Investment Matters

What matters this week: Debbie departs. Banks and risk.

Debbie departs

Ex-cyclone Debbie left us last week (and this week brought its physical destruction to our neighbours across the ditch).  But there were some continuing reverberations on Australia's financial markets, most notably a downgrade from IAG, and a jump in the price of coking coal (used to manufacture steel).

The general insurer IAG announced an estimated increase of $170m in natural peril cost claims, including $140m associated with Cyclone Debbie.  This will result in a quite significant downgrade in the insurance margin forecast for FY-17, from 12.5-14.5% to 10.5-12.5%.  This will flow through to lower net profit to shareholders.

Force majeure (essentially a stop work, allowing a company to not meet contractual obligations because of factors outside its control) has been declared at BHP Billiton's and Glencore's coking coal mines in the Bowen basin.  Not unexpectedly, this has resulted in a jump in coking coal prices.  

Coking coal

Banks and risk

This week was really marked by a step up in pronouncements from various regulators and commentators regarding Australia's banks, debt levels and risks to financial stability.   APRA announced a crackdown on interest only loans, the prevalence of which has drastically increased in the last 2 to 3 years.  Lenders will not be allowed to write more than 30% of new loans as interest only (currently around 40%), with use to be limited for LVRs > 80%.

APRA also announced a requirement for tighter mortgage serviceability assessments.  Additionally, APRA flagged changes that will increase capital requirements (more on this below). 

Other regulators have also been vocal about bank lending this week: ASIC announced it will be using its powers to ensure that mortgagees are not being put into interest only loans inappropriately.  The RBA also noted concern about growth in household borrowing (mainly resi mortgages) outpacing growth in household income, and thus articulated support for APRA's measures.

The banks have proven remarkably resilient to this news - down between 0.7% (CBA) and 1.9% (WBC) for the week (as we go to print).  Perhaps those retail investors continue to have their heads in the sand.