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As discussed below, quarterly disclosure of assets, credit quality and capital is supposed to be one of the “pillars” of the modern regulatory model governing Australia’s banking industry. Yet the mandated disclosure of this data is uneven, sometimes unavailable and, by and large, poorly read.
It was not meant to be this way. Theoretically, depositors and other investors in all banks were meant to take this information into account before making investment decisions. The fact that this is not happening means one of three things – it should be dropped as it is useless, it should be fixed or it just needs more time as people catch on.
The third possibility can be ignored, as the sheer difficulty of getting the data means that it is not probable that it will be done on a regular basis.
If we look at the second, then improvements clearly need to be made. Firstly, the target market for these disclosures needs to be determined – something that probably was not done before APS 330 was issued. In short – who is going to use this data? If it is the retail depositors, the mums & dads, then the data on the reports needs to be turned into something they can read and understand.
Some of the issuers of these reports are already doing this. Seventeen of the 121 issued reports feature explanatory information that may be accessible to the (relatively) unsophisticated user. Of the Big Four this includes CBA, the NAB and Westpac, with the standout being the Commonwealth. Their risk report seems to attempt to explain the whole 333 page Accord in each disclosure statement, the most recent of which was 87 pages long and includes a mass of detail.
Most of the disclosures, though, would have been meaningless to most mums & dads. To do as the Commonwealth does would also be a virtual impossibility for the small credit unions. Even to match, say, Westpac would be difficult.
Most of the disclosures simply take the bare compliance route – APS 330 mandates the tables to be included, so the data is in tabular format will either little or nothing by way of additional information. This is pretty difficult to read at the best of times.
Worse, and as is true of most disclosures, they really only are very useful when you can compare them to a competitor or to the institution itself, something that even the most sophisticated mum or dad would find difficult and time consuming.
If the target for the data is the wholesale market and credit risk analysts, the way that it is presented is also a problem. Given most institutions do not preserve a history on their websites, to get a meaningful data history means that an analyst would need to visit the websites of most of the 119 institutions that have one at least once every three months to get a full picture. For the four that don’t have a website an email or phone request would be needed.
The data would then need to be extracted from every report and then manually input into an analysis package.
This is clearly a lot of effort and, given it has not yet happened other than for this study, seemingly not a popular idea.
A possible technical solution to this would be for every ADI with a website to publish the data in a consistent way – possibly using XML or a similar method – to format the data for easy import into an analysis package.
Of course, this would mean than the 17 that are providing more and better information would have to be “dumbed down” to re-join the pack. Either that or they continue to produce the APS 330 formatted for general consumption as well as this other method.
A third possibility is that APRA itself publishes the report every quarter using data from its existing returns from each of the reporting institutions. This would have the benefit of a standard format and ease of finding. However, if APRA were to publish these reports then it would be difficult to avoid the impression that APRA has in some way endorsed the contents.
Perhaps they should be cancelled then – but this may be a breach of the Accord itself. There are two reasons why it may not be. The Accords were always meant to apply to “internationally active” banks, not to institutions with less than $1m in total capital. For the non-internationally active banks compliance with the Accord was a policy decision by APRA, not a requirement of the Accord.
Additionally, the Pillar 3 on which APS 330 is based speaks clearly about the concept of materiality – how it is the users that matter to this concept. The fact that there are so few, if any, users of these reports from the smaller financial institutions may well mean that the information is not actually material.
It’s clear that the APS 330 process, at least as it applies to the smaller institutions, needs to be re-thought. If we want to keep this form of market disclosure then it needs to be made useful to at least one group of investors or analysts. If the statements are not being used, then, perhaps, they should be dropped.
This is not coming out of retirement. I wrote this piece for Banking Day (an excellent way to keep abreast of banking in Australia) and I thought it may also be of more widespread interest. There will be one more piece tomorrow before I go quiet again.
Quarterly disclosure of assets, credit quality and capital is supposed to be one of the “pillars” of the modern regulatory model governing Australia’s banking industry. Yet the mandated disclosure of this data is uneven, sometimes unavailable and, by and large, poorly read.
Basel II Pillar 3 is the part of the international bank capital Accords that was intended to improve the discipline that the market imposes on banking institutions. It was meant to do this through increasing the amount and nature of disclosures that the banks (and other deposit takers) make on a routine basis, using the idea that more disclosure means there is more data and therefore better pricing.
There are, of course, two problems here. If the markets themselves are not pricing risk correctly (for whatever reason) then all the disclosures possible are not going to do the trick. The other problem is around whether anyone actually reads the disclosures.
The recent experience in Europe gives real pause on the first point. The Basel Accords themselves may be at least partially at fault here. The Accords effectively tell the banks that lending to their own government is so safe that they do not have to hold any capital at all against it. Most countries’ regulators also mandate that the bonds they receive for this lending are also always able to be sold instantly, and so count as being as liquid as cash.
Both of these now look, at best, overly optimistic.
What about the second, though? Does anyone actually read the disclosures and use them? If we turn to smaller Australian banks, building societies and credit unions, the answer seems to be a strong “No”.
Over the last few months these disclosures by all of the 123 banks (including the big four), building societies and credit unions operating in Australia have been collected as part of a research project. According to APS 330 all of them should have been reporting these every quarter since September 2008, making (so far) 12 reports in total.
There are also two differing types of disclosures – for listed banks or building societies extra disclosures must be made semi-annually and for unlisted institutions the extra disclosures are made annually.
There are still several faults in the process, with a couple not reporting at all and others not reporting fully or properly.
Both of the institutions not reporting were very small, but several of the other problems were more wide-spread. Of the 121 actually publishing, eight seemed to want to hide the results, making them virtually impossible to find on their websites, while six institutions had missed important data off the disclosures, including core numbers such as assets and impairments.
Three of the disclosures had clearly not been formatted for any sort of use.
Other problems were more widespread. For the June quarter end 14% (17 in total) of the disclosures were not out on time (40 business days after the relevant quarter end) – and this included three of the 12 banks.
The widespread issue, though, is that nearly 70% of the institutions are only making their most recent disclosure statement available – meaning that there is often no history or context, but, more importantly, for most of these the annual or semi-annual long disclosure is not on their website for at least half the year.
The other major problem is the sheer difficulty in harvesting the statements. The way that APS 330 mandates the disclosures is that they shall be put up on an institution’s website in a clear location. Formatting is meant to broadly follow the formatting in APS 330 – consisting of a variety of tables.
This was set up with the idea that an individual depositor could go to their institution’s website or offices and get a copy and then read it and understand their institution, and their risks, better. The problem here is that the basic format, and target audience, has not been thought through. There are not many depositors in the smaller institutions that would know the meaning of “Risk Weighted Assets”, “Tier One Capital” and the difference between 90 days past due or specifically impaired. Judging by many of the disclosures, not many of the preparers do either.
For your normal depositors, then, the disclosures are nearly useless.
For professionals, the situation is not much better.
Four ADIs do not have websites, making getting the data from them a process of calling or emailing them to ask for the data. For the others, it’s a matter of trying to find their website either by guesswork or using a search engine. If you are trying to get them all together and put them into a database it is a very time-consuming job.
The only people who may actually be able to use them, the wholesale providers of funds to the smaller institutions, would be able to get much better and timelier data direct from management.
There seems to be at least a few people reading, and using, the disclosure statements of the Big Four and Macquarie. This includes Banking Day readers, as the APS 330s for the majors are regularly reported there. However, it has not been noticed, least of all by APRA, that some institutions are not reporting at all, others are missing important data, several are late and most are not disclosing all of the data on a consistent basis.
It’s clear that the APS 330 process, at least as it applies to the smaller institutions, needs to be re-thought. If we want to keep this form of market disclosure, then it needs to be made useful to at least one group of investors – or analysts. If they are not being used, then perhaps they should be dropped.
I have heard through the grapevine (thanks Ian at The Sheet) that Bendigo has fired the starting gun to the next big consultant’s feeding frenzy – they are talking about going for Basel II advanced accreditation.
I will be going through their numbers over the next day or so to see what this would do for them and will get back to you.
In the mean time, if you are with a major consultancy and have Basel II exposure you may want to dust of those proposal documents you did for the bigger banks, update them with the latest blurb and achievements and get them over to David Hughes (CFO) at Bendigo.
Given that these disclosures have started to settle down into a slightly more regular pattern, I will be expanding my analysis to look at more areas. In particular, I intend to look at what the actual content of the numbers is saying about the risks embedded in each of the banks. As the vast majority of the numbers relate to credit risk, this is where I am forced to concentrate.
Firstly, though, a big warning to all. All of these numbers below are based on the disclosed numbers as I have read and, in some cases, aggregated them. They are not in any way official numbers from the banks and you should go back to the source documents (as linked previously) if you want to look at them seriously. As all of the tables I have used have some variations across each of the documents I may have mis-interpreted the numbers in some way. If you spot one, or merely have a question, please put it in comments or contact me on the email address given on the “Authors” page.
There are also a few oddities in the data that make me question my own numbers. So, please, do not rely on these and I will not be interested in any claims that you made any financial decisions based on the below. It’s a blog post, for heaven’s sake.
Disclaimer over – on to the numbers.
You would have heard me by now praising CBA’s disclosures, so I will not bore you again with them. OK, I will – yay, CBA. Keep at it. It is just a pity the government guarantee means that you will not be rewarded for it, but, chin up, it will go soon (I hope).
Just a quick reminder here, though. All of the numbers and discussion below is given relative to other banks in Australia. If you compare these numbers to almost any other in the world today you will find the Aussies are far better than most. None of the Oz banks are even trading close to making a loss. Westpac, for example, had the best return on equity of any major bank anywhere last year – and the others are not far behind.
NAB and CBA
The numbers from these two, though, are a study in contrasts, While they have much the same sized portfolio overall (NAB is slightly bigger overall), CBA is more weighted towards the housing end and NAB towards business. In the good times, this served the NAB well in profitability, but it is now hurting in terms of impaired assets and arrears. NAB, despite having only about 16% bigger book (in EAD terms) has about 50% more impaired assets. It also has more loans at over 90 dpd, although CBA, because of its bigger book size, has more residential mortgages overdue. Oddly, though, this has not followed through into the impaired category. My guess here is that many of the NAB’s residential mortgages were used to back business loans, which have been more likely to get impaired quickly.
The rest of the assets story is more or less as you would expect. NAB has many more of its assets in the Standardised categories, mostly because they have substantial overseas assets that they (presumably) have not been able to get a model approved for as yet. If they do not soon do so it may make sense to dispose of them to someone that can.
Overall, 22% of their assets are held in Standardised portfolios, as opposed to 6% average for the others. more work required here, I would have thought.
None of the rest is startling, So I will put some more push into completing the analysis on the overall comparison.
Reading through these as I am in writing up my comparative disclosures I just have to comment on them specifically.
In brief – these are disclosures made the way they should be. If this is not international best practice in bank disclosures I would be staggered. In there is everything that I can think of that would be of interest – from exposures broken down by PD band, exposure size and category to a full and detailed analysis of securitisation exposures and proper discussion on each type of capital employed by the group and much else in between. They are so detailed they have had to provide an index to allow you to find the actual APRA mandated disclosures in the book they have provided (see page 45).
In fact, and with a nod to Matt’s request on the previous thread, the only area that is lacking in detail is operational risk, with just the bare numbers given. A real pity as it is my favourite area. They did, however, cover it fairly well in the full year disclosures.
Well done, CBA. Are you paying attention, ANZ?
Enough gushing from me. Back to the numbers.
Just in time the NAB and CBA have published their Pillar 3 disclosures. Just on sheer weight alone, the CBA wins the overall disclosure stakes, with a 52 page (count ’em, 52) short form disclosure. There is comprehensive disclosure of everything I can see (just on a quick look) and numbers galore. Magnificent. This is what disclosure really means.
Besides that the NAB’s looks puny – but they still beat the ANZ’s.
I will run the numbers over the weekend and get back to you. If there are any particular areas you want me to look at, mention them in comments and I will try to do so.
The only problem with the CBA’s disclosure is that it will take a fair bit more to digest that the others.
ANZ, NAB and WBC – in this at least you can look to the CBA to show you how it should be done. [Andrew then stares happily at a lot of numbers]
My first take on these is that they seem to be trying to stick strictly to the bare minimum of disclosure – if disclosure is the right word. Last time, I gave them a distant third on the disclosures, with Westpac as tail-end Charlie. This time they are definately behind Westpac. The whole way it is written just seems to be to try to hide everything. For example the ANZ have not broken out the SL category other than in the RWA area. It complies (from memory) with APS 330 but, really guys, you should do better.
OK – brief look at the numbers (such as they are given). Capital, while the same total as before, is now better as more of it is tier one. Essentially, all of the capital raised recently will have been tier 1, so no real surprises there. Westpac was the same and I would be surprised if the others (when they deign to let us know) are any different.
The EAD numbers (the closest proxy we have to actual book size) reflect a not enormous change, with the increases in loan losses slightly more than counteracted by lending activity. Overall, this is a sign of some strength – but the only category to have increased in any material way is the “Sovereign” category, with the note saying this is due to increases in deposits with the US Fed.
As a side note I would be fascinated to see why the ANZ has over $11bn tied up with the US Federal Reserve. Perhaps this is why interest rate risk has dropped to zero – the deposits are all at call with the Fed. Odd. If the USD drops much it will hurt the bottom line immediately as these would all have to be held at fair value. As it is these will have helped over the last few months.
The rest of it is similar to the Westpac report – increased deliquencies and losses, but nothing to even come close to causing it any problems.
The disappointing thing is that they have cut back on the transparency.
So far then, Westpac was first (in both ways) and ANZ way behind. Come on NAB and CBA – show us the numbers. I think they will be instructive. I am looking forward to comparing portfolio strength across the banks, with the relative RWA to EAD numbers on the “Advanced” portfolios being a good indicator.
ANZ’s latest Pillar III report is out. I have no time to cover it at the moment, but I will later today.
CBA and NAB are going to the wire.
Looks like Westpac got a big jump on the others in releasing their quarterlies for 31 December. Well done guys – a full 7 business days early. Are the rest of you going to wait till the last day like the ANZ did last time? The last day (by my calculation) is at close of business on Friday.