Time to dump bank stocks? - MacroBusiness

Time to dump bank stocks? By Chris Becker in Australian banksat 11:30 am on May 6, 2015 | 16 comments

by Chris Becker

Its hard to predict, especially the future, but there’s a combination of factors out there, embiggened by the RBA’s rate cut debacle yesterday, that suggest the top is in for bank stocks.

Let’s count them off. Three of the majors have reported flat profits this week as they struggle to combine record low interest rates into meaningful (read:profitable) mortgage growth, even as property prices continue to surge. The crux is funding and pressures on capital ratios, as net interest margins continue to be squeezed:

Westpac and ANZ have seen their NIM cut almost to the 2% level and while funding composition for the banks has changed remarkably towards deposits (in fact CBA reported this morning a near 10% increase), other funding costs and FX (foreign exchange) translations are weighing on profitability. Here’s ANZ’s recent move in NIM:

Macroprudential may finally be arriving in a firmer than wet lettuce form as the rating agencies finally react to the bubbles in Sydney and Melbourne, with Fitch yesterday demanding some form of MP and APRA slowly acting on its 10% level, albeit on a bank-by-bank basis and not systematically.

In tandem with the Murray Inquiry push, this will force banks to shore up their wafer thin non-risk weighted capital, which could mean large capital raisings, and hence share dilutions, in the coming months.

Both CBA and WBC also showed rising bad debts in the west yet provisions for such are at historical lows, meaning that if the economy does continue to sour in WA (and QLD) then higher provisions will come straight out of the bottom line.

The technical picture is pointing to a possible top, as well. As I showed yesterday, the financials have doubled in price since the easing cycle began (each vertical line to the right of the peak shows a rate cut, not including yesterdays):

Tactically, all but CBA are going ex-dividend in coming weeks which will extend their current 10%+ slump from their record high, as the temporary yield chasers move to other pastures while the long term investors hold on.

History suggests that the current price action could be corresponding to the January 2005 new high (where shortly after, the RBA began tightening again after a two year pause). Or is it the July 2006 dip before the last surge as the RBA struggled to rein in a burgeoning asset price bubble, swiftly raising rates and pushed to the top in 2007?

Banks are tempting from a yield point of view, especially with sub 3% bond yields and deposits. But at what risk? The key with investing has always been about managing risk, not picking individual investments. Don’t get blindsided by potential doubling of returns – either capital or yield –  which has already happened, or sucked in by a potential 20-40% blowoff in the months ahead. That is, don’t confuse market action and reaction for reality.

There is no doubt that further rate cuts should, in theory, benefit financials as the yield trade intensifies, however, the huge income shock and the need to corral systemic risk are now real risks to earnings growth even as the sector remains priced for perfection:

The days of the free printing press at the banking oligopoly appear to be over.

via Time to dump bank stocks? - MacroBusiness.

Peer-to-peer lenders claim to be recession proof

IX view: commentators with a bank perspective tend to miss the key fact that assets and liabilities are perfectly matched on peer-to-peer platforms like ours - unlike banks. And in our case, the average exposure is less than 60 days.
The charge that the growing number of non-banks that use online platforms to directly connect borrowers with lenders might not survive a recession is rejected by these new entrants.This group claimed that peer-to-peer lending, crowdfunding and other alternative financing methods rose to prominence during the global financial crisis.

In the last seven years they have plugged a gap left by banks whose credit models prevented them from lending to some customers.

Yet, ANZ boss Mike Smith and Commonwealth Bank chief, Ian Narev, have slammed peer-to-peer lending as untested in an economic downturn or when interest rates were high.

Both questioned who would be responsible if customers were burned and both raised the issue of liquidity risk.

Products of the GFC

According to MoneyPlace chief executive, Stuart Stoyan, the high-profile bankers' comments were not only wrong but short-sighted.

He said the peer-to-peer lending model is better able to cope with changing economic conditions than incumbent banking systems.

Stoyan acknowledged that peer-to-peer lending is a new banking model and has not endured a downturn in Australia. But he also noted that Australia has not suffered a significant recession for over a quarter of a century.

“On the same logic, since the last serious recession was 25 years ago, it would be also fair to argue that the management teams of the major banks are also untested to manage during a recession," he said.

Test of business models

Three of the world’s largest peer-to-peer lenders were operating during the last financial crisis and each proved their ability to provide investors with positive returns on a through-the-cycle basis, according to RateSetter chief, Daniel Foggo.

“They have found ways to help ensure positive returns can be delivered in any economic environment. In the case of RateSetter, we pioneered our Provision Fund, which is a pool of capital available to compensate lenders if they are exposed to a borrower default," he said.

"Our first priority is ensuring that enough money goes into the Provision Fund to protect investors, in good economic times and bad.

“Our business model is very efficient, and we pass on the savings to borrowers in the form of substantially lower rates. If interest rates went up significantly, it’s very unlikely there’d be an impact on our business”.

Another claim is that peer-to-peer lenders have less expertise than the major banks and are therefore more vulnerable to financial instability.

“That is wrong,” said Stoyan. “Peer-to-peer lenders in Australia are mostly led by former bankers who understand the deficiencies in the outdated banking system.”

Liquidity not applicable

MoneyPlace is managed by four ex-National Australia Bank executives; its chief risk officer previously ran unsecured lending for NAB.

Prior to joining RateSetter, Foggo ran Barclay Capital’s investment arm and worked for NM Rothschild in London. SocietyOne has hired an Investec operative.

Stoyan dismissed suggestions of liquidity risk, saying that a liquidity event is not applicable to P2P lenders since an event can only occur there is a surge in demand for deposits.

For example, a run on a bank occurs when bank customers withdraw their deposits because they believe the bank might fail. This is an issue because the banks do not hold a dollar in cash reserves for every dollar they have on deposit, they lend it out.

“Peer-to-peer lenders directly match investors’ money to a loan. This means that these lenders are fully funded 100 per cent of the time," said Stoyan.

“Further, banks run complex treasury functions that try to minimise the amount of cash they hold so they can earn more profit lending it out. However, peer-to-peer lenders do not have a treasury function.

"If they don’t run a book, they do not need to manage liquidity. In fact, because we directly match investors and borrowers, we will never face a liquidity event. To suggest otherwise is scaremongering."

Level of transparency

“The concept of illiquidity for a peer-to-peer lender would only arise if investor expectations for the term of the investment were not matched by the term of the loan," said Leo Tyndall, chief executive and founder of Marketlend.

"In peer-to-peer lending, it is the investor who chooses his term and it is matched to the loan's term so there is no issue."

Foggo said RateSetter extensively stress tests its loan book as well as any bank, but more importantly, it provides a level of transparency to investors so they can make their own assessments.

Regulators are ensuring an appropriate level of regulation and oversight for peer-to-peer lending, Stoyan added.

Dermot Crean

Director, InvoiceX

Growth Capital on Demand.

(03) 9020 4161

The impact of P2P lending on banks


21 April 2015
When Bill Gates spoke his now oft-quoted “banking is necessary; banks are not” reference in 1994, I wonder if he knew exactly how right his quote would prove to be?I have a feeling that he may have.More than 20 years later, banks are becoming less and less relevant. An exponentially increasing number of disruptive services are appearing in the space traditionally left to conventional banks, and their market share is eroding.

Arguably one of the most innovative practices in disruptive banking services internationally, including in Australia, has been the emergence of peer-to-peer (P2P) services – mainly in lending.

Simply put, P2P lenders are not lenders at all, but rather they provide a matching service to link private investors with potential borrowers.

Of course, the industry is much more advanced than that.

In offering their lending service, P2P companies have developed their own cloud-based platform that includes a proprietary credit assessment model, an investor qualification program to ensure compliance with legislation and post-settlement management services.

Small, short-term, consumer-based lending has gained the most attention from these providers, with Nimble, SocietyOne and RateSetter probably making up Australia’s top three lenders in this space.

Of these, RateSetter is the only Australian platform licenced to accept registrations from retail investors, while the others are limited to dealing with wholesale clients only. As a result, it could be argued that they are perhaps a truer representation of P2P lending than their peers, who are limited to dealing with sophisticated or corporate investors.

The next natural domain of P2P lending is lending to small businesses – a space the Australian banks largely withdrew from in 2008. The Labor government at the time attempted to introduce the Australian Business Investment Partnership – coined ‘Rudd Bank’ – to support the business community. However, it was unsuccessful. Although it has taken some time, a new wave of private-style, P2P-funded lenders such as ThinCats have recently launched in Australia and will be followed by more entrants in the next 12 months.

Whilst the introduction of P2P lending will redefine personal and short-term lending in a similar manner to how securitisation changed the mortgage lending space forever in the 1990s, it will have virtually no impact on the mortgage space. Mortgage lending requires money being borrowed long term, yet P2P funding is traditionally lent for the short term. Whoever can solve this dichotomy will have a successful business.

Where will P2P take us over the next five years?

I believe we will see not only an increased number of lenders in the small-business lending space, but also the continued emergence and adoption of white-labelled platforms as a service option for aspiring P2P funders who do not have the resources to build or manage their own platforms. ClearMatch seems to be a leader in this space and is positioned to capitalise on this opportunity.

An interesting thought is the introduction of P2P insurance services and products. Most likely, this will be an extended service of the P2P lenders already operating, with the inclusion of the insurance risk model inserted into their already-tested platforms.

How will the banks react to these changes to the landscape? I expect that rather than directly compete against the P2P lending platforms, banks will become the platforms’ largest institutional investors, or they may even look to acquire them as they have done with nearly all of Australia’s mortgage securitisers.

If you can’t beat them, then ownership is the next best option.


View from the US: why small-medium sized businesses are using alternative lenders

blog_02_bigbanks View from Kabbage in the US - Kabbage has funded over $550 million to help businesses grow in the US. 

Many Big Banks are Still Slow to Lend

Even though the economy is improving and small business owners are more likely to apply for loans, there is a big lag between the growing demand for small business loans and the reluctance of big banks to actually issue those loans. Ted Zoller, director of the Center for Entrepreneurial Studies at the Kenan-Flagler Business School at the University of North Carolina at Chapel Hill, states in, “A Look at the Future of Small-Business Financing,”that although loan demand is increasing, big banks are still recovering from the financial crisis. And that’s not the only thing holding them back; new regulations prohibit many banks from issuing as many small business loans as they used to.

“Across the board, bankers are seeing a rebound in credit applications for small-business loans,” Zoller says. “But the paradox is that banks are not in the position to fill that need to the extent they have been in the past. Regrettably, most of the capital available for debt is with large institutional banks that were significantly impacted by the financial crisis and now face substantial regulatory hurdles in determining creditworthiness for loans.”

Large Business Loans Have Recovered Faster

The news about bank lending is not all bad. A study from the Federal Reserve Bank of Cleveland, “Good News and Bad News on Small Business Lending in 2014,” found that bank lending to large businesses (loan amounts greater than $1 million) has reached a level 24 percent higher than it was before the recession. However, that same Federal Reserve study also found that small business lending (volume of loan amounts under $1 million) has barely recovered since 2012, and now stands at a level 17 percent below the pre-recession peak.

Why have banks been quicker to issue big business loans? Simply put: it’s often more profitable for banks to make big loans than it is to make small loans. According to a Harvard Business School working paper by Karen Mills, former head of the U.S. Small Business Administration, the transaction costs for a bank to issue and process a $100,000 loan are not much less than the costs of issuing a $1 million loan. So as a result, “Some banks, particularly larger banks, have significantly reduced or eliminated loans below a certain threshold, typically $100,000 or $250,000, or simply will not lend to small businesses with revenue of less than $2 million, as a way to limit time-consuming applications from small businesses.”

This can be frustrating for small business owners who “only” want to borrow $100,000 or less – but this and other structural barriers to traditional bank lending are unlikely to go away. Unfortunately, this type of bank lending environment is likely to be the “new normal” for small businesses.

More Companies are Getting Loans from Alternative Lenders

In response to the lending limitations of traditional banks, small business owners and entrepreneurs are doing what they do best: innovating. Instead of being denied their dreams or scaling back their business plans, small business owners are borrowing money from alternative lenders – including online platforms like Kabbage, peer-to-peer funding sites, or online marketplaces.

According to a recent CNBC article, “Why Small Businesses Don’t Want a Loan,” the size of the U.S. nonbank financial system is now estimated to be $3.2 trillion, with plenty of growth potential. Jef Stibel, CEO of Dun & Bradstreet Credibility Corp., was quoted as saying, “Alternative lending is a big deal and it’s becoming an even bigger deal for the smallest businesses with revenues under $5 million.”

Stibel also pointed out that according to Dun & Bradstreet’s Private Capital Access (PCA) Index, small businesses are significantly more likely than larger companies to use online marketplaces to get financing. During the first quarter of 2015, 3.4 percent of businesses with $5 million or less in revenue attempted to raise financing via an online marketplace, compared with only 2 percent of companies that had between $5 million and $100 million in revenue. Clearly the time is right for new innovations in small business lending, and small business owners are ready to think differently about where to get the financing that their companies need.

New Technology is Making Small Business Loans Faster and Easier

Traditional bank lending was often a predictable, rather stodgy affair: you go to the bank, you wait in line, you sit in the office with a banker wearing a nice suit, you fill out applications and paperwork (on actual “paper”)…it’s all very formal, old-fashioned, and “pre-digital.” The new alternative lenders and online marketplaces are putting a fresh face on the small business lending process by bringing a dose of much-needed innovation to the lending process.

New technology is making small business loans easier, faster, and more convenient. According to Fortune, “Tech’s Next Disruption? Small Business Loans,” alternative lenders are using technology to beat the big banks at the small business lending game. Instead of getting denied access to credit by big banks that aren’t interested in lending less than $100,000, small business owners can go online and quickly get approved for short-term loans at rates that are competitive with a traditional bank and often much cheaper than credit card interest rates.

Although alternative lenders make up a small percentage of the small business lending market – only $10 billion out of $600 billion – they are changing the loan landscape by making it possible for small businesses to get approved for loans that big banks might never have bothered with.

The “old days” of sitting in a bank lobby waiting to get approved for a small business loan might be gone for good – but that’s not a bad thing! Even if big banks never resume lending at the same levels as they did before the recession, there are now a variety of encouraging alternatives on the market. And hopefully these new types of small business loans will unleash a wide variety of innovations and new jobs. Only time will tell.