James Frost & James Eyers | The Australian Financial Review | 1 May 2019

https://www.afr.com/business/banking-and-finance/anz-says-7-25pc-buffer-has-to-go-20190501-p51j0g

ANZ chief executive Shayne Elliott urged the prudential regulator to scale back the buffer requiring new borrowers have the capacity to pay a 7.25 per cent interest rate, warning it was forcing the bank to turn away one in five loan applicants.

Mr Elliott supported a cut in the Reserve Bank’s record low 1.5 per cent cash rate at its pre-election board meeting on Tuesday next week, but warned that this might not stimulate the property market unless the servicing buffer also was lowered.

Mr Elliott made the plea as ANZ’s small uptick in first-half profit was overshadowed by a 12 per cent plunge in net profit from its Australian operations due to a weaker property market in an ominous sign for the sector.

A downbeat Mr Elliott said the time was right to revisit the buffers established five years ago by the Australian Prudential Regulation Authority as the Reserve Bank considers a rate cut and lenders grapple with responsible lending laws.

“The lower interest rates get, the less likely it is that rates get to 7.25 per cent any time soon, so I think it’s time to rethink it,” Mr Elliott said.

The serviceability measures were introduced by APRA in December 2014 to put the brakes on a runaway housing market and required banks to assess all borrowers against a rise of 200 basis points, or a floor of 7 per cent. Banks typically add another 25 basis points to the APRA buffers. Since it was introduced, the RBA has cut rates by 100 basis points.

Reducing the serviceability requirement would increase borrowing capacity and provide an alternative measure to a cash rate cut that would stimulate demand in the sagging housing market.

On Monday The Australian Financial Review reported that speculation was building that the RBA and APRA were considering lowering the buffer by 50 basis points as an alternative to cutting the cash rate by 25 basis points.

Mr Elliott said the argument for a small rate cut was sound. It would give home owners some breathing space and “put a bit more juice into the economy” however the buffers meant the bank would continue to turn away applicants who could not service a loan at 7.25 per cent.

A spokesperson from APRA declined to comment.

‘A profound impact on Australia’

Mr Elliott also warned the outlook for Australian banks was deteriorating, as stagnant wage growth and lower property prices collided with heavy handed regulation, saying the cost of getting the balance right was more than just credit risk.

“If you make a mistake and don’t have thorough lending processes, that cost might be an increase in regulatory capital or it might be a fine,” he said.

“The royal commission and planned law changes are having a profound impact on Australia.”

Efforts to transform ANZ over the last three years put it in good stead, however the pace of change was accelerating and it could not afford to stop the search for efficiencies, Mr Elliott said.

“The market has been changing even faster, headwinds we saw in 2016 are even stronger than we expected,” he said.

ANZ reported a 2 per cent rise in net profit to $3.56 billion, based on continuing operations, however its statutory net profit after tax was 5 per cent weaker to $3.17 billion, as the bank struggled to balance growth with its responsible lending obligations.

“The risk and cost of doing business has risen as a result. That is not a complaint but a reality,” Mr Elliott said. “We do not believe there is any going back.”

‘A rate cut is unlikely to help’

Perpetual is one of ANZ’s largest shareholders with 14.6 million shares worth $409 million. Deputy head of equities Vince Pezzullo said it was hard to see a catalyst for improvement in the sector with the election looming.

“They have underperformed quite a bit and it could remain subdued for quite a while. A rate cut is unlikely to help,” Mr Pezzullo said.

ANZ said there was a small rise borrowers more than 90 days overdue on their mortgage repayments, with between 500 and 600 families out of the bank’s one million customers unable to keep up.

“It’s terrible for those 500 people but it is 500 people,” Mr Elliott said.

“But there is a trend happening. There is a slow increase in the number of people getting into difficulty repaying their mortgage. The numbers are very small but it is increasing,” Mr Elliott said.

Some customers had built wage rises that never emerged into their budget which forced a decision to downsize when they could no longer afford to meet the payments.

“Our data shows there is more stress in households .. some of that is due to stubbornly low wage growth,” Mr Elliott said.

“When customers buy a house most will generally make some assumptions about our future wage growth … for many people that is not happening.”

Perpetual’s Mr Pezzullo said the lack of growth in the Australian operations had been countered by the strong focus on cost control. The bank has delivered lower costs in five consecutive halves.

‘A marathon, not a sprint’

Airlie Funds Management founder and portfolio manager John Sevior said the result was better than expected however the bank only had a few levers at its disposal to deliver better outcomes.

“Market conditions remain very difficult so in the absence of much revenue growth all the banks will continue to focus on cost,” Mr Sevior said.

Mr Elliott said the bank would no longer indiscriminately chase market share to prop up its top line because the risk of getting it wrong was too great.

“This is a marathon not a sprint and we have made judgements about where value lies,” Mr Elliott said.

He said although the definitions of what constituted responsible lending had not changed, the application of those laws had moved dramatically since the Hayne royal commission began in February 2018.

“The terms of responsible lending haven’t changed but what I would suggest is that the interpretation of the law has changed significantly,” Mr Elliott said.