Harbour Asset Management managing director Andrew Bascand last week asked lots of prickly questions of Australian banks and other financial companies and says it is not clear anything is broken. Business editor Dene Mackenzie reports.
Sometimes perception does not bear the truth.
Factors are ignored and experts unheeded or discounted as they are deemed too close to the issues, Andrew Bascand says.
The managing director of Harbour Asset Management said the prickly issues were well known.
Market sentiment could swing wildly and questions to experts needed to be asked face-to-face to find reality.
‘‘In our most recent trip to see analysts and financial companies in Sydney, we were struck by several inside views.''
Australia was not in a recession, far from it, he said.
There was a degree of ‘‘moderate optimism'', tempered by the need for reform on several fronts.
Business was still focused on cost but productivity and technology investments were more important than cutting employment.
Perth, and some mining towns, were seeing both income and house price deflation.
Elsewhere, trends in the housing sector remained benign, at worst.
‘‘These conditions are not conducive to a major deterioration in impairments.''
Specific loan concerns had been highlighted, Mr Bascand said.
Dairy sector risk had been quantified and resource and energy sector exposures were still largely investment grade.
Those issues could well have an impact on the new quarter's impairment levels but all seemed controlled and well within reasonable provisioning.
There might be some complacency about the potential for further waves of economic or commodity price weakness.
However, loan-to-value rations in housing and institutional lending were relatively low, he said.
Perhaps Australian executives were a ‘‘little concerned'' with more recent New Zealand dairy price weakness and stress tests but there was a calm approach in dealing with investor concerns about those issues.
The agenda for the banking system to hold even more capital was softening. Australian banks already sat in the top quartile of global capital ratios.
‘‘The banks we spoke with said the regulator is more focused on risk weights for lending, on lending classification by risk and general lending criteria. There is a growing perception higher capital requirements will only result in a further rise in both mortgage and business interest rates as banks seek to maintain a reasonable return on equity.''
During the next two to three years, risk weights for lending might rise further, Mr Bascand said.
Floors for overall portfolio risk weights were being discussed globally.
But taking the lead from the United Kingdom, there was a general perception total banking system capital was already at a high level and the conversation needed to move on to consider liquidity, risk weighting classifications and lending practices.
When questioned on more general lending practices, the banks said recent media concerns had led to a further check on their controls.
They said all lending practices were tightened further in 2014.
Investor loans, in particular, had significant controls and were now much less than 10% of lending.
Interest-only loans had higher interest rates and all borrowing was subject to a 7%-plus rate stress test.
Directors and senior executives of the banks confirmed original bank statements were viewed to check borrowers' income and expenditure.
New mortgage applications were also reviewed in Australia and New Zealand - not offshore as suggested by some.
The regulator continued to be focused on auditing lending practices, he said.
Turning to wealth management, the banks remained divided about how best to approach the sector.
Advice practices had been generally weak and both Commonwealth Bank and ANZ were widely reported for weaknesses in some life insurance processes recently.
National Australia Bank had sold its life business and more formally separated itself from its private bank JB Were.
ANZ also made several changes recently to its wealth management reporting lines, Mr Bascand said.
‘‘It seems banks are keen to distribute life, general insurance and wealth products but seem generally less enamoured with operating these businesses.''
In part, that reflected both the capital intensity of insurance and the regulatory and consumer challenges facing the wealth management and investment advice environment in Australia.
The superannuation industry had navigated its way through a significant reform agenda, he said.
Wealth management advice was increasingly focused on the post-retirement income generating years.
Annuities remained a significant focus as part of the solution.
Self-managed superannuation My Super and ‘‘robo-advice'', or automated advice, were also having an impact on margins.
Financial technology disruption remained a general risk for incumbents. Some of the banks were leading the charge with their own disruption.
Consumers in Australia and New Zealand were already inundated with bank-led ‘‘fintech'' solutions.
Wealth management was more exposed to robo-advice disruption, Mr Bascand said.
A more general discussion with each institution on longer-term technology disruption around blockchain (such as Bitcoin) and quantum computing (theoretical computing) yielded little insight.
All the banks had joint working groups on improving the payments system to ward off a disruptive social media-based change in the payments system.
A giant spreadsheet with everyone's ‘‘ledger'' instantaneously connected was apparently the future, he said.
The cost base of the Australian banking system was an astonishing $40 billion a year.
Blockchain technology would significant lower costs, so the prize was worth the investment.
Conceptual beta trial implementation was still years away but lots of talk about blockchain and quantum computing was expected in coming years.
‘‘Overall, we asked lots of prickly questions of banks and other financial companies. It isn't clear anything is broken. In fact, higher capital, stronger lending practices and senior executives thinking about technology suggests a very healthy financial system.''
Much of the outlook depended on the bigger trends in the Australian economy and commodity prices, Mr Bascand said.
‘‘We generally heard honest responses to our questions. And while the recent recovery in share prices leaves less upside, we liked the expression that right now it is probably better to ‘hug the cactus'.''
