Home lending still remains weak

ANZ chief Shayne Elliott is by no means getting excited about green shoots in the housing market.

While he is seeing first-home buyers return and a bit more demand coming back into the market, Elliott doesn’t think home lending across the sector will bounce back for at least 12 months.

The issue is partly due to a shortage of houses being placed on the market as potential sellers bet on a further improvement in property prices.

The central bank’s numbers on Thursday showed a tick down in annual housing credit growth to a new record low of 3.1 per cent, and total credit was even more sluggish printing at 2.7 per cent. The latter is the slowest annual growth since mid-2011.

Elliott reckons the numbers are even worse when you annualise the past three months, with housing credit at about 2 per cent.

Over the next 12 months his best guess is that home-loan growth will come in somewhere between 2 per cent and 3 per cent.

ANZ has, of course, had its own set of problems in home lending after a spate of systems issues and reacting too fiercely to heightened regulator focus on responsible lending laws.

Those problems coupled with slower industry growth put a $7bn dent in the bank’s housing book for the year ended September 30. It now sits at $265bn.

Application volumes picked up, though, in the fourth quarter and ANZ cited improved momentum into its 2020 year.

The bank now also wants to at least halve the number of steps in its mortgage process, either by changing current practices or redesigning the whole process.

ANZ is also having to work harder on the deposits front, where record low interest rates are prompting savers to shop around.

As ANZ’s Australia retail and commercial banking boss Mark Hand put it: “There is a lot less lazy money”.

ANZ cited a figure of about $110bn of deposits globally that are already at or near-zero rates.

The door also remains ajar to further customer compensation pain at ANZ.

“I can’t tell you what we might find tomorrow,” Elliott said.

Hurdle rates

Elliott is certainly on the same page as Reserve Bank governor Philip Lowe, who this week urged businesses to scrap outdated return “hurdle rates” for their investment plans and consider projects with longer-term pay offs.

ANZ’s return on equity dipped to 10.9 per cent in the year ended September 30, and the bank is looking at what its appropriate target rates of return should be for each of its units. The starting point is a lower cost of capital of 8 to 8.5 per cent, with the target to be a decent margin over that.

But there are stark differences across divisions. ANZ’s Australian retail and commercial business has a return-on-equity of about 18 per cent and ANZ’s institutional arm printed in the order of 10 per cent, with both units backed by similar amounts of capital.

So it’s no wonder Elliott fielded a spate of questions on the institutional bank’s strategy and whether it would shrink further.

Whichever way you look at it investors are in for a long period of lower returns at the major banks. Commonwealth Bank’s cash return on equity fell to 12.5 per cent as at June 30 and we’ll hear from Westpac and NAB next week.

Across the ditch

There are just five weeks of treading water for the big banks before they learn of the final structure of capital reforms in New Zealand.

The central bank in NZ will unveil its blueprint in early December and the dominoes will start to fall by way of the response, albeit over a five-year implementation phase.

The potential fallout and scope of the change has ANZ boffins peddling hard on roughly seven streams of work as it readies for possible capital review outcomes.

The ANZ action team is meeting weekly to brainstorm on the topic and the board is being kept across the developments.

Among its proposals, the Reserve Bank of New Zealand wants the common equity tier-one requirement for large banks to increase to 16 per cent, from 8.5 per cent currently. It is also pursuing a deposit protection scheme.

Given ANZ’s common equity tier-one is sitting at 11.4 per cent, well above the domestic banking regulator’s 10.5 per cent “unquestionably strong” threshold the bank is not coming from a standing start. But given resolving challenges in NZ featured in Elliott’s new six-point plan, clarity and resolution on the capital topic can’t come soon enough.

“It will force us to be more focused,” Elliott said on Thursday.

But there’s another sore point across the ditch as well.

ANZ’s NZ board is yet to appoint a permanent boss after the abrupt departure of David Hisco over an expense scandal.

But the wheels are turning on the selection process. This column understands and the NZ board — led by former NZ Prime Minister John Key — is aiming to make a permanent appointment by the year’s end.

ANZ announced Mr Hisco’s exit in June after revealing questionable expenses were claimed, amounting to tens of thousands of dollars. They related to chauffeured cars as well as wine storage.

Antonia Watson, who has led the NZ retail and business banking units since 2017 and prior to that was finance chief, is acting in the NZ CEO role while the search happens.