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Impairment expense has remained low; however, it did increase for all four banks compared with previous periods. This reflects higher arrears and 90+ day delinquencies showing some early signs of deterioration.
The 1H-2019 results highlight the challenges for the Australian retail banking sector with asset quality emerging as a potential issue as mortgage arrears continue to rise across the board. ANZ reported that 5% of its portfolio was in negative equity and home loan delinquencies (particularly 30 days past due) have risen from 1.8% of the portfolio in Sept 2018 to 2.25% for 1H -19. NAB reported an increase of 18bps in its 90 days past due delinquencies and WBC also saw a deterioration in its 90+ days past due loans. The banks’ asset quality is showing some signs of stress, as the 90DPD+GIA/GLA ratio has increased by 8 basis points compared to the half ending March 2018.
After a period of strong house price growth the housing sector is facing a challenging outlook with house prices in Sydney and Melbourne falling at their fastest rate.[i]
The headwinds the banks are facing include:
· High levels of household debt to GDP[ii]
· High levels of household debt to household disposable income[iii]
· Falling Australian house prices[iv]
· Declining housing loan approvals[v]
· Low consumer confidence[vi]
Together with tightening credit conditions these headwinds are likely to affect credit quality negatively. The risks to the downside are mounting and could impact the asset quality for the banking sector, which has been benign for several years.
In its latest Financial Stability Review the RBA noted: “Risks to the household sector have increased over the past six months given weak housing market conditions. Housing prices have fallen significantly in Sydney and Melbourne after the earlier large run-up in prices, while in Perth and other mining exposed regions, prices have been declining for several years.
Indicators of financial stress remain low outside the mining-exposed regions. However, the value of housing loans in arrears has drifted up from very low levels.”[vii]
Given the Royal Commission’s focus on misconduct, banks have continued to address operational issues and earn back trust.
Significant culture change is required to meet the regulators determination to use the ‘full extent of its new powers’ to ensure there is ‘meaningful change to meet the goals of a fair, strong and efficient financial system’.
As APRA’s Wayne Byres said, there needs to be more investment in operational resilience and more needs to be done to build cultural resilience, ‘a multi-dimensional problem requires a multi-dimensional solution’.[viii]
For instance, accountability regimes like BEAR, are at their heart about cultural change. BEAR pivots around making sure organisations and their most senior people prevent, detect, and properly fix problems. It is about establishing and documenting what accountabilities Directors and the most senior executives face. This requires setting standards of conduct, and being held to account through remuneration and reputational consequences. In addition to acting honestly and with integrity, and taking due care and diligence, it also requires being open, co-operative and constructive with APRA (and soon ASIC), and taking steps to protect the organisation’s prudential standing and prudential reputation.
While the remuneration aspects of BEAR – the deferral of part of variable pay – has gathered particular attention, this is in reality the least important aspect of what is really driving cultural change. The reality is no-one wants to fail, or to be seen to have failed.
Boards and executives are being held to community, and not just legal, standards.
Questions CROs and business units should be asking include:
1. Have we clearly communicated the organisation’s risk tolerance?
2. Have we created a cross-enterprise customer view of risk?
3. Have we effectively incorporated stress testing into our risk management processes?
4. Have we effectively added risk assessment into our new products and services?
5. Is our data collection, aggregation, use and reporting robust?
6. Is operational risk effectively incorporated into evaluating variance and performance management?
7. Do we monitor and supervise third parties to mitigate risk?
8. Do we effectively measure our performance in meeting the promise we make customers?
9. Are our risk management processes accurate, reasonable and have integrity?
10. Do we have the right capabilities in our risk and compliance teams?
11. Can we effectively manage significant and emerging risks, and regulatory obligations?
For more on the Australian Major Bank Results click here.
[i] Corelogic – ‘Most Capital Cities Have Now Seen Values Fall Below Their Peak As The Housing Downturn Becomes More Widespread’ – March 2019; Refer https://www.corelogic.com.au/news/most-capital-cities-have-now-seen-values-fall-below-their-peak-housing-downturn-becomes-more
[ii] 120.5% at Q3 2018. Refer https://tradingeconomics.com/australia/households-debt-to-gdp
[iv] Down 5.1% yoy to Q1 2019. Refer https://tradingeconomics.com/australia/housing-index and https://www.rba.gov.au/chart-pack/household-sector.html
[vii] RBA’s Financial Stability Review – April 2019 – page 26
[viii] Byres, Wayne, Building resilience in three dimensions, Australian Financial Review Banking and Wealth Summit, 27 March 2019. Refer https://www.apra.gov.au/media-centre/speeches/building-resilience-three-dimensions
Mike is the Deloitte Risk Advisory FSI Industry Leader, and also head of the Regulatory Risk business. Mike has spent the last 30 years working in Australia, the UK and New Zealand, advising the banking and financial services sector in the areas of Governance, Operational and Strategic Risk, Regulatory Compliance, Conduct and Culture.
Steven is the lead Partner in Deloitte’s Treasury Advisory practice. Steven has over 18 years’ experience in Australia and the UK auditing and advising financial institutions and large corporates on financial risk and finance matters, including financial instruments accounting, in particular IAS 39 and IFRS 9, financial instruments valuations and impairment. Steven leads a national team of 60 professionals with deep experience in financial risk matters including credit risk, market risk and liquidity risk. The team also consists of experts in banking regulations specific to market, credit and liquidity risk as well as regulatory capital. The team also consists of experts in quantitative finance and financial product valuations, modelling and pricing.