Good Times Ahead For Borrowers To Secure A Loan?

The recent times in the Australian economy have been thickly clouded with consecutive reforms and updates on the housing front, the interest rate cuts by the Reserve Bank of Australia and regulatory changes that have brought major banks of the Aussie land in the forefront of financial discussions.

In our article on the 100 years of the Australian equity market, we pointed out an interesting fact- Financial institutions, especially banks, have been the main contributors towards the Australian output and employment, and this trend has not undergone a significant drift over the century Even though the financial sector of any economy is often prone to a flux, the Australian financial system has witnessed changes and continued to remain significantly strong in the country’s economic structure.

Macquarie Group Limited and Suncorp Group Limited lowers home loan hurdles

In a recent update from two major Australian financial institutions, Macquarie Group Limited (ASX: MQG) and Suncorp Group Limited (ASX: SUN) took a governing step amid the regulatory changes and falling interest rates situation prevailing in the country.

MQG had shunned down the assessment floor rate to 5.3 per cent from 7.25 per cent, while SUN reduced the floor rate to 5.5 per cent from 7.25 per cent. 

Along with the reduction in the assessment floor rate, both financial mammoths have increased the respective assessment buffer rate. MQG’s assessment buffer rate now is 2.5 per cent, up from a 2.25 per cent prior figure, whereas SUN’s assessment buffer rate stands at the same figures- 2.5 per cent from a prior 2.25 per cent.

Market experts believe that this regulatory change, rather enhancement, is a positive signal for the borrowers who have been willing to apply for a loan off late.

SUN would also lower the all variable home loan interest rates by ~19 basis points. The all variable super offer discounts would go low by a point to stand at the effective basis point of 20.

Following a similar route, MQG would adhere to the RBA’s 25 basis point cut and lower the variable rates by 20 basis points, along with the fixed rates, which would go down by 40 basis points.

Other major banks on the same path: Westpac Banking Group (ASX: WBC) and Australia and New Zealand Banking Group Limited (ASX: ANZ) had been part of the bandwagon already and have implemented similar changes recently, with Westpac reducing its floor rate to 5.75 per cent from a 7.25 per cent figure. ANZ had lowered its sensitivity and floor rates rate to 5.5 per cent and 2.5 per cent, respectively.

Market experts believe that the other two banks of the Aussie land, National Australia Bank (ASX: NAB) and Commonwealth Bank of Australia (ASX: CBA) would soon follow suit and revert in a similar fashion in the days to come.

Servicing Sensitivity Margin and Floor Rates: Bring back the basics to understand the above discussed changes; in banking terminology, an interest rate floor is an affirmed rate in the lower range of rates that is linked with a floating rate loan product. Contrary to the concept of interest rate caps, the interest rate floors are primarily used in derivative contracts and loan agreements.

Servicing sensitivity analysis is a financial modelling tool which, in the banking space, is used to scrutinise and decipher a reasonable and most apt assessment for the existing and new loan applicants.

In the light of this context, let us have a look at some of the recent updates pertaining to Macquarie group Limited and Suncorp Group Limited on the Australian Securities Exchange:

Macquarie Group Limited (ASX: MQG)

Company Profile: MQG is a pioneer of the financial sector and is a financial services provider of banking, financial, advisory, investment and funds management services. It has its registered office in Sydney and was listed on the ASX in 2007.

Recent Update: The Group highlighted that it had reduced its variable and fixed home loan rates, and these were set to be effective for the new loans from 5 July 2019 (for new loans) and 18 July 2019 (for the existing variable rate loans).

Stock Performance: MQG is currently trading at A$127.510, up by 0.173 per cent, relative to its last trade as on 22 July 2019 (11:57 AM AEST). With a market capitalisation of A$43.33 billion and ~340 million outstanding shares, the company has delivered returns of 1.52 per cent and 8.17 per cent in the past one and six months, respectively, with a YTD return of 19.13 per cent.

MQG’s 6-month stock performance (Source: ASX)

Suncorp Group Limited (ASX: SUN)

Company Profile:  One of the leading players of the financials space in Australia, SUN is involved in the provision of banking, insurance, wealth and other financial solutions to the retail, corporate and commercial sectors. It has its registered office in Brisbane and was listed on the ASX in 1988.

Recent Update:  The new variable interest rates were set to be effective from 19 July 2019, as announced by the company on 3 July 2019. Suncorp CEO Banking and Wealth, David Carter believes that the bank’s rates were amongst the most competitive in the market and the Term Deposits remain some of the best priced in market.

Stock Performance: SUN is trading at A$13.190, up by 0.07 per cent, relative to its last trade as on 22 July 2019 (11:57 AM AEST). With a market capitalisation of A$17.11 billion and ~1.3 billion outstanding shares, the stock has delivered negative returns of 2.37 per cent and 2.87 per cent in the past one and three months, respectively, with a YTD return of 7.08 per cent.

SUN’s 6-month stock performance (Source: ASX)

APRA Reforms: Adding to on the recent and consecutive drifts being witnessed in the Australian Banking Space, on 11 July 2019, Australian Prudential Regulation Authority firmly stated that the country’s major banks- ANZ, NAB and WBC, were bound to hold an additional capital worth $500 million, as a response to the higher operational risk that had been identified in their self-assessments. In Australia, APRA is the prime governing body which looks in to matters related to bank’s capital and financial regulations.

The Consecutive Interest Rate Cuts by the RBA- An Unusual Step

Any discussion on banking and financial reforms, in the present Australian context would remain incomplete without the mention of the consecutive interest rate cuts done by the RBA in the country, affecting all parties of the financial sector. It was asserted from this regulatory move that the RBA expects the Aussie banks to forward the maximum rate deductions to the borrowers.

Role of the Banking Royal Commission: A reformative addition to the Australian banking space, the Banking Royal Commission was set up in 2017 with the aim to detect the misconducts of Australia’s financial institutions. In its due course of action, the Commission took charge to point out discrepancies in the governance and culture of the financial system, as a result of which, it was made a mandate for banks to adhere to interest of the customers. Recommendations and changes have been a regular affair in the financial space, ever since.


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