per share.

The Net Interest margin was up 7% from the prior period, and a rise in Treasury and Markets income contributed  4 basis points while margins excluding Treasury and Markets increased 3 basis points.

Net interest income increased $665 million or 9% compared to First Half 2017, with total loan growth of 5%, mostly from Australian housing which grew 6%. Reported net interest margin increased 11 basis points to 2.16%, reflecting higher spreads on certain mortgage types (including investor lending and loans with an interest-only feature), and increased deposit spreads. These were partly offset by the Bank Levy which was effective from July 2017.

Non-interest income decreased $281 million or 9% compared to First Half 2017 primarily due to a decrease in trading income of $226 million and the impact of economic hedges on New Zealand earnings ($63 million lower).

Expenses were up 1%, and included $34 million relating to the Royal Commission. They benefited from $131m productivity savings.

Stressed assets to total committed exposure were down 5 basis points over the year, but moved from 1.05% in September to 1.09% in March, up 4 basis points.

Mortgage delinquencies were a little higher, but from a low base.

The CET1 capital ratio was 10.5%, and the liquidity coverage ratio was 134% and the net stable funding ratio 112%.

Westpac’s CET1 capital ratio was 10.50% at 31 March 2018, 6 basis points lower than 30 September 2017.

Looking at the divisional summaries:

Consumer Bank (CB) has continued to be a key driver of the Group’s growth, lifting cash earnings by 6%. Disciplined balance sheet growth, flat operating expenses and a $60 million reduction in impairment charges were the key drivers of performance. Net interest income increased from a 2% rise in mortgages, a 1% increase in deposits and a 1 basis point improvement in margins. Margins benefited from lower funding costs, including improved spreads on term deposits, and prior period loan repricing although this was partly offset by the full period impact of the Bank Levy and from customers switching to lower rate loans. Non-interest income was lower, mostly due to the elimination and reduction of certain transaction and account keeping fees and lower credit card interchange fees. This was partly offset by the non-repeat of customer refunds and payments that occurred in Second Half 2017. Expenses were little changed (up $3 million) as the division continues to transform itself via digital while enhancing service. More customers migrating to digital channels has supported a 4% decrease in branch transactions and a reduction of 21 branches in the last six months. The reduction in impairment charges reflects the lower seasonal unsecured personal lending write-offs.

Looking in more detail at the Australian Mortgage portfolio, we see a reduction in interest only loan flow, and a rise in loans from brokers. They have been growing their relative share of investor loans in terms of flow.

They showed that delinquencies on interest only loans are LOWER than for P&I loans.

Personal loan delinquencies have risen.

Mortgage delinquencies are a little higher with WA significantly above, though it now represents just 9% of the portfolio, compared with system 1t 12%.

Business Bank (BB) delivered a 3% increase in cash earnings. Lending increased 2% with SME business lending up 2%, and commercial lending increasing 2%. Deposits rose 1% over the half, mostly in term deposits. The net interest margin was up 4 basis points, from repricing on certain mortgages in Second Half 2017 and improved term deposit spreads partially offset by the full period impact of the Bank Levy. Non-interest income was up 1% with higher business line fees. Expenses were 1% higher, mostly from higher investment related costs, and regulatory and compliance costs. Credit quality has been sound, although stressed assets to TCE were up 35 basis points, mostly due to commercial customers moving into the watchlist category. Impairment charges decreased $6 million from lower impaired downgrades in the commercial portfolio.

BT Financial Group (Australia) lifted cash earnings 13% with higher funds, an increase in life insurance premiums and a stronger contribution from Private Wealth. Growth was also supported by provisions for customer refunds and payments raised in the Second Half 2017 that were not repeated. Partially offsetting these gains were lower advice income and seasonally higher general insurance claims. Superannuation balances and platform funds were both up 3% while packaged funds increased 4%. Growth was supported by stronger investment markets and $2.6 billion of net flows onto Panorama. Fund margins were lower including from the migration of customers into MySuper accounts which has now been completed. Expenses were well managed, down 1%. The decline was consistent with normal seasonal patterns (higher costs are incurred around the end of the June financial year) and continued productivity gains. Investment spending was a little higher including from the launch of the new super product, “BT Super Invest”. Regulatory and compliance costs were little changed but remain elevated.

Westpac Institutional Bank (WIB) delivered a 4% lift in cash earnings to $551 million. The $21 million rise was due to a 1% rise in core earnings and a $9 million benefit from impairment charges. Supporting core earnings, lending increased by 3% and deposits were 7% higher while markets related income also increased. These gains were partially offset by lower net interest margins and a reduction in Hastings fees. While investing more, particularly in payments, expenses were lower from the full period impact of productivity initiatives. Continuing good credit quality and the workout of further impaired assets led to another impairment benefit in First Half 2018.

Westpac New Zealand delivered cash earnings of NZ$482 million, down 5%, compared to the prior half. The business generated 3% core earnings growth although this was more than offset by a small impairment charge which followed a NZ$40 million impairment benefit in the Second Half 2017. A 3% lift in net interest income was the main driver of core earnings growth with lending up 2%, deposits rising 5% and margins increasing 6 basis points. The rise in margins followed some repricing of mortgage and business lending and improved deposit spreads. Expenses were 1% lower as the benefits from the division’s transformation program flowed through. The program has led to a reduction in the size of the branch network and increased self-serve via digital channels. Impairment charges increased NZ$67 million over the half, as Second Half 2017 benefited from the improvement in the dairy industry and from the increase in consumer delinquencies in First Half 2018.

The Group Businesses delivered cash earnings of $58 million in First Half 2018, up $50 million on the prior half. The increase was due to a higher Treasury contribution (from interest rate risk management) partially offset by higher expenses and an increased impairment charge. Higher expenses were mainly due to increased investment and a rise in regulatory and compliance costs, including expenses associated with the Royal Commission and higher employee costs. The impairment charge in Group Businesses was mostly related to movements in centrally held impairment overlays. The impairment charge was $13 million in First Half 2018 compared to a $32 million benefit in Second Half 2017 – a $45 million turnaround.

They made specific comments on the need to restore their reputation.

The First Half 2018 has continued to see the industry (including Westpac) under intense scrutiny including from the Royal Commission into Financial Services.

Restoring the Group’s reputation has remained a focus and the Group has continued to implement a number of programs aimed at improving trust. In particular, Westpac has largely completed the implementation of the Australian Banking Association’s “Six point plan” with the Group waiting for finalisation of the industry Code of Banking Practice to complete implementation. In 2017 the Group also commenced a broader program to reduce complexity and resolve prior issues that have the potential to impact customers and the Group’s reputation. These reviews have identified some previous instances where the Group has not met industry or community standards and Westpac is taking action to put things right so that customers are not at a disadvantage from past practices. Work on this program over the last 12 months included:

  • Progressing the review of products to reassess their features and how the Group had engaged with customers. As part of these reviews, 150 changes were made including more than halving the number of consumer products on offer;
  • Cutting transaction fees for 1.3 million customers, removing ATM fees, and introducing a new low rate credit card; and
  • Continuing remediation of previous issues, paying out $39 million to customers from our 2017 provision for customer refunds and payments.