Finance Market Update - 9 November 18
The big 4 banks have announced their 2018 full year profits, and while still billions of dollars, is unsurprisingly down due to increased costs. We talk about this and the growing trend towards non-major banks in this update.
Declining wealth affects us all
In a recent update we commented on the slow Spring season we are facing and declining auction clearance rates. This week Core Logic, the country’s leading property data provider, claimed that the annual decline this year has been the biggest in 28 years, wiping roughly $160 billion in property value out which impacts almost everyone, especially since 60% of people’s wealth is tied up the property.
The decline of property prices is set to continue from downward pressure coming from the credit crunch and slowing demand from buyers.
Repercussions of a credit crunch can be extremely negative. We have previously discussed the situation of mortgage prisoners who can’t refinance because they borrowed too much / the bank over lent to them in the first place, or worse get negative equity where the mortgage/debt on a property is greater than the value of the property itself – all of which ties into the issue of declining wealth and property prices – which is an issue for us all. And the more these unfortunate situations arise the higher the impact it has on declining property prices.
Because of the declining prices, recently Skyward Financial has been talking to many clients of ours about refinancing their mortgage to improve their cash flow position by lowering repayments or fixing the rate to mitigate rising rates, contact us for a no obligation free consultation.
Big banks and big profits
The 2018 results are in. NAB $5.7 billion, ANZ $6.49 billion and Westpac $8 billion have been announced in the past few weeks. CBA announced their full financial year results back in August for $9.23 billion, which was down almost 5% from the year before.
Combining the most recent full year results for each of the big 4 banks the total profit pool is $29.49 billion – that is a significant result, but one that will likely be impacted over the next year by the Royal Commission.
While this is a giant profit pool for what are essentially homogeneous banking services offered by each of the big 4 banks, they are incurring increased funding and compliance costs, for example, Westpac announced that it increased customer payment provisions from $46 million to $281 million, so this giant profit pool is under threat.
We have also talked about how the rising compliance costs for banks will ultimately result in higher costs for customers, and these increasing bills from the Banking Royal Commission are set to continue. Westpac’s increase is not an isolated incident, all of the big banks are making provisions to pay back customers, lawyers or government fees.
The profit results will likely make a few customers unsettled, particularly in the aftermath of the royal commissions uncovering of greed and scandals. At Skyward Financial we work across a spectrum of banks, non-banks and specialist lenders so if you are unhappy with your current bank we should talk.
Shifting borrower sentiment Bank bashing has almost been a public sport for Australians over the past few decades as we hate to hear about how much their CEO’s earn and how much profit they make from their customers. Will this be exacerbated with rising rates and royal commission scandals?
Well borrowers have voted with where they get loans from. Months ago we wrote about “second tier lenders” and the growing appetite from borrowers to use them, and just last week the figures from the ‘Mortgage & Finance Association of Australia’ (of which Skyward Financial is a top tier full member) released an industry report which showed the big 4 bank market share has dropped from 51% to 45%.
That is a clear sign of a shift in borrower sentiment away from the big 4 banks to work with other lenders.
It is likely the Royal Commission played a big role in this decline along with rising interest rates but we continue to see great service and competitive rates and products coming from second-tier banks, non-bank and even specialist lenders depending on the situation, so we expect this trend to continue.