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#4
26 September, 2014
Selected digestible insights joining the dots between
Socio-economics, Strategy, Transformation and Delivery
The Radar
The G20 Finance Ministers in Cairns, ISIL and the threat of terrorism,
concerns with the Chinese economy, the Ebola outbreak, Scotlands
referendum: a past few weeks that brought us back to the big picture
FINANCIAL SERVICES
Systemic stability: UBS has almost doubled their estimates of the
capital Australias major banks may have to raise in response to the
Murray financial system inquiry, from $23B to $41.1B. Given
Australias unique situation as a small, commodity-based economy
heavily reliant on foreign capital, with a very concentrated banking
system, David Murray is likely to err on the side of caution, meaning
both higher mortgage risk weights and capital buffers despite the
major banks objections.
Former Goldman Sachs JBWere co-chairman Alastair Walton joined
the debate with a provocative ANU lecture: "Would Australia be
better off with 8 to 10 banks each of which are rated A (like almost
every other bank in the OECD) and primarily rely on domestic
deposits to fund their lending activities, or continue infinitum with 4
'too big to fail' banks each of which are rated AA-, and utilise the
sovereign support of the Australian Government (either implicitly or
explicitly with a guarantee fee) to access high levels of low-cost
offshore funding to support their domestic lending activities

> Whilst such a dramatic a move isnt considered by our policy makers,
Walton summarised a good insight into our system, and captured the
tensions around the appropriate measures to save too big to fail
banks. At the global level, the Financial Stability Board is pushing bail-
in measures forcing losses on the banks creditors (bondholders)
before taxpayer funds are called upon, which is opposed by banks.
Countries with banks largely funding loans from customer deposits -
rather than borrowing in debt markets - are concerned that a
bondholder bail-in rule would hurt their lenders and increase the cost
of providing loans. And also add the risk of runs on other banks: In a
systemic crisis, bail-in of the creditors of one bank may lead to a run
on other banks as their creditors seek to avoid a similar bail-in.
> Some analysts also argue that those pressures on liquidity partly
explained the recent correction in banks shares (WBC fell 10% from
recent highs)
In parallel APRA is easing liquidity requirements for foreign banks,
cutting the amount of liquid assets required to hold to finance a
bank run moving to a 15-day bank run, rather than 30-day
requirement for local banks. APRA also extended the types of assets
that foreign banks could help beyond the narrow definition that
locals are subjected to (commonwealth and state government
bonds). Those concessions will make it substantially easier for
foreign banks to meet the liquidity requirements.
> But more interestingly, it means that foreign banks will not have to
subscribe the RBA and APRAs Committed Liquidity Facility, the
emergency line of credit, hence effectively sparing Australian
taxpayers from backstopping foreign banks. The reason is systemic:
Australian banks, in total, would be required to hold $418 billion to
fund a 30-day bank run. But with only $503 billion of eligible high
quality assets in the system, there were obvious capacity constraints,
which the regulator fixed by taking the foreigners out of the equation.
NABs Andrew Thorburn is making changes to the banks
management, engagement, and incentive structures: He is planning
to focus on Net Promoter Score, collocate his leadership team to
break divisional silos.
> This shows that Service Revolution and customer focus are at play
across the industry, reinforcing our imperative to differentiate.
Competition is ramping up as banks are distributing cash to
customers to win business as spring hits the property market and
house prices soar. NAB is giving borrowers $1000 to increase its share
of Australias $1.3T mortgage market without cutting interest rates,
which are at historic lows. NABs argument is that its $1000 cash in
hands, not a rebate lost in mortgages totalling $100,000s.
> Westpac topped that offer with a $1500 cash rebate if customers
borrowed $500,000. CBA gives 1st home buyers a $1000 rebate, St
George, Bank of Melbourne and BankSA offer $1250 to new customers.
ANZ said its branch managers had discretion to pay up to $1000 to
customers who switched with a loan larger than $1 million.
OTHER INDUSTRIES

The 38% surge in Alibabas share price on its opening day of trade
ensured the largest IPO in US history lived up to the hype. The
Chinese internet retailer is already the worlds biggest e-commerce
firm, with a market capitalisation of $US231B, 231million active
buyers and $US300B in annual merchandise turnover across its main
websites Taobao, Tmall and Alibaba (See this great WSJ infographics).
Alibaba is forecast to post a $US7B profit this year, compared to
Amazon which is still delivering losses. The growth potential seems
enormous too, given that internet penetration across Chinas 1.3B
people is a low 45%. And unlike the controversial Facebook IPO,
Alibaba was embraced by buyers in the secondary market.
> However Alibaba shareholders will bear particular risks: restrictive
foreign ownership Chinese laws prevent them to actually own shares in
the company. Instead, they will have a right to a Cayman Islands
company which has a claim on the Alibaba assets.
MACRO-ECONOMICS
The G20 finance minister summit in Cairns worked through the
policies required to boost G20 GDP growth by 2% by 2018 (ie an extra
US$2T in global economic activity). The debate moved from a battle
about austerity vs stimulus to a growth agenda focused on shifting
activity from public to private sector, and on infrastructure. It struck
a chord with governments that are running out of options to get
growth through fiscal and monetary policies. 900 separate policy
proposals have been tabled, with the disclosure that they can only
achieve 1.8% growth, which the G20 hopes to bridge in November.
> Product market reforms represent the biggest contributions from
advanced surplus countries (like Germany and Japan) and emerging
surplus countries (like China); while infrastructure is listed as the
biggest contribution in advanced deficit countries (like Australia and
much of Europe). IMFs Christine Lagarde insisted she would like to see
more labour market reforms. In parallel, the ATO is also leading a pilot
project with 5 other countries to map the global tax planning of
multinationals in the digital economy and share intelligence on their
activities to tax them effectively. As a reminder, The Economist
magazine estimates about $US20T could be hidden in tax havens.

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DEEP-DIVE: The financial psychology of Australian households ME Bank 6th survey June 2014.
The rising concerns with systemic risks is a good segue to the ME Bank Household Financial Comfort Index published in June 2014,
measuring ongoing changes to households perceptions of their own financial comfort. It provides insights into the changing financial and
economic psychology of Australian households.
Financial comfort levels of Australian households Index over
time showing % change from the previous survey

1. A lack of cash savings has emerged as one of the biggest areas of
concern among Australian households:
It contributed to an overall 3% fall in the Household Financial Comfort
Index to 5.33 out of 10, largely reversing previous gains in 2013.
Other factors contributing to the fall in the overall Index was:
a marked drop in expectations for financial comfort over the next
year,
and, to a lesser extent falls in comfort with household income, as
well as anticipated standard of living in retirement.
Only 46% of households surveyed reported the ability to save each
month, the lowest level since ME Banks first survey in October 2011
(falling 3% from Dec 2013), while 42% were breaking even, and 12%
were overspending by drawing on savings, loans or home equity.
Of those saving the amount saved per month fell 12% to $735 per month, and of those overspending the amount overspent rose 13%
to $501 per month. 35% of households also reported having less than $1000 in cash-on-hand (a rise of 7% during the past six months),
while 24% said they could not raise $3000 in an emergency (a rise of 6%).
Unsurprisingly Level of cash savings on hand appeared as a top two concern, reported by 36% of respondents.


2. In line with the economic big picture, there has been a further strong boost to net wealth at the aggregate level from higher equity
and house prices in most major cities (house prices are at stratospheric levels) as well as easing debt burdens from low loan rates and
early prepayments (rates are low). In contrast, household purchasing power and confidence have fallen.
Consumer confidence fell sharply - especially about the time of the Federal Budget - to be almost 9% lower than a year earlier in June
2014 and to return to well below its long-run average level.
Labour market remains weak with a subdued outlook. The national unemployment rate rose to its highest rate since mid-2003 to 6% in
June 2014.
Household income gains have slowed further and real purchasing power has fallen, with average annual wage growth at about 2.5% -
its slowest pace for about a decade and below the pace of consumer inflation.
Household consumption spending growth remains relatively weak, albeit a bit above the relatively slow income growth. As measured
by the official data, the household saving rate from current disposable income was estimated at about 10% in the first half of 2014, a bit
lower during the past year, but still well above the average of the past two decades.
Growth in household debt has remained subdued overall with a pickup in housing loans partly offset by repayment of unsecured
personal loans. The amount of housing credit increased at an annual rate of about 6% in the first half of 2014, with growth i n repeat
owner-occupiers and investors out-pacing demand from first-home buyers.
Finally households have remained relatively conservative in their investment preferences albeit there has been an increased tendency
for investors to search for yield and switch from still relatively high cash holdings to residential property and equity investments.

3. an undeniable social and generational divide: On
aggregate household financial stress indicators generally are
low an indication that households, on average, are coping
reasonably well with debt servicing burdens due to relatively
low borrowing costs, despite a gradual rise in unemployment
over the past year.

However this masks a great deal of variation amongst
Australians across socio-economic demographics, but also
across generations.
Do you overspend
or save?
Thinking about your household finances,
which aspects cause you the greatest worry?
Financial comfort over time for different generations

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Analysing the comfort levels across the key drivers of
household finances


4. Cash [Savings] are king!
Retirees have the highest level of comfort with
savings, of whom self-funded retirees have even
higher comfort. Retirees are also the only group
whose comfort with savings increased significantly by
17% in the past six months.
Single parents are the least comfortable with level
of savings, followed by couples with young children
6% of Australians are using equity in their home to
purchase larger discretionary items like a car or fund a
holiday.
Comfort levels across key drivers of household finances


5. The flipside of the Savings and Financial Goals coin is Debt

Unsurprisngly Retirees and Empty nesters (50+) are the
most comfortable with debt. Single parents and couples
with young children are the least comfortable with debt.

Paying off a mortgage (30%), paying off debts as fast as
possible (30%) the most common financial goal reported by
households while getting debts under control (21%) is not far
behind.
Property investing (11%) is more popular than investing in
shares, bonds and commodities (8%).
Self-funded retirees are the most likely group to be buying
investment properties (27%), Gen X are the most likely to be
focusing on paying off their mortgage (45%), while working
single parents and students were the most likely to be
saving for a raining day (37% for both groups).



The ME bank survey highlights some concerning debt habits particularly
around credit cards:
33% reported they were credit card revolvers during the last six
months, never paying off the debt in full, up from 29% in December 2013;
35% reporting they maxed out the limit on a credit card in the last six
months, up by 1% from December 2013.
The survey also provided insighst into the activities employed by
households to manage expenses: including comparison shopping (up 1%
to 95% in the six months to June 2014), staying within their budget (down
1% to 90%), setting a budget (down 1% to 74%) and keeping an electronic
record of monthly expenses (down 2% to 67%).

These dimensions should prompt valuable insights into
the focus of service, and the type of solutions banks
ought to design be it tablet apps, call centre processes
or financial products The next step would be to break
them down into actionable features and functionalities to be prototyped
and tested in our incubator and accelerator.

21%
37%
20% 18%
35%
18%
32%
29%
23%
22%
19%
22%
18%
16%
16%
24%
18%
22%
20%
11%
19%
14%
16%
18%
10%
7%
23% 22%
12%
19%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Household
Income
Monthly
expenses
Cash
Savings
Investments Debt from
all sources
Anticipated
standard of
living
in retirement
Very comfortable Somewhat comfortable Neither
Somewhat uncomfortable Very uncomfortable
What are your financial goals?
So what?