Investment Matters

What Matters this week

NAB decided to buck the trend and announce that it was keeping its home loan rates on hold, a move CEO Andrew Thornburn described as aimed to “restore trust with existing customers” (rather than win market share of course). While sparing homeowners from a 16 basis point rise in interest rates, it dropped the interest it pays on its iSaver deposit accounts by 30 basis points.

Other banks have followed suit with Westpac & CBA dropping headline saver rates by 30 basis points.

The banks have however raised bonus rates to compensate for this, incentivising customers to continue topping up their balances – at a time when the household saving rate is at its lowest in 10 years.

This in effect encourages the growth of deposits to decrease bank's reliance on ever more expensive overseas funding while increasing their net interest margin (the difference between the interest they pay for funding and receive from making loans).

Class action litigators Maurice Blackburn and Slater and Gordon (SGH) were busy this week. Slater and Gordon announced that it would be filing a $500m class action against CBA and AMP for paying customer’s below market rates on their cash holdings.  Shares in Slater and Gordon were up 14% on the news.

Meanwhile, Maurice Blackburn is pursuing Woolworths for $100 million after it allegedly breached disclosure obligations and misled investors with its profit outlook in 2015.

Myer delivered results that were slightly under the market’s estimates with underlying net profit coming in at $32.5 million vs market expectations of $33 million. The upside was that a decline in sales began to slow in the second half and margins increasing.  Newly minted CEO John King has unveiled a strategy to put “customers first”, grow online sales, shrink stores, better utilise its floor space and change up its product mix. He also reiterated a renewed focus on maximizing profits, rather than sales. Meanwhile the company has refinanced its debt for another 2.5 years, giving management some time to implement its strategy. The market response was exceedingly positive with short-sellers left scrambling as shares rebounded by 37%.

Bega raised $250m to pay down debt taken on as part of its acquisition of Koroit dairy amid speculation it is also running a ruler over Capilano.

The ACCC has green-lighted a $13 billion takeover of APA by CKI after concerns about foreign ownership of key natural gas and electricity assets at a time when energy prices are rising.  The Hong Kong consortium appeased the regulator by agreeing to sell APA’s Western Australian pipelines and plants given that it already controls the Damper-Bunbury pipeline, Western Australia’s main gas artery.  The deal however still needs to be approved by the foreign investment review board (FIRB), which may be more difficult as the deal would essentially put ownership of Australia’s gas transmission pipelines in the hands of two Chinese owned firms (CK and Jemena).

Cirque du Royal Commission was back in town this week. This week’s spectacle: the life insurance industry. Rowena Orr QC held the feet of the industry to the fire in her usual stern manner. We heard about policies with a litany of exclusions (essentially rendering them worthless), deliberate customer churning, questionable policy definitions, predatory sales practices targeting the vulnerable and a lack of timeliness in processing claims.

The proof is in the pudding: a report by ASIC found that 60% of life and funeral insurance policies sold directly to consumers were cancelled within 3 years. Furthermore, last year only 10 out of 21,000 accidental death policies written by insurer Clearview were paid out.

Perhaps the most disturbing revelation was that a salesperson from Freedom Insurance sold three life insurance policies to a man with Down syndrome, who struggled to cancel the policies due to difficulty in saying the words "I wish to terminate the policy”.

Companies have been quick to act, with Freedom Insurance creasing sales of life cover, accidental death and injury, and TPD insurance via outbound phone calls. Furthermore, insurer Clearview has abandoned the direct sale of life insurance policies via outbound calls, after admitting it is difficult to adequately inform customers about complex financial products in a 20-minute conversation over the phone. Clearview shares were down 2% for the week while shares in Freedom Insurance dropped by 18%.

The over-riding message this week (if not through the majority of the Royal Commission) was that commercial interests were put before the fair and equitable treatment of customers.  It serves as another salient reminder of the dangers misaligned incentives and poor company culture bring.