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Reserve Bank sets date to ease LVR restrictions

Reserve Bank governor Adrian Orr said today the bank would ease its loan:value ratio (LVR) restrictions on banks’ new mortgage loans from 1 January.

Reserve Bank loan:value ratio (LVR) restrictions on new mortgage loans from 1 January 2019:

  • Up to 20% (increased from 15%) of new mortgage loans to owner-occupiers can have deposits of less than 20%
  • Up to 5% of new mortgage loans to property investors can have deposits of less than 30% (lowered from 35%).

Mr Orr made the announcement when he released the bank’s November Financial Stability Report. He also put dates on 3 other reviews:

  • A final consultation paper on bank capital requirements in December
  • Jointly, with the Financial Markets Authority, reviewing banks’ responses to that review in March, and following up as required, and
  • An ongoing review of conduct & culture in the insurance sector, also with the Financial Markets Authority, to be released in January.

Mr Orr said in today’s report:

“Risks to New Zealand’s financial system have eased over the past 6 months, but vulnerabilities persist. In particular, households remain exposed to financial shocks due to their large mortgage debt burden.

“However, both mortgage credit growth & house price inflation have eased to more sustainable rates, reducing the riskiness of banks’ new housing lending. In response, we are easing our loan:value ratio (LVR) restrictions on banks’ new mortgage loans. If banks’ lending standards are maintained, we expect to further ease LVR restrictions over the next few years.

“Debt levels also remain high in the agriculture sector, particularly for dairy farms, implying ongoing financial vulnerability. Balance sheets need to be further strengthened. In the medium term, an industry response to a variety of climate change-related challenges appears likely, requiring investment.

“While domestic risks have eased, global financial vulnerability has risen. Significant build-ups in debt & asset prices, and ongoing geopolitical tensions, overhang financial markets.

“This vulnerability is highlighted by the current elevated price volatility in equity & debt markets. New Zealand’s exposure to these global risks has reduced somewhat, as New Zealand banks have become less reliant on short-term, and foreign, funding.

“The domestic banking system remains sound at present. We are using this period of relative calm to reassess whether the banking system has sufficient capital to weather future extreme shocks. Our preliminary view is that higher capital requirements are necessary, so that the banking system can be sufficiently resilient whilst remaining efficient. We will release a final consultation paper on bank capital requirements in December.

“The banking system remains profitable, reflecting banks’ low operating costs & strong asset performance. While positive overall, banks’ low costs have been partly achieved through underinvestment in core IT infrastructure & risk management systems in New Zealand. This was highlighted in our review of bank’s conduct & culture with the Financial Markets Authority. We will be jointly reviewing banks’ responses to our review in March, and following up as required. 

“CBL Insurance Ltd was placed into full liquidation by the High Court on 12 November. Aside from CBL, the insurance sector as a whole is meeting its minimum capital requirements.

“However, capital strength has declined and a number of insurers are operating with small buffers. The insurance industry must ensure it has sufficient capital to maintain solvency in all business conditions. Our ongoing review of conduct & culture in the insurance sector with the Financial Markets Authority will illuminate the industry’s risk management capability. The review will be released in January.”

Link:
Financial Stability Report

Attribution: Bank release.

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Reserve Bank publishes first update on banks’ financial health dashboard

Published 27 August 2018
The Reserve Bank published new data on the financial health of NZ-registered banks on Friday, the first quarterly update of key metrics since it launched the bank dashboard in May.

The dashboard is an interactive tool that makes it easy to compare banks on a range of financial information, such as how much capital they have in reserve, whether they are taking risks by concentrating lending too much on any single area, and non-performing loans. The Reserve Bank has 2 aims – to improve the public understanding of banks, and to increase incentives for banks to operate soundly.

Following feedback, the Reserve Bank said on Friday it had made 2 technical improvements which allow users to share charts more easily, and identify & select which banks they wish to compare.

The next quarterly update is scheduled for 26 November.

Link: Dashboard

Attribution: Bank release.

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Heartland Bank lifts earnings 11%

Heartland Bank Ltd increased net profit after tax by 11% to $67.5 million in the year to June. Net operating income rose 15% to $196.8 million.

Chief executive Jeff Greenslade said yesterday the strong growth in profitability was driven by growth in underlying net finance receivables, which were up 12% to $4 billion.

Mr Greenslade said the growth strategy was delivering results in core business – reverse mortgage, motor & small business lending – while the bank’s Australian operations had grown 39%.

Assuming shareholders approve the company’s proposed restructure at the annual meeting on Wednesday 19 September, shares in the new parent company, Heartland Group Holdings Ltd, will begin trading on the NZX & ASX on 1 November.

The bank has entered the new financial year positively, expecting net profit after tax for the June 2019 year to be in the range of $75-77 million – a rise of 11-14%.

Financial highlights for the 2018 year (2017 in brackets):

  • Total comprehensive income, up 14.4% to $71.2 million ($62.2 million)
  • Net profit after tax, up 11% to $67.5 million ($60.8 million)
  • Net operating income, up 15% to $196.8 million ($171.3 million)
  • Impaired asset expense, up 47% to $22.1 million ($15 million)
  • Impairment ratio59% (0.45%)
  • Pretax profit, up 11.5% to $94.3 million ($84.6 million)
  • Basic & diluted earnings/share, 13c (12c)
  • Net tangible assets/share, up 9.5% to $1.04 (95c)
  • Total equity, up 16.6% to $664.2 million ($569.6 million)
  • Net finance receivables, up 12.4% to $4.0 billion ($3.6 billion)
  • Return on equity1% (11.6%)
  • Net interest margin42% (4.46%)
  • Cost:income ratio9% (41.9%)
  • Final dividend5c/share, full-year dividend 9.0c/share

Link: Heartland Bank

Earlier story:
6 August 2018: Heartland aims to add ASX listing in restructure

Attribution: Company release.

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Fitch sees house price slump slowing Australian credit growth

A Fitch research report out this week says the ratings business expects Australian credit growth to weaken as house prices continue to slump.

The research, by 2 Fitch Ratings Inc affiliates, Business Monitor International Ltd & Fitch Solutions Group Ltd, concludes: The ongoing slump in Australian house prices does not bode well for the outlook for the banking sector over the coming quarters as credit growth weakens. This will be compounded by the low interest rate environment & increased oversight by regulators.”

The Fitch researchers expect Australian credit growth to slow to 4.0% in 2018 & 3.5% in 2019.

The graph below, based on Reserve Bank of Australia numbers, shows the percentage change compared to a year earlier:

Link:
Fitch Solutions, 8 August 2018: Australian housing market downturn a major headwind for banks

Attribution: Fitch article.

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“Cynical & deliberate” repossession practices earn Allan Hawkins’ companies fines & refund orders, commission seeks banning orders

2 finance companies headed by former Equiticorp boss Allan Hawkins – Budget Loans Ltd & Evolution Finance Ltd – were fined $720,000 in the Auckland District Court yesterday on 125 charges under the Fair Trading Act.Judge David Sharp also ordered the companies to pay $53,000 emotional harm reparations to 9 victims and $38,000 in refunds & credits to borrowers for repossession tactics he described as “cynical & deliberate”.

The Commerce Commission is seeking banning orders against Mr Hawkins, now 76, and his elder son, Wayne Hawkins, who was also a director at the relevant times, following this sentencing & the earlier conviction of Budget Loans on 34 charges under the Fair Trading Act in 2010.

6 years of misrepresenting repossession rights

The Commerce Commission’s general counsel for competition & consumer, Mary-Anne Borrowdale, set out the companies’ practices. She said that, over 6 years from 2009 until 2014, Budget Loans misrepresented its right to repossess goods and recover interest & costs from borrowers. It also misrepresented amounts borrowers were required to pay under attachment orders and made misrepresentations about the benefits of refinancing existing loans.

Budget bought the distressed loan books of National Finance 2000 Ltd in 2006 and Western Bay Finance Ltd in 2008, and has twice been convicted for its handling of them. After the company was fined in 2010, it undertook to return $500,000 in overcharged interest & fees to borrowers.

In 2016, Budget Loans was convicted on 106 charges but 19 charges were dismissed. The Commerce Commission successfully appealed the dismissal decision, and Budget Loans’ application for leave to appeal to the Court of Appeal was dismissed in November 2017.

Mr Hawkins founded 1980s high-flier, the Equiticorp group. After its demise in the 1987 sharemarket collapse, he & other Equiticorp executives & an advisor were tried in relation to financing arrangements behind the group’s $166 million purchase of NZ Steel Ltd from the Government in 1987. Mr Hawkins was sentenced to 6 years’ jail in 1993.

After yesterday’s court hearing, Ms Borrowdale said: “The court acknowledged today that Budget Loans attempted to create cashflow by getting Western Bay & National Finance borrowers to pay as much as possible for as long as possible. It continually added costs & interest to loans and then repossessed essential goods from borrowers without notice when they couldn’t pay, regardless of whether it was legally entitled to do so.  “The costs of the repossession were, for the most part, higher than the value of the goods and sometimes Budget Loans simply threw repossessed goods away rather than selling them. It also obtained judgments against some borrowers, but continued to add interest & costs and demanded more from borrowers than the courts had awarded, and to misrepresent its right to repossess.

“Where loans were not secured, Budget Loans sought to convince some borrowers to sign new, secured loans by telling them that they would get a discount on their loan balance. However, the amount of the discounted loan was higher than the amount the borrower was actually required to pay.

“Budget Loans’ conduct & misrepresentations kept vulnerable borrowers in a cycle of debt & repossession. It knowingly engaged in illegal repossessions of essential items from people that it knew were already living in hardship. The financial & emotional distress caused by this conduct to borrowers & their families should not be underestimated.”

83 of the charges were for misrepresentations around repossession, including where there was no valid right to repossess a secured item of property, such as a vehicle or household goods, or where there was no outstanding loan balance to be paid.

“In some cases Budget Loans stripped houses almost bare. In other cases, it repossessed items that it should have known were of low value, and dumped them. Its own loan notes include such comments as ‘someone’s great idea to undertake an illegal repo’ and ‘debtor not to know we can’t repo’.”

29 charges were for adding interest & costs to a loan balance after repossession, when that is not allowed under the Credit Repossession Act.

Ms Borrowdale said: “One borrower declared herself bankrupt when told her loan had ballooned from about $9000 to $57,000. In fact she had less than $2500 to pay at that time. 10 charges were for misrepresentations about adding interest to loans, beyond amounts in attachment orders issued by the courts. One borrower’s loan balance was $8600 following an attachment order, but it was ‘recalculated’ to nearly $56,000.”

The final 3 charges were for misrepresentations about the benefits of refinancing with Budget Loans.

Allan Hawkins is now sole director of Budget Finance & its shareholder, Cynotech Securities Ltd. He & his wife, Laurel, own 99.98% of Cynotech.

He is also sole director of Evolution Finance. Its owner, the previously NZX-listed Cynotech Holdings Ltd, went into liquidation in 2013 after close funding supporters decided they’d no longer pay its overhead & infrastructure costs.

Earlier stories:
19 April 2017: Judge told to reconsider 19 dismissed charges against Hawkins loan companies
118 July 2016: Hawkins’ finance companies guilty on loan contract enforcement
 7 December 2014: Commission files criminal charges against 2 Allan Hawkins finance companies
9 November 2013: Commission tells Allan Hawkins’ finance companies to stop repossessions
31 July 2013: Hawkins goes to McDonald Vague for Cynotech liquidation
11 July 2013: Cynotech share trading halted after backers end support
15 June 2011: Cynotech loss increases as it clears decks
12 August 2010: NZX refuses Cynotech request for waiver
11 August 2010: Cynotech suspended
4 August 2010: Cynotech talks departure, NZX talks suspension
28 July 2010: “Welcome letter” from Hawkins’ Budget Loans to National Finance borrowers came with an illegal $15 fee
16 June 2010: Cynotech slips to loss
14 April 2010: Remaining Cynotech shares to move to NZAX
20 January 2010: Hawkins renews Cynotech privatisation bid
23 December 2009: Hawkins withdraws Cynotech bid after Takeovers Panel asks questions
21 April 2008: Cynotech doubles receivables book to $60 million-plus in 4 months
9 October 2006: Allan Hawkins buys National Finance (Payless Cars) loan book

Attribution: Commission release.

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ANZ announces over $800 million of negatives week before half-year result

8 days before the scheduled release of its half-year financial report, ANZ Banking Group Ltd disclosed an $A632 million hit to its bottom line following sale of Wealth Australia & OnePath businesses.

The bank also disclosed an $A16 million first-half hit for legal & other costs related to the Australian royal commission into banking, and an anticipated $A50 million commission cost in the second half.

With an $A80 million addition of restructuring charges, the total comes to $A778 million ($NZ827 million).

The bank is scheduled to announce its half-year financial results next Tuesday, 1 May, but issued an advance package of information yesterday “to assist market participants preparing to analyse the group’s financial performance”.

ANZ created OnePath when it bought various ING businesses in Australia & New Zealand in 2010. It ran into immediate outrage in New Zealand when it tried to lift the price on management contracts on 2 NZX-listed former ING entities, the ING Property Trust & ING Medical Properties Trust, which became the Argosy Property Trust (now Argosy Property Ltd) and the Vital Healthcare Property Trust.

Argosy became internally managed and Vital’s management contract is held by a subsidiary of the Northwest Healthcare group headed by Paul Dalla Lana of Toronto, Canada.

ANZ’s disclosure of losses now arises from its reclassification, as discontinued operations, of Wealth Australia businesses it’s sold. The bank announced 2 separate Wealth Australia sales last year:

  • Sale of the OnePath pensions & investments (OnePath P&I) and aligned dealer groups (ADG) business to IOOF Holdings Ltd on 17 October, and
  • Sale of the life insurance business to Zurich Financial Services Australia on 12 December.

As discontinued operations, their assets & liabilities have been reclassified as at 31 March as held for sale and measured at the lower of their carrying value & fair value less costs to sell.

Consequently, the bank said, “an $A632 million loss has been recognised, comprising an $A277 million net loss on measuring the assets & liabilities at fair value (including a treasury shares adjustment of $A396 million) and future separation & transaction costs to complete both transactions of $A355 million”.

Wealth Australia businesses the bank retains are ANZ Lenders Mortgage Insurance, ANZ Share Investing, distribution of general insurance products and ANZ Financial Planning. The bank said the profit for these retained businesses in the 2017 financial year was $A95 million before group elimination adjustments.

Restructuring charge

The bank said the ANZ group had incurred about $A80 million in restructuring charges within cash profit in the 2018 first half, compared to charges of $A26 million & $A36 million in the second & first halves of 2017. “In large part, the 2018 first-half charges relate to the implementation of agile ways of working in the Australia division,” the bank said.

In other accounting details, ANZ said its total net gain on sale from divestments in the 2018 first half was $A138 million, comprising:

  • an $A85 million net gain on sale for the Asia Retail & Wealth businesses, including a gain on sale for Vietnam retail
  • an $A86 million loss on sale of Shanghai Rural Commercial Bank, which includes the offset to $A58 million of equity-accounted earnings (recognised in cash profit in the 2017 first half and identified as a large/notable item), which increased the carrying value. Allowing for this, the total net loss is $A28 million, reflecting additional hedging & tax costs associated with the extended completion
  • an $A121 million net gain on sale for the first tranche of multi-currency conversion. The sale of the second tranche is subject to a put option exercisable in the fourth quarter of the 2018 financial year.
  • an $A18 million cost recovery related to UDC. The derivative valuation adjustment charge for the Institutional Markets business is not material in 1H18. The charges for 1H17 and 2H17 are shown in the large/notable items template.

ANZ announced the $660 million sale of its subsidiary UDC Finance Ltd to the Chinese HNA Group in January 2017, but the Overseas Investment Office declined the application in December, saying it was dissatisfied by HNA’s opaque ownership trail.

Link: Guide to ANZ’s half-year 2018 results

Earlier stories:
21 March 2018: ANZ says listing among UDC options
18 October 2017: ANZ sells pensions & investments businesses to IOOF
12 January 2017: ANZ sells UDC Finance to Chinese HNA Group
 2 November 2016: ANZ sells Asian retail & wealth business to DBS
 29 July 2011: OnePath management sell-off totally unstuck
9 June 2011: 3 institutions fight $32.5 million Argosy management buyout, demand manager be sacked
20 April 2011: ANZ proposes internal management for 2 NZ property trusts
25 March 2010: ING to get its own brand under ANZ Bank ownership

Attribution: Bank release.

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ANZ says listing among UDC options

ANZ Banking Group Ltd will explore a sharemarket listing for its subsidiary UDC Finance Ltd after the Overseas Investment Office’s December decision to decline the Chinese HNA Group’s application to buy the finance company.

ANZ NZ chief executive David Hisco said yesterday relisting UDC – it was listed in 1965 until ANZ privatised it in 1980 – was one of a range of strategic options for UDC’s future. It’s New Zealand’s leading asset finance company funding plant equipment, vehicles & machinery.

Mr Hisco said: “We have been looking at strategic options for UDC’s future for some time as part of ANZ’s strategy to simplify the bank and improve capital efficiency. While UDC is continuing to perform well and there is no immediate requirement to make decisions, after last year’s planned sale to HNA did not proceed it makes sense to keep examining a broad range of options for UDC’s future.

“This will include exploring whether, subject to market conditions, an IPO would be in the interests of UDC’s staff & customers, and ANZ shareholders.

“The range of strategic options we have for UDC, including approaches we have received regarding the business and the option of retaining it, will take a number of months to examine before any decision is made. In the meantime, it will continue to be business as usual for UDC.”

ANZ agreed in January to sell UDC, plus the Esanda name & trademarks in Australia & New Zealand, to HNA for $660 million.

But the Overseas Investment Office said in its decision in December: “The information provided about ownership & control interests was not sufficient or adequate for the OIO to determine who the relevant overseas persons are for TIP-HNA’s application to acquire UDC.

“We were therefore not satisfied that the investor test in section 18 of the Overseas Investment Act was met. Without knowing who the relevant overseas person is, the OIO cannot be satisfied that section 18 has been met, therefore we are unable to grant consent.”

HNA has since disposed of various assets, including New York hotels and parts of the Hilton hotels business which it held for only a few months.

Earlier stories:
21 December 2017: HNA fails in bid for UDC for lack of transparency
12 January 2017: ANZ sells UDC Finance to Chinese HNA Group

Attribution: Company release.

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Australian investors switch loans to owner-occupier status after differential introduced

The Reserve Bank of Australia candidly noted on Friday that housing investors had switched $A61 billion to owner-occupied status after it introduced an interest rate differential between the 2 categories in 2015.

In its financial aggregates for November, the bank said: “Following the introduction of an interest rate differential between housing loans to investors & owner-occupiers in mid-2015, a number of borrowers have changed the purpose of their existing loan.

“The net value of switching of loan purpose from investor to owner-occupier is estimated to have been $A61 billion over the period of July 2015-November 2017, of which $A1.2 billion occurred in November 2017.

“These changes are reflected in the level of owner-occupier & investor credit outstanding. However, growth rates for these series have been adjusted to remove the effect of loan purpose changes.”

Link: Reserve Bank of Australia, financial aggregates November 2017

Attribution: Bank release.

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HNA fails in bid for UDC for lack of transparency

The Overseas Investment Office said today it had declined the Chinese HNA Group’s application to buy UDC Finance Ltd from the ANZ Bank for lack of ownership transparency.

International concerns about HNA’s opaque nature have circled the acquisitive group for months.

TIP-HNA NZ Holdings Ltd – immediate owner Global TIP Holdings 5 BV of Amsterdam – applied under the Overseas Investment Act to acquire 100% of the shares in UDC Finance Ltd from ANZ Banking Group Ltd.

ANZ agreed in January to sell UDC, plus the Esanda name & trademarks in Australia & New Zealand, to HNA for $660 million.

But the Overseas Investment Office said in its decision today: “The information provided about ownership & control interests was not sufficient or adequate for the OIO to determine who the relevant overseas persons are for TIP-HNA’s application to acquire UDC.

“We were therefore not satisfied that the investor test in section 18 of the Overseas Investment Act was met. Without knowing who the relevant overseas person is, the OIO cannot be satisfied that section 18 has been met, therefore we are unable to grant consent.”

The decision was delegated to the Overseas Investment Office as it involved significant business assets only. TIP-HNA can apply to the High Court for a judicial review of the decision. The Overseas Investment Office said it would publish copies of decision documents on its website early in the New Year.

ANZ assesses options

ANZ group executive & NZ chief executive David Hisco said: “While the sale agreement between the parties remains in place, unless HNA successfully overturns the OIO decision the sale will not proceed.

“We don’t know if HNA will attempt to overturn the decision. If the sale does not proceed, we’ll assess our strategic options regarding the future of UDC. It’s a great business and there is no immediate requirement to do anything, particularly given the strength of ANZ’s capital position.

“UDC continues to be a highly profitable & strong business, with great staff & customers, and a growing loan portfolio across a range of industries.

“UDC’s focus remains on its core business of financing vehicles & equipment for people & companies across New Zealand. So, it will be business as usual for our staff & customers.”

Mr Hisco said this OIO decision had no impact on the recently announced $A1.5 billion on-market buyback of ANZ shares. The UDC transaction proceeds are equivalent to about 10 basis points of APRA CET1 capital. If the transaction does not go ahead, ANZ’s 2018 financial year earnings will no longer be adjusted for the sale.”

HNA in pursuit of growth through acquisitions

The HNA Group is based on Hainan Island off the south coast of China and operates globally in the tourism, logistics & financial services sectors. One of its subsidiaries, Hainan Airlines, began a regular service of 3 flights/week between Shenzhen & Auckland on 31 December 2016. In October 2016, HNA agreed to buy 25% of Hilton Worldwide Holdings Inc from asset manager the Blackstone Group LP for $US6.5 billion.

HNA Group was founded on the business of Hainan Airlines Ltd in 1993 and has grown through acquisitions over the last 6 years into an international conglomerate with $US90 billion of assets. TIP Trailer Services is a European transport & logistics arm of HNA.

Links:
OIO, 21 December 2017: Overseas Investment Office declines consent to TIP-HNA
HNA Group
Bloomberg, 11 December 2017: HNA unit bonds fall to record amid concern of lender support
7 December 2017: HNA rules out default in coming years after yield surge
China Human Rights Accountability Centre, 15 August & 19 October 2017: Open letter: Call for investigation into HNA Group’s activities in the US and probable links with corruption at top of Chinese Communist Party

Earlier stories:
12 January 2017: ANZ sells UDC Finance to Chinese HNA Group
30 October 2016: Hainan conglomerate adds Hilton stake to its international expansion

Attribution: OIO & ANZ releases, HNA.

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China Construction Bank registers second NZ entity

The Reserve Bank today registered China Construction Bank Corp, incorporated in China, to provide banking services in New Zealand. It will operate in New Zealand as a branch.

A New Zealand-incorporated subsidiary, China Construction Bank (NZ) Ltd, has been registered to provide banking services in New Zealand since July 2014.

For the 9 months to September, the subsidiary disclosed today that it lifted its operating income from $6.46 million in 2016 to $19.39 million, and improved from a $778,000 pretax loss last year to a $10.2 million profit. After tax, the 2017 9-month profit was $7.35 million. It had $199.2 million of equity in 2016 after negative retained earnings of $6.2 million, but took equity to $202.7 million this September after adding $3.7 million of retained earnings.

The bank lifted its lending from $523 million at September 2016 to $1.445 billion, total assets from $712 million to $1.6 billion. It’s lifted its provision for impairment from $522,000 to $1.45 million. Customer deposits grew from $21.25 million to $118.9 million. The bank had $782 million of residential mortgages, none at a loan:value ratio over 80%.

The 25 registered banks in New Zealand include 10 branches of overseas banks, 4 subsidiaries & 3 branches of Australian banks, Bank of China (NZ) Ltd and the Industrial & Commercial Bank of China (NZ) Ltd as well as the 2 China Construction entities, and 5 New Zealand banks not owned elsewhere.

Link: Register of banks

Attribution: Reserve Bank release & register.

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