CBA Prunes Brokers

From Australian Broker.

The Commonwealth Bank of Australia (CBA) has sent out a note giving certain brokers two weeks’ notice for the revocation of their accreditation.

The note was sent out to a segment of accredited brokers which CBA had identified as being “inactive” with the bank for quite some time, a bank spokesperson told Australian Broker. This was part of an ongoing review of CBA products and services.

“To ensure we uphold the highest level of professional standards, and continue to meet the needs and expectations of our customers, those mortgage brokers who have been inactive will no longer be accredited with us,” they said.

Brokers were deemed inactive if they had not written a CBA home loan in the past year or if they had only written a single mortgage. Once identified, brokers are notified that their CBA accreditation will be resigned following the bank’s agreement with the broker’s head group.

The letter provided recipients with 14 days’ notice, starting from the date the letter was sent, in which the bank would revoke the broker’s authority to act.

“This means you will no longer be able to submit home loan applications to the Commonwealth Bank. Please be advised that effective immediately, we will not accept any new home loan applications from you,” the note said.

By freezing loan applications, this stops new loans from being written by brokers about to lose their accreditation which could cause issues for the customer.

Brokers who want to appeal this decision can contact their relationship manager or head group representative.

The note brings into question how independent brokers are from the banks, Mark Harris, director and owner of THE Home Loan Broker, told Australian Broker.

“What does this say? If I don’t believe that CBA is the best fit for my client, are they essentially trying to force me into making them a choice?”

“This is a very big heavy stick to say, ‘Well, you’ll use us anyhow’. I really wonder how interested ASIC would be in this. It sends a very bad message about the industry by taking our entire independence away.”

The note also shows “absolute disrespect” to brokers and potential clients, Harris said. While he understands that CBA has every right to make a decision like this under their business, he would not be encouraging the six brokers under him to use the bank.

“The main reason for this is what if a broker was talking to someone today and decided to do an application with Commonwealth Bank tomorrow and then tomorrow night before they got to lodge that application, the bank cancelled their accreditation?”

“I think it’s appalling. They’re not giving any notice. The note states that you can’t lodge any more loans as of now and you’ve got two weeks to settle anything that’s in the system.”

The decision was “kind of odd” given that brokers use different lenders at different frequencies, Harris said.

“The email was obviously alluding to their belief that if you aren’t actively giving them business that the customers aren’t going to get best practice customer service.”

“I find that very hard to believe. No other lender believes that because no other lender does this sort of thing.”

Over the past two years, Harris acknowledged that he had only used CBA once when he sent through a $900,000 loan last October. The application “flew through with no problems,” he said.

CBA targets third party origination in investment lending crackdown

From Australian Broker.

The recent tightening of investment lending practices by the Commonwealth Bank of Australia only apply to those loans coming through the third party channel, it has been revealed.

Last week, it was reported that the CBA had halted any new refinance applications for standalone mortgages.

A notice sent to the bank’s broker network stated: “To ensure we continue to meet our commitments, from Monday 13th February we will be suspending the acceptance of new refinance applications for Investment Home Loans, until further notice.

“Applications which include both Investor and Owner Occupier loans are not impacted.”

While the notice appeared to apply to all refinance investor loans, the major bank has now told Australian Broker that these changes apply solely to intermediary-sourced loans. Borrowers will still be able to access refinance investor loans via CBA’s retail branches.

“We’re committed to meeting our responsible lending and regulatory obligations and to ensure we continue to meet this commitment, we are unable to accept new refinance applications for Investment Home Loans from our broker partners,” a CBA spokesperson told Australian Broker on Wednesday.

“The vast majority of our single property investment home loan refinances come to us through our broker partners so the decision was made to address this in the first instance to ensure we continue to meet our regulatory requirements.”

“We constantly review our products, policies and processes to ensure we’re meeting our customers’ financial needs,” the spokesperson said.

This decision comes soon after CBA subsidiary Bankwest announced it too would halt all new applications from customers looking to refinance their standalone investment lending.

ANZ, Westpac and NAB have thus far made no changes to their investment lending policies in either the third party or retail channels

Digital Trumps Branch

Buried in the CBA results presentation today was a series of charts which shows just how far digital has come.  Just as predicted in our Quiet Revolution Report.

Yet, as banks focus on more younger, digital users, they see a decline in satisfaction from older, less digitally aligned households. See the change in Main Financial Institution (MFI) by age bands.

… and relative needs met by age.

Yet transaction migration is well underway. CBA showed the fall in branch deposits and withdrawals…

… and ATM transactions as cash becomes less critical compared with electronic transactions.

On the other hand, point of sale transactions have risen strongly …

… as well as internet transactions.

This is the killer slide – app use, cardless cash and tap and pay volumes are rising fast. Mobile first is here.

Yet they also reported an increase in sales from smaller but reconfigured branches, with home lending applications up 13%, and reducing broker originated volumes, and a 10x increase in branch leads and 95% contact rates leading to 3x higher conversion rates.

The new branch is smaller, more tech, and focuses on customer relationships.

But transformation of banking distribution has profound consequences, in terms of economics, profitability and customer satisfaction, and there is no doubt that digital will trump branch (just watch kids with their digital devices and how naturally they use them). It just depends on how long it takes.

 

CBA 1H Results Strong … But

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

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

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

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

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

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

The key drivers were:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In terms of underwriting criteria they use the following parameters:

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

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

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

CBA says housing fundamentals suggest slower growth ahead:

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

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

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

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

 

 

CBA Lifts Investor Interest Only Mortgage Rates

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

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

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

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

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

We will provide more detailed commentary later.

 

Is This Why CBA Has Cut Back Its Investment Lending?

As a follow-up from our recent post, this chart may explain why CBA has been forced to trim its investment housing lending sails.

If you annualise the monthly net movements in investment loan stock, in December CBA came out at 10.3%, above the 10% APRA imposed speed limit. Also, clearly the growth trend was upwards.

Further evidence to our hypothesis that the regulator picked up the phone, and suggested they should trim their growth. It also shows that the remaining majors need to be a little careful, but there is headroom in the system to take up some of the slack. It will be interesting to see how this plays out.

Of course the APRA data is full of noise thanks to ongoing loan reclassification, but the trend is pretty clear.

 

CBA suspends some investor home lending

From AAP.

The Commonwealth Bank will stop accepting refinancing applications for investment home loans from next week.

The bank has written to mortgage brokers on Wednesday to advise of the suspension, which takes place from Monday, February 13.

In its message, the bank says it is committed to “upholding the highest level of professional standards, and meeting our responsible lending and regulatory obligations” and it will suspend the acceptances “to ensure we continue to meet our commitments”.

Investor and owner-occupier loan applications will not be affected and investor refinance applications submitted prior to February 13 will be processed as usual.

The decision comes a day after CBA’s subsidiary, Bankwest, said it had stopped accepting new business from customers seeking to refinance their investor home loans.

 

One in two Australian households expected to be retire ready

Fifty-three per cent of Australian households are expected to have enough for a comfortable retirement from their combined superannuation savings, personal assets and the Age Pension, according to the latest CommBank Retire Ready Index released today.

When the Age Pension is removed, the number of households that can afford a comfortable retirement reduces to 17 per cent, and to just six per cent when the calculations are based on superannuation only.

Linda Elkins, Executive General Manager Advice, Commonwealth Bank said: “The good news is that many Australians who may not currently be on track for a comfortable retirement are very close. A little bit of planning could see them reach the comfortable level.”

CommBank commissioned Rice Warner to prepare the report, which shows that many Australians are close to achieving the comfortable retirement standard defined by the Association of Superannuation Funds of Australia (ASFA). The report shows that while 53 per cent of Australian households are on track, a further 18 per cent are projected have 80 to 99 per cent of what they will need.

The overall results are mixed across cohorts and age groups, and highlight the growing importance of superannuation in helping Australians achieve a comfortable retirement.

Millennials will need to save harder for retirement than other cohorts due to their longer life expectancies. Superannuation will play an important role and will comprise, on average, 78 per cent of retirement assets for 25 year-olds working today.

“The CommBank Retire Ready Index shows how important superannuation will be for the long term financial well-being of young Australians. Many people do not become engaged with superannuation until later in their working lives, but taking a keener interest in superannuation now, consolidating accounts into one super fund and contributing a little more each week can help younger Australians stay on track for a comfortable retirement,” Ms Elkins said.

In the 60-64 year-old age group, couples are expected to be better off than singles but will have reduced retire readiness as they have not received the long term benefits of compulsory Superannuation Guarantee contributions. On the other hand, younger age groups are expected to have less in assets at retirement outside of superannuation when compared with their older counterparts.

“The report also shows that more men than women are retire ready. Women have longer life expectancies, and therefore need more assets to maintain a comfortable level of retirement. Women also generally have lower retirement savings due to career breaks during their child bearing years and lower average income levels throughout their working lives.”

Ms Elkins also said: “People who are approaching retirement could give their savings a boost by taking advantage of the current superannuation contribution caps before they are reduced on 1 July.”

“It is important that people of all ages understand how much they will need to save now to secure their financial futures.”

“To help Australians see how on track they are for a comfortable retirement, CommBank has developed a retirement calculator. This is a good first step to see how retire ready you are and is a useful resource to help you get on track to reach your goals for a comfortable retirement,” she said.

Bankwest refunds $4.9 million for overcharging interest on home loans

ASIC says Bankwest, a division of the Commonwealth Bank of Australia, has refunded approximately 10,800 customers more than $4.9 million after it failed to link offset accounts to home loan accounts for some customers who had open accounts between 2007 and June 2016, resulting in customers being overcharged interest.

Following media coverage of ASIC’s work in relation to similar breaches by another bank, Bankwest undertook an internal investigation into the operation of its offset accounts. Bankwest identified issues in the linking of offset accounts with home loans and reported the matter to ASIC as a significant breach of its licence obligations.

ASIC Deputy Chairman Peter Kell said, ‘It is critical that licensees ensure that their systems work properly so that promises made to customers about their bank accounts are kept.

‘When a problem is identified, licensees not only have an obligation to report the breach, but impacted customers must be returned to the position they would have been in, had the breach not occurred.’

Bankwest has since updated its systems and processes, including the automatic linking of new offset accounts.

Bankwest has contacted those customers it has identified as being affected to explain the impact and has arranged refunds.

Customers with queries or concerns about this matter should contact Bankwest Customer Help Centre on 1300 334 805 (for retail customers), or the Bankwest Business Support Centre 13 7000 (for business customers). Alternatively, customers can complete an online form here.

Background

An offset account is a savings or transaction account that, when linked to a home loan, offsets the balance of the loan account, reducing the interest payable.

For example, a customer with a home loan of $500,000 and a balance of $20,000 in their offset account, would only pay interest on $480,000. If accounts are not properly linked, the customer would be charged interest on the full loan amount of $500,000.

ASIC accepts enforceable undertaking from NAB and CBA to address inadequacies within their wholesale spot FX businesses

ASIC says it has today accepted enforceable undertakings (EUs) from each of the National Australia Bank Limited (NAB) and the Commonwealth Bank of Australia (CBA) in relation to the banks’ wholesale spot foreign exchange (FX) businesses.

As a result of ASIC’s investigation, ASIC is concerned that between 1 January 2008 and 30 June 2013, both banks failed to ensure that their systems and controls were adequate to address risks relating to instances of inappropriate conduct identified by ASIC.

ASIC Commissioner Cathie Armour said, ‘A well-functioning foreign exchange market depends on all participants acting with integrity and fairness. ASIC is committed to ensuring that major financial institutions have in place effective mechanisms for ensuring that their employees are trained, monitored and supervised to provide financial services efficiently, honestly and fairly.’

NAB

ASIC identified the following conduct by employees of NAB between 1 January 2008 and 30 June 2013:

  • on several occasions, a NAB employee on an offshore spot FX desk, acting together with an employee of another Australian bank, shared confidential information and entered offers into the trading platform without any apparent legitimate commercial reason for placing the offers;
  • on a number of occasions, NAB employees disclosed specific confidential details of pending client orders to external market participants, including identification of the client through the use of code names; and
  • on several occasions, NAB employees on an offshore spot FX desk inappropriately exchanged confidential and potentially material information about the bank’s client flow or proprietary positions.

ASIC is concerned that NAB did not ensure that its systems, controls and supervision were adequate to prevent, detect and respond to such conduct, which had the potential to undermine confidence in the proper functioning of the market.

Under the EU, NAB will develop a program of changes to its existing systems, controls, monitoring and supervision of employees within its foreign exchange business to prevent, detect and respond to, amongst others, the following types of conduct:

  1. attempts to manipulate the market for a currency, including by placing offers without a legitimate commercial reason and attempts to influence benchmark rates;
  2. inappropriate trading while in possession of confidential and potentially material information; and
  3. disclosures of client confidential information.

The program and its implementation will be assessed by an independent consultant appointed by ASIC.

Upon implementation of that program, for a period of three years, NAB will provide to ASIC an annual attestation from its senior executives that the systems and controls in its spot FX business are appropriate and adequate to effectively prevent, detect and respond to specified conduct. The program will also be subject to annual internal reviews and assessment by the independent consultant for a period of three years.

NAB will also make a community benefit payment of $2.5 million towards advancing financial literacy education related to the aged care sector and the promotion of ethical behaviour in Australian financial markets.

CBA

ASIC identified the following conduct by employees of CBA between 1 January 2008 and 30 June 2013:

  • on two occasions, CBA employees on an offshore spot FX desk acquired proprietary positions in a currency after coming into possession of knowledge of large CBA fix orders in that currency;
  • on at least two occasions, CBA employees traded in a manner that may have been intended to cause the trigger price for a stop loss order to trade when it might not have traded at that time; and
  • on a number of occasions, CBA employees on an offshore spot FX desk disclosed confidential details of pending client orders to external third parties, including identification of the client through the use of code names.

ASIC is concerned that CBA did not ensure that its systems, controls and supervision were effective in relation to such conduct by its employees. Such conduct had the potential to undermine confidence in the proper functioning of the market.

Under the EU, CBA will develop a program of changes to its existing systems, controls, monitoring and supervision relating to the management of fix orders, management of stop loss orders, and external communications containing specific confidential information to address such conduct. The program will incorporate changes already made by CBA as part of an existing review of its Global FX business.

The program and its implementation will be assessed by an independent consultant appointed by ASIC. Upon implementation of the program, CBA will also provide ASIC with an annual attestation from a senior executive, for a period of three years, that the systems and controls in its spot FX business are appropriate and adequate to effectively manage specified conduct risks.

CBA will also make a community benefit payment of $2.5 million towards advancing financial literacy education related to the aged care sector.

ASIC encourages market participants to adhere to high standards of market practice, including those set out in the Global Code of Conduct for the Foreign Exchange Market, published by the Bank of International Settlements (BIS Global FX Code). The BIS Global FX Code provides a global set of good practice guidelines to promote the integrity and effective functioning of the wholesale foreign exchange market. Phase 1 of the Code was published in May 2016, and Phase 2 is due for publication in May 2017.

ASIC is grateful for the assistance of our international regulatory counterparts in progressing our investigation, including the UK Financial Conduct Authority and the NZ Financial Markets Authority.

Background

The wholesale spot FX market is an important financial market for Australia. It facilitates the exchange of one currency for another and thus allows market participants to buy and sell foreign currencies. As part of their spot FX businesses, both banks entered into different types of spot FX agreements with their clients, including Australian clients.

Spot foreign exchange refers to foreign exchange contracts involving the exchange of two currencies at a price (exchange rate) agreed on a date (the trade data), and which are usually settled two business days from the trade date.