Didn’t get time to stay up to date with banking news this week? – here’s a quick round up of what went on.
A lot of discussion this week was around another housing boom, possible sale of ME Bank, fintech developments, bank performance, sustainable banking, crime, people movement and other.
Housing Boom:
There were numerous reports this week indicating the housing market is expected to heat up over the next couple of years. A few sources quoted the release of Westpac Melbourne Institute Index of house price expectations which rose 1.1 percent in January after a 9.4 percent jump in December. Bill Evans, the chief economist for Westpac predicts a 15 percent rise in housing prices by 2023 or 7.5% per year. UBS economist George Tharenou also expects a 5 to 10 percent rise per annum but thinks it could be more especially when you factor in the planned changes to responsible lending. Reserve Bank of Australia’s own research shows that house prices could rise 30 percent over three years if the low interest rates persist. Finally Corelogic research showed that property markets rose 4% although the economy was in recession.
House price increases are expected despite a reduction in consumer sentiment which was largely put down to the second wave of COVID and not as bad as expected. Consumer Sentiment was down approx. 4% from its 10 year high in December. It’s important to note that even with the pandemic, many retailers performed much better than expected with JB Hi-fi reporting an 86% improvement in profit and Super retail group announcing $170m in profit and even returned $18m in Jobkeeper payments to the Government. Economists also expect reductions in jobless rates, the forecast is for a 50,000 rise on people employed over December which would be in addition to the 90,000 in November. The ABS report is expected later this month.
The property market across the country, especially in capital cities has started to heat up a lot earlier than previous years with investors looking to jump back into the market. Property listings as a whole are down and there is a lot of demand and Auction clearance rates are expected to be high.
At this stage, the RBA hasn’t looked to intervene although they are aware of the demand being generated by the record low interest rates and quantitative easing which improves borrowing power.
The Governor of the RBA, Phillip Lowe commented towards the end of last year noting regional markets are starting to grow faster than major cities and house prices are growing faster than apartment prices. The dilemma the RBA faces is that one of the ways house prices grow is where people attracted by the lower interest rates either build a new house or renovate existing properties which in turn creates jobs and economic growth and that’s something the RBA is striving for and to an extent this has been working and much needed for the COVID recovery. Housing constructions rose 4 per cent in the September quarter (7.3% higher than the year before).
Phillip Lowe did note that population growth is low due to the pandemic as immigration has all but stopped so that should act as a control against rising house prices. The big four banks have also kept their credit policies fairly tight and investor growth is still pretty flat however the RBA is keeping a close eye on things and will work with APRA if the need arises. At this stage, LVR ratios for new lending are still below 2015 levels.
Possible Sale of ME Bank
There were a couple of reports this week that ME Bank may be subject of a sale to either a private equity firm linked to a neobank or the Bank of Queensland and estimate of the sale are predicted to be around the $1-$1.5bn mark. ME Bank is owner by 26 Industry super funds and faces strong competition from bigger banks and has a higher cost Distribution model. The bank made a profit of almost $81m last year however does not pay a dividend.
Fintech developments
There were a few developments in the financial technology sector, notably the growth plans of Revolut who are looking to expand into the Asia-pacific region offering their services including FX, payments, international funds transfer as well as exchanges for precious metals and cryptocurrencies. They are targeting a million customers in Australia.
Tyro, a small but growing fintech have experienced some outages in the last two weeks impacting about 30% of their customers. They listed on the ASX in 2019 with a market cap of $1.4 billion. Their technical issues are continuing and impact about 15% of their customers. Interesting to note that despite the outages, Tyro transaction volumes grew 6 percent compared to the same time last year however they were expected to grow a lot more.
A few newspapers reported on the Xinja exit from the market. Xinja was a fintech who received a banking licence in 2019. They had grown to about 55 thousand customers and a deposit base of about $250 million. They began winding up and initiated the process of giving the money back to deposit holders after failing to secure funding to launch a lending service. For customers that couldn’t be contacted, funds will be transferred to a NAB bank account after approval from APRA.
Bank performance
Westpacs new leadership team is finally accepted to be in place when their new consumer chief Chris De Bruin starts later this month. Westpac has underperformed CBA by 30% since its anti money laundering scandal started in November 2019. CBA is now worth about twice as much as Westpac even though they have a similar capital base and Westpacs cost base been increasing and pressure is on to turn it around in 2021. When CBA had their AML scandal a few years prior, they were back up and performing within 12 months.
IFM, a $158 billion money manager has also decided to restrict their exposure to Westpac over its Austrac scandal last year for which Westpac paid a record $1.3 billion fine last year.
CBA is expected to finalise the sale of their insurance business to either Suncorp or IAG in a deal expected to be worth $1 billion. IAG is expected to be the likely purchaser and counts Warren Buffets Berkshire Hathaway as one of its investors, the sale is likely to compliment their existing business.
CBA also has about $2 billion in franking credits and are expected to announce a buyback of shares. Most Analysts think this has already been priced into their share price.
Banks are expected to pay higher dividends in 2021 as lower bad debt charges are expected to improve profits. Bad debts are expected to be lower as a lot of the negative impacts on profits is expected to be provisioned in the 2020 numbers. APRA had also mandated that banks do not payout more than 50% of their profits as dividends as it looked to deal with the impacts if COVID19 but has not removed this limitation. APRA had already removed limits on investment lending previously imposed enabling banks to grow this segment once more.
The key considerations here are that the banks were not hit as hard by the pandemic as previously thought, the banks may even be able to write back some previous bad debts which did not come to pass and improve profits. CBA shares have already seen a strong increase compared to the market whilst the other major banks have also seen good improvements.
The SMH reported “Banks to abandon mortgage holidays”. The major banks are going to stop automatically giving mortgage repayment holidays to people affected by the COVID19 Pandemic.
When the Pandemic hit, the banks approved hundreds of thousands of applications to limit impacts from the pandemic however are now looking to get back to normal. Some lenders will stop offering automatic deferrals from January whilst regulators have also indicated this should stop by the March timeframes. Note the article talks about the special provisions made for the COVID19 by the major banks and their standard hardship programs will continue to be available and you can apply on a case by case basis.
An all time high was reached on total commercial real estate lending in 2020 with $261.7 billion in loans. This is expected to slow in 2021 as banks reduce their appetite. Total debt provided by the banks increased by $14.7 billion led by the industrial sector with an increase of $5.2 billion with money spend on warehouses and logistics. Office real estate grew by $4.7 billion and surprisingly retail by $4.5 billion which is interesting as retail was hit severely by the Pandemic but this may be due to projects approved before the pandemic being completed and we may see a reduction in 2021.
Lending to apartment development and land subdivisions reduced and is expected to continue to reduce on 2021 due to reduced activity and lower appetite from the banks. The industrial sector is expected to continue to improve in 2021.
Sustainable banking
A report released by Chanticleer shows that Australia’s largest companies lead the world when it comes to incorporating non financial measures in Executive pay.
However, there are some other pressures and concerns as Nationals MP George Christenen has once again tried and failed to get numbers for a review of banks and insurance companies who have refused to lend to coal and gas companies due to climate change concerns. The MP is a climate change sceptic but employs strong support from some of his Nationals colleagues.
Crime
The AFR reported “AUSTRAC lets banks walk over drug cartel money” – In 2017, the Australian border force, AUSTRAC and the Federal policy identified and disrupted a South American drug cartel who had managed to funnel over half a billion dollars through Australian bank accounts.
Whilst the Australian border force is confident that they are on top of the issue and have sufficient measures in place to restrict illegal activity, AUSTRAC confirmed that no action was taken against any of the nine banks involved. AUSTRAC is responsible for governing the anti-money laundering and counter terrorism financing obligations that banks are subject to.
AUSTRAC has in recent times taken action against the banks for breaches of the AML CTF obligations when in 2017 they fined CBA $702.5 million for AML breaches and then last year in 2020 they fined Westpac a new record $1.3 billion for breaches. The breaches also cost both the CBA and Westpac CEO’s to lose their job.
The scheme used by the drug cartels involved selling drugs in the USA, produced in South America with the money being deposited in a sequence of bank accounts including Australia.
In this instance, it’s likely that the banks met their reporting obligations to AUSTRAC and so no penalty may have been applicable.
People movement
The Australian: NAB loses key executives as group treasurer Meharry returns to Britian – Catriona Meharry has decided to leave NAB and take up a similar position with a UK lender. She was the group treasurer and played a major role in their $4.25 billion capital raising last year.
BOQ has also recruited Martine Jager as Group Executive of retail banking and she is expected to start in April, she is currently the Chief Digital and Marketing Officer at Westpac.
Investment bankers across the country are expected to receive their bonuses in the coming years and there a few opportunities available in the market with a couple of new players, expectations are that a lot of these bankers will start moving around once bonuses are paid. Most Bankers bonuses were a lot higher than expected in 2020 and a lot of firms will look to start making retention payments.
Other
A couple of former bankers trust members formed a company called Beckon capital aiming to provide cheap funding to deserving private businesses.
There was an interesting report in the AFR about a Bitcoin trader that took Westpac and ANZ bank to a tribunal and is seeking $250,000 in compensation. His complaint is that the banks closed his accounts when he informed them the purpose of the accounts was to facilitate trades for cryptocurrency. The bank closed his accounts as he was suspected of cryptocurrency fraud.
A Brisbane based fund manager Hyperion is looking at launching a ETF to capture demands for its high performing strategy according to AFR. There are large flows going to the fund as it generated a ~46% compared to a market benchmark of 5.7%. The fund is a large investor in Tesla which they believe will continue to outperform.
The best performing Australian super funds performed much better than expected despite COVID19. Although the median super fund return for the year was 3.3%, one of Suncorps growth funds generated a 9.6% return whilst Australian Ethical balanced option generated an 8% return . The outlook was looking much worse in March/April when the market saw a 30% drop due to COVID but has bounced back and had a further rally after the outcome of the US election.
Some of the headlines this week – reference for the above report:
SMH: RBA alert to risks of housing boom
AFR: Cashed-up buyers get an early start
The Australian: Fintech Revolut target million local customers
The Age: Tyro hits back at false short seller claims amid IT outages
AFR: Westpac tips a 15pc rise in property prices over next two years
The Australian: Consumer confidence down but could relate to recent lockdowns
AFR: CBA buyback inevitable
AFR: Lowe stays cool in housing heatwave
The Courier Mail: When it’s all about ME
The Australian: Westpac woes continue
The Australian: IFM bins Westpac over scandal
SMH: Banks to abandon mortgage holidays
The Age: Major banks dividends to bounce back
The AFR: Commercial lending booms for the banks
AFR: AUSTRAC lets banks walk over drug cartel money
AFR: Australia leads world in ESG-related pay
The Australian: sale of CBA’s $1bn insurance business is close
AFR: Bankers bonuses better than expected but won’t stop the movement
The Australian: Top-placed super funds defy virus chaos