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Blood in the streets – investment lending

Blood in the streets – investment lending

The prudential regulator has shaken the branches when it comes to investment lending in fact I haven’t seen this level of lender reaction since the GFC and maybe not even then.  Let’s look at the results so far lender by lender on investment lending only:

  • AMP have withdrawn completely from investment lending
  • ANZ increased rates on new and existing loans reduced LVR 90%
  • CBA increased assessment and interest rates on new and existing loans including fixed rate loans while tightening servicing
  • Heritage max lending 80% LVR
  • ING increase all interest rates reduced max 80% LVR  and tightened servicing
  • Macquarie increased rates on new and existing loans
  • NAB increased rates on new and existing loans
  • Suncorp something but too obscure to figure out what
  • Westpac reduced discounts and tightened servicing

As for the other lenders on panel – well nothing much has changed.  We can still get 95% investment loans on interest only and we can get interest rates as low as 4.04% variable and 4.29% fixed so the question is; how long can this situation last and how much damage will be done to  the lenders above?

Initial response from clients has been anger.  If the situation persists I can see some second tier lenders doing very, very nicely out of this.

More level playing field for smaller banks

More level playing field for smaller banks

The Australian Prudential Regulator ( APRA ) has announced the the four major banks and Macquarie will be compelled as of 1st July 2016 to increase their risk weighting for home loan lending to 25 percent up from the current 16 percent.   This will bring them a little closer to the 35 percent that applies to other non-IRB accredited lenders which basically represent the rest of the market.

The move will be welcomed by the regional/second tier lenders who have argued for several years that the risk weighting has been biased in favour of the major banks.  This will to some extent level the playing field as the major banks will be required to fund their lending with between $10 and $12 billion dollars of extra capital.  Meanwhile there is still a possibility that APRA could lift the 25 percent figure further, depending on the outcome of the Basel Committee on financial regulations later this year

This will probably result in increased interest rates or more likely reduced discounts, which have recently been seen as high as 1.35% off the standard variable.   Where as ten years ago discounts were closer to 0.60% to 0.80%.

ABC reports Westpac CFO Peter King said that, while Westpac had started increasing its capital position, customers and shareholders would be forced to bear the costs.

“We are well placed for this change, having already taken a number of significant steps to boost our capital position,” he said. “While Westpac is well-placed to meet these changes, increased capital does come at a cost. The cost of holding higher capital will inevitably be borne by customers and shareholders.”?

 

RBA Board leaves cash rate unchanged at 4.75 percent

Glenn Stevens, current Governor of the Reserve bank of Australia left a statement regarding the Board’s decision on monetary policy today. Just as many economic forecasters have predicted, RBA’s Board has kept the cash rate the same at 4.75 percent, a record spell since the last increase on November 2, 2010’s Melbourne Cup.

In the statement, Stevens said, “Conditions in global financial markets have continued to be very unsettled, with uncertainty increasing about both the prospects for resolution of the sovereign debt and banking problems in Europe, and the outlook for global economic growth.”

The uncertainty in the global market and financial unpredictability “have reduced confidence, which could result in more cautious behaviour by firms and households in major countries.”

Australia’s national income has increased considerably because of its very high terms of trade. The investment on service and resources sector is getting better and the government’s spending program has also decreased. The economy is expected to grow but not as early as expected due to factors outside and within, especially due to the global financial turmoil.

Inflation was also taken into account. Stevens said,” the path for inflation may now be more consistent with the 2–3 per cent target in 2012 and 2013.” The cash rate would come down if required. “An improved inflation outlook would increase the scope for monetary policy to provide some support to demand, should that prove necessary.”

RBA’s Board sees the unchanged cash rate appropriate. Australia’s financial conditions have slightly improved. Increased competition has made interest rates particularly fixed rates  for business and housing loans to decline not to mention the funding costs in financial markets which have gone down as well

More out of cycle rate movements due to funding costs

Rate cuts by the Reserve Bank are important however the good intentions seem to be a futile attempt as lenders fail to pass on cuts imposed by the central bank.

Latest report by the KPMG reveals that despite the continued good performance of Australia’s major banks on the global banking stage, they are still affected by the interconnection of new regulatory environment demands’ structural changes and the global funding markets. This could mean that there will be more out of cycle rate hikes happening in the future.

The Major Australian Banks Half Year 2012 report by the KPMG shows a healthy profit acquired by the major for the 2011-2012 half year although the acquired healthy profit lacked growth.

Andrew Dickinson, KPMG’s head of banking, stated, “The major banks’ profit clearly shows we have a strong banking system, however it must be viewed in light of the increased capital that the banks now need to hold. Return on equity (ROE) remains around 16 percent for most banks and shareholders will need to accept that this level of return is all they can expect for the foreseeable future.”

A total of $16.8 billion statutory profit before tax was recorded for 2011-2012 half year where as a total of $16.3 billion was recorded in 2011’s second half. “The banks’ biggest challenge is adapting their business model to cope with the competing strains of constrained lending growth, ongoing funding pressure, ever higher regulatory hurdles, and a transition to new mobile delivery channels and competitors,” shared Dickinson.

The major banks are still facing the challenge brought by the high cost of funding’s impacton margins. KPMG’s Head of Financial Services, Michelle Hinchliffe, stated, “Sustainable cost reduction remains a challenge for the major banks. While they are implementing a number of cost reduction measures, the full impacts are yet to flow through to the results. They need to make structural, long term changes that will sustain a lower cost base.”

KPMG believes that the condition of Australia’s major banks is still very much affected by the global markets’ economic uncertainty and by the funding costs.

Dickinson mentioned, “The global crisis in access to funding has forced the majors ‘back to the past’ where they are wooing domestic deposits to boost their funding. This means deposit competition is intense, and depositors are now being paid 2 percent more (relative to RBA rates) than before the GFC. It is these increased deposit rates which are now having the strongest impact on bank funding costs.”

Hinchliffe however stated that, “Australian banks are well capitalised, continue to maintain strong liquidity positions and are well placed to respond to new global capital and liquidity rules.”

Cash rate down 50 points

In what many believe is a belated reaction the RBA has virtually admitted that they misread the economy and have announced a reduction in the cash rate of 50 basis points down to 3.75 per cent.

The question will now be, how much will the lenders pass on to borrowers.

There can be no doubt that the home market throughout most of the country is very flat with both home buyers and investors very hesitant to commit.  Let’s hope this rate reduction will bring back some confidence and stimulate some home loan activity.

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