Australian Banks

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Analysts wary of banks despite solid earnings
THE AUSTRALIAN NOVEMBER 05, 2014 12:00AM

AUSTRALIAN banks recorded impressive earnings growth in the past year, but with the earnings season wrapping up this week, analysts expressed caution about the outlook because the sector faces regulatory risk from the financial system inquiry, and earnings per share have been boosted by an unsustainable fall in charges for bad and doubtful debts

After falling about 10 per cent during the August-October sell-off, the S&P 200 banks index quickly recovered most of that fall as the Australian dollar stabilised and three of the four major banks reported earnings which were in line or better than expected.

However, in research reports yesterday, analysts were reluctant to bet on further gains, choosing to rate the sector as a hold or a sell rather than chase the upward momentum.

According to UBS, which has a market weight rating on the banks, the sector recorded 9.7 per cent growth in underlying earnings per share in fiscal 2014 (ex-National Australia Bank’s writedowns), the strongest since 2010.

But that outcome was flattered by a fall in bad and doubtful debt charges to the lowest level ever recorded by the major banks, according to UBS analysts Johnathan Mott and Adam Lee.

“The tailwind from bad and doubtful debt charges has likely run its course,” they said in a report.

In the case of NAB, the entire underlying EPS growth of 12.8 per cent came from lower bad and doubtful debt charges, and writedowns took headline EPS growth to minus 13 per cent.

The share price bounce since October has “removed the valuation appeal of the banks”, UBS analysts added.

In their view, and the sector is now awaiting the final report of the financial system inquiry and the government’s policy response late this month or early next month.

CIMB was a little harsher on the banks, reiterating an underweight sector call. Second-half cash EPS was 1.4 per cent above their forecast, on average, but that was mostly due to further declines in the bad and doubtful debt charge.

“We don’t think bank results in this reporting period were strong enough to justify current lofty valuations,” CIMB analysts Jon Buornaccorsi and Ashley Dalziell said.

“We think banks’ intrinsic value will fall as the likely higher capital targets will lower structural returns and constrain growth.”

According to KPMG, the major banks reported a record cash profit after tax of $28.6 billion for the 2014 full year, up 5.7 per cent on 2013, aided by a buoyant housing market, historically low impairments and improved funding conditions.

But KPMG analyst Ian Pollari said: “Tensions are rising as a result of the regulatory uncertainty from the financial system inquiry, likely future increased impairment charges, as well as structural and technological changes that will significantly impact the banking industry.”

PwC was slightly more constructive on the sector, noting that increased lending volumes to business and for housing investment overcame a margin squeeze from increased competition for loans.

“A real highlight in these results is the 3.8 per cent growth in business credit to $76bn, up from just 1 per cent the year before,” PwC Australia’s financial services leader Hugh Harley said.

“This is a good news story and shows that the mild growth that emerged in business credit over the past several halves marked the beginning of a trend.

“Obviously there is also great interest about where the final report of the financial system inquiry — due later this month — is going to land,” Mr Harley said. “As we have argued from the start, we hope to see a strong focus on policies which support economic growth and development.”

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Banks warned to maintain standards on home lending
THE AUSTRALIAN NOVEMBER 06, 2014 12:00AM

Richard Gluyas

Business Correspondent
Melbourne

THE prudential regulator has issued an ominous warning about lower home-lending standards by the banks, as Commonwealth Bank’s $2.3 billion cash profit for the September quarter left the ­nation’s biggest mortgage lender on target to exceed last year’s ­record profit of $8.7bn.

CBA’s residential mortgage portfolio of almost $450bn is generally of high quality with extremely low levels of default.

Regulators, however, have become increasingly concerned about higher-risk lending, amid suggestions of a property bubble in Sydney and Melbourne.

While no macro-prudential measures were foreshadowed in yesterday’s practice guide on sound mortgage lending practices, new Australian Prudential Regulation Authority chairman Wayne Byres said credit standards had been slipping.

“Housing lending has historically demonstrated a low and stable risk profile compared with other lending exposures in Australia,” Mr Byres said. “However, for some time APRA has been seeing increasing evidence of residential mortgage lending with higher risk characteristics.”

CBA said in its September- quarter profit announcement that the group net interest margin was slightly lower, with improved wholesale funding costs more than offset by “competitive pricing”.

In home lending, the bank said it had remained focused on profitable business in a competitive market, with strong new business levels balanced by higher repayment activity in a low interest-rate environment. Credit quality also remained sound, with retail arrears flat to slightly improved.

The total loan impairment expense was $198 million in the quarter, down from $292m in the June quarter.

CIMB analyst John Buonaccorsi said CBA was “ticking over nicely”. “Most of the key business segments are still doing well, ­including home loans, but SME lending is a little sluggish,” he said. “But it’s a well-managed bank and it’s defending its turf.”

APRA’s prudential practice guide, which comes after a consultation period for the draft version of last May, comes as the regulator has been steadily ratcheting up its supervision of mortgage lending portfolios.

In recent years, the activity has included more extensive data collection, on-site reviews, targeted reviews of serviceability standards, and a comprehensive stress test focused on potential risks.

Earlier this year, APRA also sought assurances from boards of the biggest home lenders that they were actively monitoring lending standards.

Industry submissions were critical of the draft guide for being overly prescriptive in some areas, such as the guidance on risk appetite, management information systems and serviceability assessments. Some submissions said the draft held banks to a higher standard than the consumer credit legislation, particularly with serviceability assessments.

In response, APRA changed the guidance on serviceability to ensure that the whole portfolio, and not the individual loan, was able to absorb substantial stress without producing unexpectedly high losses. The regulator recommended that the banks include interest rate buffers and floors in their serviceability criteria.

There should also be a buffer on the living expense estimates, and a haircut for uncertain income streams, APRA said.

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Big four must pay levy for government guarantee: ME Bank chief McPhee
THE AUSTRALIAN NOVEMBER 07, 2014 12:00AM

Richard Gluyas

Business Correspondent
Melbourne

ME Bank CEO Jamie McPhee wants a level playing field for the smaller banks in the mortgage market. Picture: Aaron Francis Source: News Limited

ME Bank, which is majority-owned by four big industry superannuation funds, wants the major banks to pay an annual fee of up to $4 billion-$5bn for their implicit government guarantee as a way of resolving the too-big-to-fail conundrum.

Announcing a 28 per cent ­increase in 2014 net profit to $47.4 million, chief executive Jamie McPhee also launched a spirited defence of the industry funds movement, pointing out that listed financial services businesses had been hit by governance challenges, including Commonwealth Bank’s financial planning debacle.

“I’ve been around for five years and the integrity of the industry funds is of a high quality,” Mr ­McPhee said.

“It’s not to say there aren’t pockets of questionable activity but you’ll find that in the private sector as well, so there needs to be some balance and the inappropriate behaviour stopped.”

ME Bank has 30 industry-fund shareholders but the four biggest — AustralianSuper, HostPlus, Hesta and Cbus — own 80 per cent of the operation.

At the bank’s annual meeting and board meeting yesterday, the shareholders made their usual precommitments to inject an undisclosed amount of capital in October next year, with ME Bank already having raised $300m of tier-two capital in August.

ME Bank is aiming to achieve a “meaningful” size by 2020, growing customer numbers from 312,000 to 1 million. It also wants to increase annual home loan settlements from $3.8bn to $8bn in three years. In the meantime, Mr McPhee wants the Murray financial system inquiry to level the playing field for the smaller banks in the lucrative $1.3 trillion mortgage market.

With their advanced systems, the big four generate average risk weights for mortgages of 18 per cent, requiring them to put less than half the capital aside to write the same underlying mortgage as small banks, boosting returns.

“It’s nonsensical to say that one model requires twice the amount of capital than the other when we’re all lending in the same market,” the ME Bank chief said.

He said the advantage enjoyed by the major banks in lower funding costs should be addressed by the imposition of a levy in return for their implicit government guarantee. The guarantee was worth two credit-rating notches, enabling the majors to issue wholesale debt at much cheaper rates than smaller banks and credit unions.

“It’s a form of insurance, and the last time I looked I had to pay for that kind of underwriting,” Mr McPhee said. He said a fair assessment of the value of the guarantee was anywhere between $2bn a year to $5bn-$6bn.

While the market was competitive today, the ME Bank chief said the Murray inquiry was concerned with the shape of the financial services industry over the next 20 years. “The only winner is the consumer,” he said.

ME Bank has also been modernising its core banking system in a four-year project worth $70m due for completion early next year. The new platform will help to cut its cost-to-income ratio, which has been falling since June 2009 when the ratio was an uncomfortably high 84.5 per cent.

Since then, it’s declined to 71.1 per cent, but Mr McPhee said this was still “unacceptable”.

Growth will also be boosted by the bank’s recent decision to extend home loans to all borrowers, not just industry fund members and unionists.

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Fears of bank capital raisings after Murray inquiry findings
THE AUSTRALIAN NOVEMBER 08, 2014 12:00AM

APRA chairman Wayne Byres says a recent build-up in capital levels had simply reversed a decline in core equity in the pre-crisis period. Source: News Corp Australia

RISKS are rising that banks may be forced to push ahead with a round of capital raisings in the wake of the Murray financial system inquiry, as the banking regulator yesterday warned that lenders could be underestimating potential losses if interest rates moved sharply higher.

A leading bank analyst seized on a change by the Commonwealth Bank in the way the ­nation’s biggest lender calculates expected housing losses, as well as commentary by APRA chairman Wayne Byres on the outcome of stress tests for 13 banks, to say that banks could boost their capital buffers after the Murray review.

“Wayne Byres’ speech reads to me like the existing stress tests that the banks run are way short of where they should be, which further supports our contention of big capital-raising risks for Australian banks,” Mr Johnson said in a note to clients, obtained by The Weekend Australian. “The risk of post-financial system inquiry capital raisings is rising.”

CLSA recommended that clients remain “tactically underweight” in the banking sector.

In the meantime, CBA quietly started laying the groundwork for a tougher regulatory regime by reversing the longstanding and controversial industry practice of lowering risk-weights for residential mortgages.

When banks calculate their capital as a percentage of assets, international rules allow them to reduce the value of some assets according to their “risk weighting”.

For example, the average home-loan risk weighting for the four major banks is about 18 per cent, so only 18 per cent of a mortgage is counted as an asset for capital leverage measures.

Reduced risk-weights have enabled the major banks to report improved capital strength, but CBA revealed in its regular capital adequacy statement a $6.2 billion increase in mortgage risk-weighted assets, due to a change in the way it estimates losses across its lending book.

Mr Johnson said the timing of CBA’s switch on mortgage risk-weighting was “interesting”, given it was just days before Mr Byres’ speech and in the lead-up to the final report from the financial system inquiry (FSI), due late this month.

In detailing the outcome of APRA’s stress testing, Mr Byres raised the prospect that the 13 banks could be underestimating potential losses from a scenario where interest rates rose sharply.

He concluded that the industry was “reasonably resilient” to the impact of a severe housing downturn, but said this came with a “potentially significant” capital cost and “question marks” over the ease of the recovery.

Mr Byres said the recent build-up in capital levels had simply reversed a decline in core equity in the pre-crisis period.

Further, any strengthening in capital ratios over the past decade — a trend used by the banks to argue against any FSI recommendation for further capital imposts — was more to do with growth of low-risk housing loans than any significant increase in capital.

“The impact of this trend is that, even though balance sheets have grown roughly in line with shareholders’ funds, risk-weighted assets have grown more slowly and regulatory capital ratios are correspondingly higher,” he said.

“In short, banks have de-risked rather than deleveraged.”

The lobby group for credit ­unions and building societies, Customer Owned Banking, seized on Mr Byres’ commentary, saying that APRA’s own data did not support the major banks’ key submission to the FSI that they were holding more capital now than ever before.

“The claim about higher capital holdings is based on the way they are allowed to risk-weight their assets,” acting chief executive Mark Degotardi said. “A simple calculation of capital as a percentage of total assets paints a very different picture. Allowing the major banks to hold significantly lower levels of capital than their competitors provides them with a cost advantage that undermines competition.”

Mr Byres also said that the big four were in the “upper half” of the industry worldwide when it came to capital strength, in contrast to research commissioned by the Australian Bankers’ Association for the FSI that concludes they are in the top quartile.

As to stress-testing of mortgage portfolios, which was APRA’s priority this year, the chairman said more needed to be done to ensure there was strength in adversity.

While the banking industry would be severely constrained in paying dividends and bonuses in scenarios involving a severe downturn in the housing market, he said the industry still appeared to be reasonably resilient.

“That is good news but a note of caution is also needed — this comes with a potentially significant capital cost with question marks over the ease of the recovery,” Mr Byres said.

“The latter aspect is just as important as the former: if the system doesn’t have sufficient resilience to quickly bounce back from shocks, it risks compounding the shocks being experienced. Our conclusion is, therefore, that there is scope to further improve the resilience of the system.”

Mr Byres was also critical of bank recovery plans in their models.

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Treasurer puts big banks on notice

James Eyers
946 words
8 Nov 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.

Treasurer Joe Hockey has told Australia's big banks he stands ready to raise their capital levels and warned them to back down from mounting a public campaign against the change even though it will lower their profits.

Australian Prudential Regulation Authority chairman Wayne Byres on Friday effectively backed suggestions from the financial system inquiry being chaired by former Commonwealth Bank of Australia chief executive David Murray that the banks needed to hold more equity capital to help them withstand a severe economic downturn in which housing prices crashed and the jobless rate soared.

Mr Byres said APRA's stress testing of the banks suggested that, even though they had enough capital to withstand such a shock, "there remains more to do to be able to confidently deliver strength in adversity".

Big bank chiefs have ramped up their campaign against being required to hold more capital by publicly arguing it would hit the hip pocket of borrowers through higher interest rates and bank shareholders through lower dividends.

But AFR Weekend has learned that Mr Hockey has rejected the banks' ­campaign, saying that the decision had been made for him. Instead, Mr Hockey wants the banks to engage with the Murray review on how best to boost their capital buffers.

"If Murray says the banks need more capital and APRA says the banks need more capital, then they are going to have more capital," said one well-placed government source.

Under one scenario modelled by UBS, Mr Murray's changes could force banks to hold $23 billion more in ­capital, which would hit their profits.

While not rejecting the banks' claims that being required to hold more capital would put pressure on interest rates or dividends, Mr Hockey is understood to argue that it also would reduce the exposure of taxpayers to any bank ­failure. The government was open to ­phasing in the increased capital re­quirements, "but there is just no issue about getting there''.

On Friday, APRA's Mr Byres cautioned that the banks' stronger capital positions over the past decade were "less the product of substantial growth in capital and more the product of the increasing proportion of housing loans within loan portfolios".

That was because banks were able to carry small amounts of capital against housing loans, which are considered safe assets and so receive a relatively low "risk weight".

The Australian Financial Review has previously revealed the financial system report that Mr Murray is due to hand to Mr Hockey within weeks is expected to impose a floor on mortgage risk weights to force the big banks to carry more capital against home loans.

It is also expected to lift the equity buffer the big banks hold to more ­accurately reflect the fund cost advantages that come from an implicit guarantee that the federal government would support them in a crisis.

On Monday, Westpac Banking Corp chief executive Gail Kelly said bank shareholders might be forced to wear the costs of higher capital through lower dividends if banks were required to hold significantly more capital.

Ms Kelly's warning followed suggestions from ANZ Banking Group chief executive Mike Smith that higher capital costs could be passed on to borrowers through higher interest rates.

The Australian Bankers' Association has criticised the Murray inquiry's interim findings that Australian big bank capital ratios were "in the middle of the range" compared to global banks. The ABA attached to its second sub­mission to the inquiry a report by PwC which found Australia's banks had capital ratios that would place them in the top quartile of global banks.

But Mr Byres on Friday sided more with Mr Murray, saying the largest Australian banks "appear to be in the upper half of their global peers in terms of their capital strength". This will bolster Mr Murray's case to build equity levels.

Mr Hockey wants the banks to resolve with the inquiry the dispute as to where Australian banks rank internationally by agreeing to the appropriate definitions. And the Treasurer is understood to argue that higher capital requirements being imposed on so-called systemically important global banks will effectively provide a new benchmark that will inevitably flow to Australia because our banks raise 30 per cent or so of their funds offshore.

In the major speech on Friday, which revealed the results of APRA's industry-wide stress test of Australian banks' mortgage books, Mr Byres said all 13 of the banks tested for a highly stressed economic scenario – which assumed a house price crash of 40 per cent and an unemployment rise to 13 per cent – would retain sufficient capital above the minimum amount.

However, the APRA review also revealed shortcomings in the banks' own stress tests, including their modelling of different economic downturn scenarios. From next year, APRA would require the banks to use a common scenario in their own internal stress tests to ensure they test a severe enough crisis.

Mr Byres warned Australia's top bankers they did not pay enough attention to what actions would be required to help the banking system recover and rebuild confidence following a crisis. "This was an area of the stress test that was not completed, in our view, with entirely convincing answers," he said.

The Treasurer's warning to the banks not to campaign against the issue comes as the ABA seeks a louder policy voice in Canberra. The ABA hired economist Tony Pearson from Mr Hockey's office in September. Mr Pearson was a senior adviser to Mr Hockey for the past five years and joined the ABA as executive director of industry policy.


Fairfax Media Management Pty Limited

Document AFNR000020141107eab800012

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APRA concerned about bank’s performance in house-crash stress-test
THE AUSTRALIAN NOVEMBER 10, 2014 12:00AM

Michael Bennet

Reporter
Sydney
APRA
The new chairman of APRA, Wayne Byres, in his Sydney office. Source: News Corp Australia
THE prudential regulator has taken aim at the banks’ rose-­tinted view on managing a possible housing crash, upping pressure on senior management ahead of potentially stricter capital rules from the Murray inquiry.

In his most pointed speech since becoming chairman of the Australian Prudential Regulation Authority in July, Wayne Byres said the banks’ proposed mitigation actions after a collapse in house prices proved unconvincing in recent stress tests.

The comment comes after the chiefs of the big four banks this month played down concerns of emerging property bubbles in the investor-led Sydney and Melbourne markets.

Further evidence of a warming market emerged yesterday, with major mortgage broking group AFG revealing it last month processed the most home loans in its 21-year history and that the share of first-home buyers fell to a new low of just 7.2 per cent.

Mr Byres said APRA might support an increase in the big four’s capital levels and noted that some of the 13 banks stress-tested assumed they could cut their cost-to-income ratios by 10 percentage points, an “unprecedented” feat even in good times.

He said the tests raised questions about the combined impact of banks’ mitigating actions in crises, such as firming up capital through equity raisings. APRA will be engaging more with banks after the stress tests “disappointingly” revealed a gap between mitigating actions and recovery plans or “living wills”.

“In many cases, there was clear evidence of optimism in banks’ estimates of the beneficial impact of some mitigating actions, including, for example, on cost-cutting or the implications of repricing loans,” Mr Byres said.

“The feedback loops from these steps, such as a drop in income commensurate with a reduction in costs, or increase in bad debts as loans become more expensive for borrowers, were rarely appropriately considered.”

Mr Byres’ speech on Friday came at a critical juncture, with the Murray financial system inquiry to hand its final report to government later this month, just after the G20 meeting in Brisbane this week.

Mark Carney, chairman of the Financial Stability Board, will also tonight unveil key updates to capital rules for the biggest global banks ahead of the G20, which is striving to tackle risks from institutions considered “too big to fail”.

Despite reports at the weekend that Joe Hockey had already decided that the big banks must raise their capital levels, a spokeswoman for the Treasurer yesterday said he had not drawn any conclusions about the Murray inquiry.

“The Treasurer looks forward to receiving the final report and considering its recommendation and will respond in due course,” she said.

Fund managers, however, said Mr Byres’ speech did not “bode well” for the banks, noting his comment that “there is scope to further improve the resilience of the system”.

The inquiry is widely believed to be considering recommending increasing the big four banks’ common equity tier-one capital levels. It may also back forcing the banks to raise the risk weightings assigned to mortgages, a further dent to profits. Changes have been vehemently opposed by the banks, which arguing there would be a large, unnecessary cost to the economy from lower dividends and higher prices for customers.

Mr Byres touched on the issue, noting that the banks’ ratio of risk-weighted assets to total assets had fallen from 65 per cent 10 years ago to about 45 per cent because relatively safe housing loans received lower risk weights.

“Much of the strengthening of capital ratios relative to a decade ago is ... more the product of the increasing proportion of housing loans within loan portfolios. Banks have de-risked rather than deleveraged,” he said.

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RateSetter launches in Australia, plans to challenge banks
BUSINESS SPECTATOR NOVEMBER 11, 2014 9:28AM

Mitchell Neems

Business Spectator Reporter
Melbourne
ONE of the world’s largest peer-to-peer (P2P) lenders has just launched in Australia, providing consumers with an alternative to the big banks when sourcing loans.

The UK’s RateSetter is the first P2P lender licenced to offer lending to all Australians, including the all-important business market, and will join the likes of SocietyOne — currently Australia’s largest P2P operator — in taking on the traditional might of the banks.

RateSetter’s founder and chief executive Rhydian Lewis said Australia was chosen because of local investors’ desire for better returns on their cash.

“Australia’s financial system is ripe for disruption — for too long banks have been offering below-par savings and loan deals in the absence of real competition,” he said.

RateSetter Australia chief executive officer Daniel Foggo has set the new market entrant lofty goals.

“Our aim is to redefine Australia’s $100 billion consumer finance sector by offering Australians a better way to save and borrow,” Mr Foggo said.

“We want to empower savvy investors and borrowers by putting them in control of their finances through a simple, fair and flexible P2P platform.”

Mr Foggo said the lender could offer investors attractive returns by directly connecting them with creditworthy borrowers on its secure online platform.

“Without a traditional middleman taking a cut and with our lower overheads, we can pass on savings in the form of better rates,” he said.

Throughout the recent bank profit season, a number of the country’s leading lenders flagged concerns about the growing presence of P2P lending, most notably Bendigo and Adelaide Bank’s managing director Mike Hirst, who singled out Apple and PayPal as emerging threats.

RateSetter’s entry into the market comes as the Murray inquiry prepares to hand down its final report on the nation’s financial system, with the expectation that a key recommendation will be that lenders have more capital backing to their loans.

First launched in the UK in 2010, RateSetter has since attracted over 500,000 customer registrations and facilitated over $700 million in loans.

RateSetter’s launch in Australia makes it the only P2P lender to be operating on two continents.

Business Spectator

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It is people like Joe Hockey and Wayne Byres who dare to be party poppers that everybody hates, so that the hangover mess can be minimised, that makes the Australian financial system historically robust to shocks as we discussed previously

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Commonwealth Bank ‘cautiously positive’ about year ahead
THE AUSTRALIAN NOVEMBER 12, 2014 12:55PM

THE Commonwealth Bank has warned Australian regulators not to get “too prescriptive” about how much capital banks are required to hold as a buffer against financial shocks.

The comment came as Australia’s biggest lender (CBA) told shareholders at its annual meeting it was “cautiously positive” about the year ahead, and as it said sorry for the bank’s role in a financial advice scandal.

The ongoing financial system inquiry is expected to recommend major banks hold more capital, amid worries about increasingly risky lending practices and the potential consequences.

But chief executive Ian Narev said he believed the Commonwealth Bank was well capitalised, and that regulators should keep in mind the balance between growth and safety.

“It’s important not to get too prescriptive about capitalisation because the world around us is still moving,” he told the AGM.

The Financial Stability Board, a Swiss-based panel of central bankers and regulators, on Monday said the world’s biggest banks would have to increase their financial cushions by issuing equity or long-term debt worth 16-20 per cent of their risk-weighted assets.

The requirement could force some banks to add billions of dollars in new capital in an attempt to ensure that if they collapse they won’t need to be bailed out by taxpayers.

But Mr Narev said the watchdog had made it clear that it could be about another two years before the global financial sector decided what the right levels of capital were.

Westpac boss Gail Kelly last week warned the federal government could damage the economy if it requires banks to hold more capital.

ANZ boss Mike Smith has also said interest rates on all loans would have to rise half a per cent if his bank was required to hold more capital.

Earlier, CBA chairman David Turner said while business and consumer confidence remain fragile, the levels of underlying activity confirm the strong foundations of the Australian economy.

He said lower interest rates have been positive for the housing and construction sectors, with increased activity in these sectors partially offsetting the impact of reduced resources investment.

“Although investment in the resources sector has tapered off as predicted, the fruits of previous investment are showing up in increased production of iron ore and LNG as new projects move into the production phase,” he said.

Last week, the Reserve Bank of Australia held the official cash rate at a record low 2.5 per cent for the 15th consecutive month.

“We are cautiously positive about the outlook for the 2015 financial year,” Mr Turner said.

Mr Turner added the past year had been a period of “relative stability” in the global economy, but warned downside risks still remain.

“If the stability in global markets continues, we expect to see gradual increases in consumer spending and demand for credit from businesses over the coming year,” he said.

Addressing the ongoing fallout from the lender’s financial planning scandal, Mr Turner noted CBA had faced additional public scrutiny, as well as appearing at a parliamentary inquiry into the performance of ASIC.

A Senate inquiry earlier this year recommended a royal commission to probe the actions of CBA advisers amid revelations of wrongdoing that led to the loss of life savings for thousands of customers. It is estimated around 400,000 clients dealt with the CBA’s financial planning unit in the period under review, while it is known at least 1100 CBA customers lost savings from bad or unethical advice from CBA planners.

The Abbott government has ruled out a royal commission, but will push forward with the establishment of an enhanced, industry-wide public register of financial advisers.

“We are very sorry indeed that some customers received poor advice in the past,” Mr Turner said.

“We know that saying sorry is not enough, and that action is required, and where we’ve not already made good, we are absolutely committed to doing so.”

Mr Turner pointed to CBA’s Open Advice Review program, its increased training and education of staff and the overhaul of its remuneration structures as key examples of this.

However Finance Sector Union secretary Fiona Jordan, representing many of the bank’s employees, said workers were burdened with sales targets that they must meet to avoid daily humiliation, and a culture still existed of pushing products that were not in customers’ best interests.

CBA recently unveiled first-quarter cash earnings of $2.3 billion — an increase on the $2.1bn result in the previous corresponding quarter — which bodes well for the lender as it looks to surpass last year’s record annual cash profit of $8.8bn.


Business Spectator, AAP

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Bank capital at risk from house bust

Christopher Joye
886 words
15 Nov 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
Exclusive

Stress tests completed by the Aus­tralian Prudential Regulation Authority found that all of the capital assigned to protect the major banks' $1.25 trillion mortgage books would be wiped out by a "severe downturn" in the housing market.

The four majors were only able to pass APRA's stress tests after drawing on extra capital allocated to other areas of their business and through profits generated in some years of the test.

The finding was confirmed on ­Friday by APRA after enquiries by AFR Weekend and raises the odds that ANZ Banking Group, Commonwealth Bank, National Australia Bank and Westpac Banking Corp will be forced to boost their equity capital in response to David Murray's financial system inquiry report, which is due in weeks.

It is also potentially embarrassing for Treasurer Joe Hockey, as he hosts G20 discussions in Brisbane on how to deal with banks that are "too big to fail".

During the 2008 financial ­crisis, banks around the world required government bailouts. The G20 is focused on ensuring banks and investors wear maximum pain prior to drawing on the public purse again. A spokesman for APRA confirmed AFR Weekend's interpretation of the stress tests was correct, but declined to comment further.

In a November 7 speech, APRA's new chairman, Wayne Byres, revealed the results of stress tests of the equity held by 13 Australian banks – rep­resenting 90 per cent of total assets – against losses on their residential ­mortgage, personal and business ­lending portfolios.

It was previously reported that the banks' aggregate tier-one equity cap­ital fell sharply from 8.9 per cent to 5.8 per cent, which is still above APRA's required minimum of 4.5 per cent.

In a footnote in the published version of the speech, Mr Byres said capital for non-major banks was "just sufficient to cover the losses incurred during the stress period". The footnote added that this "was not the case" for the major banks. The text was unclear as to whether the major banks had sufficient or insufficient capital held against their mortgage books to withstand the losses. But an APRA source confirmed to AFR Weekend that it was the latter, and that all residential mortgage capital was wiped out in the stress test.

The majors stayed afloat and kept capital levels significantly above APRA's minimums during the stress tests, the source said, due to their ability to draw on capital across their other businesses and their profits in some years. The stress tests modelled two downturns over a five-year period.

AFR Weekend understands that in an earlier iteration of Mr Byres' speech, the impact of the stress tests on the capital banks' hold against home loans was ­discussed in a dedicated section with accompanying charts. This was, however, condensed down to the footnote due to concerns it might interfere with the financial system inquiry.

The different fate of regional banks compared with major banks in APRA's stress tests reflects rules that allow ANZ, CBA, NAB and Westpac to use their own "risk-weightings" to determine how much capital is needed to cover each loan. In contrast, all other banks must use "standardised" risk weights set by APRA. As a result, the major banks hold only about $1.50 of equity capital for every $100 of home loans they make, which means they can leverage their equity 65 times when lending against housing. Smaller ­com­petitors carry more than twice the majors' equity and therefore less than half the leverage with commensurately lower returns on equity.

APRA's stress tests assumed only "limited management action to avert or mitigate the worst aspects of the ­scenario" and modelled several downturns. One involved a 4 per cent decline in GDP, a 13 per cent jobless rate and a 40 per cent decline in house prices (although mortgage loss rates were "not of the scale seen overseas"). Another simulated high inflation, a spike in interest rates, a rise in unemployment and a "significant fall in house prices". While Mr Byres concluded that because overall capital stayed above APRA's minimums, the banks were "reasonably resilient to the immediate impacts of a severe downturn in the housing market", he warned that "this comes with a potentially significant capital cost and question marks over the ease of the recovery".

He said "there is scope to further improve the resilience of the system" with a "focus on prudent capital buffers" that can be "utilised in stress", which is code for more equity. Yet bank bosses say boosting equity will force up their funding costs, which will be "expensive" for the economy.

Michael Fitzsimmons, managing director of the $8 billion equity fund manager JCP Investment Partners, retorted that this is "clearly not true". He argued that as banks increase equity they reduce their risk and therefore the cost of both equity and debt capital.

"Bank executives pedal this bullshit to scare politicians that they will have to increase interest rates if they are re­quired to increase equity capital," he said. "What's true is the value of the call option [subsidy] on taxpayer bailouts falls, but this is a contingent gift that no company should have in a free-market economy."


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