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Bank crackdown should have been sooner: APRA’s Wayne Byres
Michael Bennet
[Image: michael_bennet.png]
Reporter
Sydney
[b]Wayne Byres, the chairman of the Australian Prudential Regulation Authority, has revealed he wished the regulator had begun cracking down on banks “a bit sooner” to shore up weaker-than-expected lending standards.[/b]
Revealing the extent of APRA’s concerns about the housing market, Mr Byres today said while the regulator had long been alert to the risks, with the benefit of hindsight he wished “we got on to this a bit sooner”.
During APRA’s heightened supervision in recent years, Mr Byres said he was surprised by how much competitive pressures had led banks to do things “that were really in our view lacking in commonsense”.
“I think though as we’ve dug deeper … we have been a bit surprised at what we found in some places and it did seem that competition was eroding standards,” Mr Byres, who has more than 30 years’ experience at the Reserve Bank and APRA, told a Senate Standing Committee today.
The comments add to the RBA’s warning last week in its biannual financial stability review that the banking industry’s lending standards were “weaker around the turn of this year than had been apparent at the time or would be desirable in the current risk environment”.
Regulators’ concerns about heightened risks in the housing market coincide with the government’s backing this week of the Murray financial system inquiry’s two key recommendations to increase bank capital buffers, including that they have capital levels that are “unquestionably strong” globally.
The government also told APRA to “take additional steps” so banks have unquestionably strong capital ratios “by the end of next year”.
Mr Byres today said the deadline “seems quite manageable at this point in time”, notwithstanding “all the moving parts”, including the next wave of global reforms from the Switzerland-based Basel Committee.
APRA has already clarified the “big four” banks — ANZ, Westpac, Commonwealth Bank and National Australia Bank — plus Macquarie, would have to meet higher mortgage “risk weights” by July next year, as recommended by the inquiry to increase competition for small lenders saddled with stricter risk weighing rules.
The big four have this year raised about $18 billion in equity to help increase the average risk weights of their housing books to 25 per cent, up from 16 per cent.
“The additional capital is timely because banks are currently facing an environment of heightened risk in their housing loan portfolios,” the RBA said in the financial stability review.
While not directly asked about Westpac’s decision last week to hike mortgage rates to offset the cost of higher risk weights, Mr Byres said the regulatory change should “improve the competitive dynamics for the smaller banks”.
As the other major banks continue to hold out in following Westpac’s rate hike, Mr Byres also indicated regulatory changes should not result in banks changing rates by the same amounts because of the different impact on individual lenders.
It came as Ord Minnett analysts said the other big banks should “follow Westpac’s lead”.
“With major bank market share at an all-time high above 80 per cent, now is the time when banks can afford to cede some share,” the analysts told clients, noting the “commercial” political environment.
Prime Minister Malcolm Turnbull has said that while “many people” thought Westpac’s rate rise was wrong, the banks’ interest rate decisions were “ultimately a matter for them” based on several variables, including competition and the cost of their own funds.
Part of APRA’s increased efforts to shore up lending standards has been its cap on banks’ lending to property investors of 10 per cent a year, or potentially be punished with higher capital requirements.
Under heated questioning today, Mr Byres conceded there was an “element of bluntness” in the 10 per cent cap, but dismissed that it was wrongly punishing regional areas not experiencing the same heady growth as Sydney and Melbourne.
Charles Littrell, executive general manager of APRA’s supervisory support division, added it would be “dumb” for lenders to grow too strongly and faster than peers in smaller, concentrated markets.
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Goldman boosts already bullish bets on Aussie banks
NaN of
[img=620x0]http://www.afr.com/content/dam/images/g/k/h/z/y/5/image.related.afrArticleLead.620x350.gkk724.png/1445978213995.jpg[/img]Australian bank dividend yields are among the highest in the 99-member MSCI World Bank Index. FDC
by Adam Haigh
Goldman Sachs Asset Management is even more bullish on Australian bank shares after a slew of capital raisings by the nation's largest lenders dragged stock prices lower.
The money manager, which oversees about $6 billion in Australian equities, increased holdings in banks amid expectations higher mortgage rates and credit growth can sustain an expansion in earnings and dividends, said Katie Hudson, who is part of the firm's investment team in Melbourne. Stock-price declines among the so-called big four lenders around the time of the capital raisings were overdone, she said.
Westpac Banking, Australia & New Zealand Banking Group, Commonwealth Bank of Australia and National Australia Bank all raised variable mortgage rates this month in part to cover the cost of regulations forcing lenders to hold bigger capital buffers. Bank shares under-performed the broader Australian equity market through the lows in September amid concern the higher capital requirements would lead to lower dividends.
"We have been increasing our weighting toward the banks," Hudson said in an interview in Melbourne. "We took advantage of the capital raisings to increase our positions. We have a positive view on the outlook for the banking sector across credit growth, across provisioning, across margins. You've seen early evidence of that with the mortgage repricing."
The biggest four lenders have added almost $20 billion in capital this year to meet regulations partly aimed at sheltering them from any downturn in the nation's housing market. Some economists are predicting property prices will fall over the next two years amid increasing supply and lower-than-expected population growth. The higher mortgage rates come into effect next month.
The S&P/ASX 200 Banks Index declined 6.5 per cent this year through Monday, compared with a 1.2 per cent drop on the S&P/ASX 200 Index, the nation's benchmark equities gauge. Even when including returns from dividends, the banks measure returned 5.8 percentage points less than the broader market.
"What people took out of context was the size" of the raisings, said Hudson, who has worked for the asset management arm of Goldman Sachs since 2008. "These were actually quite modest capital raisings in the context of these businesses. It was the equivalent of about seven months of dividends. So the price reaction and the response was probably overstated relative to how significant these were."
The mortgage rate increases will boost profit at the four banks by as much as 3 per cent and increase net interest margins, the difference between interest earned on loans and paid on deposits, by as much as 5 basis points, Deutsche Bank analysts predict.
Commonwealth Bank, ANZ and Westpac comprised the largest chunk of Goldman Sachs' Australian equities fund at the end of September, according to the firm's website. Hudson declined to name the individual companies they were buying, citing company policy not to disclose such details.
Banks make up 30 per cent of the S&P/ASX 200 Index compared with just 9.4 per cent on the MSCI World Index of developed market shares. Australian bank dividend yields are among the highest in the 99-member MSCI World Bank Index. Westpac will post the largest year-on-year dividend increase, according to Bloomberg forecasts.
"Dividends are likely to rise in line with profit growth," Hudson said. "Dividends today are sustainable."
Bloomberg
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Business borrowing rockets on Turnbull effect
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[img=620x0]http://www.afr.com/content/dam/images/g/i/r/x/p/5/image.related.afrArticleLead.620x350.gkmsxx.png/1446182528669.jpg[/img]Lending to businesses surged last month by the most since the 2008 financial crisis. istock photos
Lending to businesses surged last month by the most since the 2008 financial crisis, a sign the lower dollar, record-low interest rates and potentially the shift to Malcolm Turnbull as prime minister are reinvigorating company spending and hiring plans.
Credit to companies rose 1.2 per cent in September from August, far above the 0.1 per cent average of the past seven years, figures published by the Reserve Bank of Australia showed on Friday. Annual business credit rose hit 6.3 per cent, the fastest gain since early 2009.
Simultaneously, the figures showed that lending to the property investment sector has cooled to its slowest pace in more than two years, a sign regulatory efforts to curb borrowing are starting to work.
The rise in business lending – which has been in the doldrums for most of this decade – has pushed overall credit growth to the fastest rate since the financial crisis and supports anecdotal and survey evidence that Mr Turnbull's replacement of Tony Abbott is seen by companies as positive for the economy.
[img=620x0]http://www.afr.com/content/dam/images/g/k/i/d/a/w/image.imgtype.afrArticleInline.620x0.png/1446181499629.jpg[/img]The rise in business lending has pushed overall credit growth to the fastest rate since the GFC, supporting anecdotal and survey evidence that Malcolm Turnbull's replacement of Tony Abbott is seen by companies as positive for the economy. Andrew Meares
"You want to see this backed up in future months, but when you think about it, business conditions continue to improve, business confidence is up, the lower Australian dollar is helping, there's budget stimulus for small business and a housing market providing good growth for the economy," said Craig James, a senior economist at Commsec.
'PLENTY OF POSITIVES'
"There are plenty of positives out there and it may be that the resolution of the political uncertainty is the final factor that businesses needed," he said.
"All the ducks are lining up for them to have a bit more confidence to spend, invest and employ."
Early evidence of a rebound in business investment will be welcomed by the Reserve Bank, which meets on Tuesday to consider another interest rate cut, and the government, given the need for Australia to find alternative drivers of growth to replace the end of the resources boom.
Nicholas Moore, chief executive of Macquarie, said while Australia was going through a short-term period of subdued growth, the economy would soon benefit from a series of "tailwinds" provided by the currency and demographic change.
"You see these things having an effect almost immediately with tourist flows, student flows, agriculture and the Australian dollar being good for our exports," Mr Moore told AFR Weekend in an interview.
"We certainly share Malcolm Turnbull's optimism but Tony Abbott was also optimistic, and I think you'll find the Labor side of politics is optimistic too," he said. "The new prime minister has been optimistic on his feel of the Australian economy … we support that view."
PERSONAL CREDIT GROWTH SLOW
The figures were tempered by further signs that households remain under financial pressure from low wages growth and high unemployment, with personal credit rising just 0.1 per cent in the month and 0.5 per cent from a year earlier.
Lending to property investors rose just 0.5 per cent in September – or about half the average pace of gains over the previous 12 months – a cooling that may bolster the Reserve Bank's scope to cut the official cash rate by early next year.
Annual growth in investor credit slowed to 10.4 per cent from 10.9 per cent in August, and is now at the lowest in 10 months.
The Australian Prudential Regulation Authority has been keen for banks to limit the pace of lending growth to property investors to 10 per cent, amid growing alarm that the surge in house prices in Sydney and parts of Melbourne over the past year are creating significant financial risks.
Regulators have prevailed on banks to toughen lending standards, impose tests on new borrowers to ensure they can handle interest rates 2 per cent higher than today's rates, and restrict lending to certain suburbs where a property bubble looks more likely.
Australia's big four banks have hiked mortgage rates in recent weeks after being forced to boost their regulatory capital buffers to ensure they can weather any future financial disasters.
WIDESPREAD DEBATE
This has triggered a widespread debate about whether the Reserve Bank will next week counter that credit tightening by cutting the official cash rate below 2 per cent for the first time.
Officials at APRA and the Reserve Bank have increasingly warned that an unsustainable surge in house prices driven by investor activity has created an economic risk if prices were to fall suddenly.
The cooling in property investor lending adds to signs the measures are taking some of the heat out of the housing market, where auction clearance rates have fallen sharply in recent months.
While investor lending growth has slowed over the past three months, credit to owner-occupiers has edged up to 0.7 per cent in September, compared with 0.4 per cent in May.
Annual growth for the segment is now running at 5.8 per cent, the highest pace for almost four years.
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Banks rein in growth in landlord lending to meet APRA target
Michael Bennet
[Image: michael_bennet.png]
Reporter
Sydney
[b]The nation’s major banks are set to avoid penalties as the industry finally complied for the first time with the regulator’s growth cap on lending to property investors.[/b]
In a notable win for the banking regulator in its quest to contain growing risks in the housing market, overall bank lending to property investors grew at 8.3 per cent in the year to September 30, according to Macquarie’s analysis of the Australian Prudential Regulation Authority’s most recent data released on Friday.
While APRA’s data is being affected by several banks’ loan reclassifications in recent months, the September credit numbers mean the industry is officially complying with the regulator’s 10 per cent speed limit for investor lending put in place last December.
At the time, APRA threatened to slap banks that didn’t obey with more onerous capital requirements to provide a greater buffer against their riskier lending volumes.
But the September data shows all the biggest banks — apart from National Australia Bank and Macquarie — growing below the 10 per cent limit. Notably, non-listed banks are growing at a stronger 17 per cent annually.
This comes at an increasingly tense time for the major banks which put up their mortgage rates twice in recent months independent of official moves.
“This month marks the first tangible evidence that macroprudential policies have been successful in restraining investor lending to within the RBA/APRA’s target range, providing scope to ease policy for the rest of the economy,” said Goldman Sachs economist Tim Toohey, who expects a rate cut by the Reserve Bank tomorrow.
If the RBA cuts, the spotlight will be on the banks to see how much they pass on — if any at all — as they try to offset tightening regulation and slowing earnings, as reported by ANZ and NAB last week in their annual results.
Westpac reports today.
APRA’s data came as the RBA’s separate monthly credit data of the entire system also highlighted the shift in growth away from investor lending towards owner occupiers, deemed less risky.
While the RBA’s numbers showed the annual pace of investor lending slowing to 10.4 per cent, Mr Toohey said that once adjusted for “series breaks” the pace also fell below APRA’s 10 per cent limit for the first time since September last year.
It comes after the banks in July hiked investor and interest only mortgage rates by between 27 and 29 basis points amid pressure from APRA to meet growth cap. The banks then last month hiked variable mortgage rates again — this time for both owner occupiers and investors — meaning landlords are paying close to 50 basis points more for housing debt.
According to Macquarie’s crunching of APRA’s data of deposit taking banks, the nation’s biggest lender to landlords, Westpac, has slowed its annual growth to 3.2 per cent.
Commonwealth Bank is down to 7.9 per cent, while ANZ is at 8.4 per cent. NAB is still above the cap at 13.1 per cent a year. However, APRA has suggest it would give lenders trying to slow growth some leniency given the extended time between when customers apply and drawdown on loans.
NAB last week stressed it was on track to comply with the 10 per cent cap, slowing investor lending to low single-digit growth in July and August. However, APRA’s latest data showed a fresh kick up for NAB in September, rising 8.2 per cent.
Macquarie Bank’s annual rate of growth remains turbocharged at 66.3 per cent, although it is coming off a low base, but its annualised growth for the past three months is just 2.7 per cent. Another notable move was Citibank. Its investor loans have dropped to 18.8 per cent in the past year.
While slowing housing credit growth is hurting the banks, the RBA’s data showed the strongest month of business lending since September 2008.
But ahead of the RBA’s meeting, Mr Toohey said: “The most important development was that for the first time in over 12 months the pace of property investor lending is now below the 10 per cent year-on-year pace that the RBA and APRA have set.”
UBS says the RBA would cut the cash rate tomorrow to 1.75 per cent following the banks’ out-of-cycle mortgage hikes.
“Overall, credit growth clearly surprised on the upside, with a lift in September to the fastest pace since the global financial crisis,” UBS said. “Despite this however, the recent pace of investor housing credit has still clearly cooled in the last three months to well under APRA’s threshold, and hence is no longer such an obstacle to the RBA easing again.”
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RBA 'surprised' by banks' $50b home loan error
DateNovember 5, 2015 - 5:29PM
[Image: 1425525330490.png]
Jonathan Shapiro
Senior Reporter
[Image: 1446705356535.jpg]
Philip Lowe said he was surprised, disappointed and concerned with "recent problems with the data relating to banks' owner-occupier and investor housing loans". Photo: Daniel Munoz
The Reserve Bank's deputy governor has scolded the banks over poor home loan data that is "complicating" its understanding of the housing market and clouding its ability to make and enact policy decisions.
In a strongly worded speech delivered at the Finsia regulators' panel in Sydney on Thursday, Philip Lowe said he was surprised and concerned over recent problems with the data relating to banks' owner-occupier and investor housing loans, a development he described as disappointing.
Increased regulator scrutiny has unearthed an additional $50 billion worth of property investor loans on the banks' books, Dr Lowe said.
This increased the total portion of investor loans on banks' books to 40 per cent, from 35 per cent.
More recently, the picture has been complicated by the banks' decision to charge higher rates for investor loans, prompting some customers to ask the banks to reclassify their loans as owner-occupier.
"Faced with the higher interest rate on investor loans, some borrowers have indicated to their bank that they are not an investor but rather an owner-occupier, and so should not have to pay the higher rate," he said.
The banks have indicated that more reclassifications were expected in the coming months, Dr Lowe said.
Internal systems cast doubt
While the banks were able to explain some of the earlier errors, in other cases Dr Lowe said the reasoning was unclear and lenders had not been able to provide comprehensive back data.
He said the various data problems reinforced the RBA's view that the "supervisory focus on investor lending has been entirely appropriate".
"And it is disappointing that some lenders' internal systems have not been up to the task of reporting accurate data on the split between investor and owner-occupier housing loans."
The effect of the reclassification had led to confusion in measuring the rate of growth for investor and owner-occupier loans. It is a problem for the RBA because macroprudential measures introduced by the RBA and the Australian Prudential Regulation Authority to manage a build-up of risks in the housing sector have specifically targeted investor loans.
In December 2014, the regulators jointly set a "speed limit" for the banks to cap the growth of investor housing loans at 10 per cent.
The objective was to slow the pace of lending to housing speculators that could amplify the housing price cycle and increase the risk of significant price falls later.
But the effectiveness of the policy has been complicated by data issues at the banks, which have been exposed by the regulatory scrutiny that has limited investor loan growth, and the tiered pricing as banks responded to the speed limits by raising rates to investors.
The RBA said more than 10 institutions had made material revisions, including two of the largest lenders. They are National Australia Bank and ANZ Banking Group.
Dr Lowe said the issue was discussed at the recent meeting of the Council of Financial Regulators and said APRA, the RBA and the Australian Bureau of Statistics would undertake a thorough review of the data collected from banks.
In addition to investor loan data, there are also doubts about the accuracy of first-home buyer data, with many entrants into the housing market believed to be classified as investors.
The RBA is also reliant on home loan data because of the Committed Liquidity Facility it makes available to meet global liquid asset targets.
The multibillion-dollar facilities are backed in part by mortgage-backed bonds and earlier this year the RBA introduced extensive reporting requirements relating to asset-backed securities.
The reclassifications were not likely to have been material to the value of existing mortgage bonds.
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Home loan approvals rise 2.0pc in September, beating expectations
- AAP
- NOVEMBER 10, 2015 3:21PM
[b]Investor home loans have suffered their largest monthly decline in seven years as borrowers appear to be pulling out of the property market in response to higher interest rates.[/b]
And while overall credit has softened too, doubts over the reliability of recent data mean the Reserve Bank will probably take the news with a grain of salt.
The value of loans approved for owner-occupied housing jumped three per cent in September, while approvals for housing investment plummeted 8.5 per cent, and has now fallen for five consecutive months.
All major banks have bumped up their interest rates on investment loans in response to requirements to increase their capital reserves.
CommSec chief economist Craig James said it was the biggest drop for investor loans in seven years, and regulators will be satisfied that their measures are working to slow demand.
“The Reserve Bank would be happy at the mix of lending in the housing market,” he said.
But JP Morgan economist Tom Kennedy said the central bank in a speech last week indicated it was sceptical of the data, and urged banks to refine and improve it.
“There’s some other things going on behind the scenes in terms of reclassifying data from investors to owner-occupiers,” he said. RBC Capital Markets fixed income and currency strategist Michael Turner said figures from the banks have been revised to show a much higher level of investor credit outstanding.
“And borrowers now have an incentive to report loans as owner occupier given the relative increase in rates charged for investor lending,” he said.
Regardless, demand for overall housing credit has steadied during the past few months, Mr Turner said.
The number of home loans approved rose 2.0 per cent, but the value of total housing finance was down 1.6 per cent in the month, seasonally adjusted data from the Australian Bureau of Statistics showed.
“It implies there’ll be slower credit growth ahead, which is usually a sign that price growth is going to moderate,” Mr Turner said.
“This would be consistent with anecdotes of a cooling in Sydney and Melbourne and an ongoing mixed state of affairs elsewhere.”
ANZ economists said falling auction clearances rates, weaker house price growth and higher mortgage rates in recent weeks point to a soft housing market outlook in 2016.
They said the sharp loss in momentum in recent months will also impact the housing market’s contribution to national economic growth.
“(This will) weigh on planned housing construction and provide less of a boost to consumer confidence and retail spending,” they said.
AAP
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Commercial lending soars 9.5pc
[b]Commercial lending finance rose strongly in September while the personal lending measure fell, according to data from the Australian Bureau of Statistics.[/b]
The ABS data showed total commercial finance commitments -- which include investor housing finance -- rose a seasonally adjusted 9.5 per cent in the month to $46.135bn, which compares to a upwardly revised $42.131bn in August.
Fixed lending commitments rose 9.8 per cent and revolving credit commitments rose 8.4 per cent, the ABS said.
Personal lending commitments in September fell a seasonally adjusted 0.8 per cent to $7.112 billion.
The result compares with a downwardly revised $7.169bn in August.
Meanwhile, lease finance slipped 0.5 per cent in the month to $601 million.
The RBA cut the official cash rate to a new record low of 2 per cent at its May board meeting but the move has not resulted in an increase in personal lending commitments.
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Ten reasons to be wary of banks
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Best and worst bank stocks
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by Christopher Joye
The $500 billion Australian banking sector is undergoing profound and irreversible change. Far-reaching regulatory reforms (long forecast here) are forcing seismic shifts in the big four major banks' returns and risks and the competitive balance of power between this dominant oligopoly and its perennially handicapped rivals.
Investors, analysts, pundits and even the banks themselves have been either awfully slow on the uptake or keen to peddle the fairytale that the great capital crunch would never materialise.
Yet $33 billion of "surprise" equity raisings over the past year – via rights issues, dividend reinvestment plans, asset sales and retained earnings – have dramatically lifted the majors' capital ratios to deleverage home loan lending and minimise too-big-to-fail concerns, which is crushing their returns on equity (ROE) and, in the long run, their once unassailable grip on home loans.
Since so many supposedly informed experts have been proved relentlessly wrong, and the banks' reform and capital generation processes are far from complete, it is timely to consider 10 key insights that can be drawn from this episode.
[img=620x0]http://www.afr.com/content/dam/images/g/k/x/a/k/q/image.related.afrArticleLead.620x350.gks99g.png/1447646216092.jpg[/img]We've predicted for years that the majors' unsustainable ROEs had to decline, and they delivered in 2015, with more downside doubtless lying in wait in the years to come. Supplied
First, it consistently pays to question not just conventional but also expert opinion. Many sharemarket gurus failed to figure out that the major banks were not leveraged 10 to 12 times, as they claimed, but actually circa 25 times, according to my analysis, which the regulator has since backed. If you want to beat the market through active investment strategies that identify mispriced assets, you must, by definition, capitalise on opportunities where the herd is wrong and you are right.
Second, the Australian Prudential Regulation Authority has demonstrated how empowered policymakers can make tough decisions that result in enduring reforms that benefit us all in the long term.
Before chairman Wayne Byres' ascension, the regulator was a notoriously soft touch with the big banks, reflexively defending their capitalisation levels and rejecting criticisms fielded by overseas authorities such as the International Monetary Fund. Byres has changed this and reshaped the power dynamics between taxpayers and these awesomely influential institutions.
DEFENCE AGAINST ADVERSITY
Third, the big banks will have to continue building capital buffers, which are the last line of defence against adversity. One major bank analyst recently wrote that APRA is targeting a minimum common equity tier 1 (CET1) ratio of 10 per cent. Pro forma for the 2016 changes in mortgage risk weights, the majors are sitting on 9.25 per cent CET1 ratios.
That implies they have to raise at least another $11 billion of fresh equity, which they could comfortably do over the next 12 months. And because additional tier 1 (AT1) hybrids are included in the major banks' leverage ratios, these securities will remain a cheap source of equity funding with the ensuing supply pressuring their prices.
Fourth, we've predicted for years that the majors' unsustainable ROEs had to decline, and they delivered in 2015, with more downside doubtless lying in wait in the years to come.
Indeed, UBS' top bank analyst Jon Mott says he was "surprised Westpac maintained its ROE target of greater than 15 per cent following the announcement of higher capital requirements, especially as this implies a return on tangible equity target of more than 19 per cent".
"Is this justifiable in a 2 per cent interest rate environment?" Mott asks. I think not.
Fifth, the banks' current loss rates on loans, hence provisions for bad and doubtful debts (BDD), are both at record lows and less than half the average BDD charge that has prevailed since 1990. At some point this dream run will end, which will be the biggest headwind to ROE and major bank valuations.
Crucially, none of the leading banking analysts, including Mott, are forecasting a mean reversion in BDD charges, which suggests that all their valuations are wrong.
OPPORTUNITIES FOR COMPETITORS
Sixth, the major banks will try, and fail, to innovate – they are far too cumbersome, bureaucratic and consensus-driven to develop genuinely disruptive products that dare to threaten their core businesses. This means there are huge opportunities for nimble competitors that have every incentive to rock the status quo. Keen an eye on challenger banks for superior returns.
Seventh, what the majors should be doing is cutting their dividend payout ratios down to Macquarie Bank's level – from 75 per cent to 50 per cent – and harnessing that scarce capital to invest in higher ROE opportunities. Macquarie is exhibit A for any bank looking to reinvent itself by reallocating capital to ideas that will produce the best risk-adjusted returns. While any fall in payout ratios could signal duress, it could also be a harbinger of smart management.
Eighth, a silver lining from the great capital-raising race is that the major's stand-alone credit profiles should get upgraded from A currently to A+ in future, which reflects the fact depositors and bond holders are lending to companies with substantially lower risks. They should eventually benefit from lower interest rates and potential capital gains.
Ninth, Australian households cannot realistically leverage up much further. The next big banking thing will be financing small and large businesses. Business lending has the advantage of being a highly heterogeneous activity that requires deep resources and sophisticated credit assessment skills, which imposes high barriers to entry on competitors. I think the much-maligned NAB is best placed to capitalise on this opportunity.
Finally, one worry I have is ANZ's horrifically large Asian credit exposures. We projected this would become a source of growth-sapping problems, which is exactly what has transpired. ANZ's Asian business could be a long-term handicap vis-à-vis its peers and I would avoid any banks that mindlessly lend overseas in the name of chasing above-system growth.
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NAB sees pick up in home lending despite cooling markets
[img=620x0]http://www.afr.com/content/dam/images/g/h/s/n/4/m/image.related.afrArticleLead.620x350.gl226p.png/1447844159366.jpg[/img]Craig Drummond, NAB CFO, played down concerns that margin pressure in business lending and more onerous capital requirements threatened the major banks' dividend payout ratios. Jim Rice
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by Michael Smith
National Australia Bank says owner-occupier home loan volumes have rebounded in the past seven weeks following a drop immediately after the banks raised mortgage rates last month but says it is not worried by a cooling in the Sydney property market.
"Our experience over the last six or seven weeks, we have seen a bit of a rebound back up in volumes and it is probably a bit more in the owner occupied space," NAB's finance chief Craig Drummond told The Australian Financial Review in Singapore.
"There was a period of uncertainty. I don't think it was an alarming dip but there was a bit of a drop and we have seen that rebound."
Speaking on the sidelines of the Morgan Stanley Asia Pacific Investor Summit in Singapore, Mr Drummond said the bank still expected to meet the regulator's 10 per cent annual growth limit on investor loans. He said lower clearance rates in Sydney in recent weeks was not a concern.
"It is about sustainability. We don't want to see sharp moves up or down. We want to see a sustainable move in pricing and I think that is where the regulator was a little bit concerned ... clearances have come off a bit but not to unhelpfully low levels."
Mr Drummond, who is in Singapore to meet Asian investors, played down concerns that margin pressure in business lending and more onerous capital requirements threatened the major banks' dividend payout ratios.
The Basel Committee is expected to announce new global capital rules by the end of the calendar year. Mr Drummond said it was unclear what would be announced but there was an expectation any rule changes would have a long implementation period, while the work APRA has already done to lift mortgage risk weights would soften the blow.
PROFIT MARGINS
He said he remained comfortable with forecasts to maintain the bank's 70 to 75 per cent dividend payout ratio based on the bank's current capital and franking position, asset quality and forward earnings. Some analysts have raised concern that a pick up in bad and doubtful debts would impact on dividends.
"We are not seeing anything along those trends. What happens in the future we can't foretell but based on those settings we are comfortable with giving the market the indication that the 70 to 75 per cent payout ratio is a fair area for us to be," Mr Drummond said.
NAB last month delivered a $5.84 billion full-year profit, which was driven by low bad debts. But its shares fell on concern around a 19 basis point contraction in profit margins on business loans in the second half due to stiff competition.
"What we have said to them (investors) is we have had to make an investment in the business, we are not going to reset this business in a six-month timeframe," Mr Drummond said.
"We have sensibly met the market in the segments we want to play in. We are lending and transacting at returns that are above our cost of capital and we are saying that is economically rational."
NAB has been investing heavily in its core Australian and New Zealand business, which is now chief executive Andrew Thorburn's main focus following the spin-off of its troubled United Kingdom operations in February and the $2.4 billion sale of its life insurance business. The bank added 330 front-line bankers and upped marketing and IT spending in the past 12 months.
Mr Drummond said business confidence was strong following the change in prime minister and Australia's transition from a more service-based economy that was showing positive signs for jobs following the mining downturn.
"For banks that is absolutely crucial, household debt in Australia is high and with a combination of low interest rates and strong employment that is a very helpful combination to ensure banks have a good operating environment."
Michael travelled to Singapore courtesy of Morgan Stanley
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Investor housing lending slows- GARRY SHILSON-JOSLING
- THE AUSTRALIAN
- NOVEMBER 30, 2015 2:32PM
[*]
Investor housing credit has slowed to less than the speed limit set last year by the financial regulator, but demand for credit rose overall.
After a monthly rise of 0.4 per cent, the slowest for two and a half years, investor housing loans owed to domestic Australian lenders rose 9.7 per cent over the year to October, below 10 per cent for the first time since September 2014.
In December, the Australian Prudential Regulation Authority warned lenders not to grow their investor loan books by more than 10 per cent annually.
Total lending posted its second consecutive monthly rise of 0.7 per cent, lifting annual credit growth to 6.7 per cent, its fastest pace since 2008, according to Reserve Bank of Australia figurers released today.
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Analysts surveyed by Bloomberg had tipped a gain of 6.6 per cent.
The RBA has cut the official cash rate twice this year, to 2.25 per cent in February and to 2 per cent in May, as the central bank seeks to stimulate the sluggish economy in its transition away from the mining industry.
The strongest component was business credit, which rose by 1.0 per cent in October after a 1.1 per cent gain in September, making those the strongest two months of business credit growth since August-September 2008, just before the global financial crisis erupted.
Meanwhile, personal credit growth fell 0.3 per cent higher in October, after the September result was downgraded from a 0.1 per cent lift to no change.
Housing credit grew by 0.6 per cent in September, after also rising 0.6 per cent per cent the month prior.
Broad money, which includes currency, deposits and other short-term liquid liabilities, rose 0.5 per cent in October after posting an upwardly revised 0.4 per cent lift in September, the RBA data showed.
For the 12 months to October, housing loans rose 7.5 per cent, while personal loans were flat.
Business loans, meanwhile, lifted 6.6 per cent over the year, compared with a 4.4 per cent rise in the previous year.
Broad money increased 6.4 per cent over the year, down from growth of 7.6 per cent in the prior year.
AAP, Business Spectator
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