Grounds/Reasons for the Written Questions

Chapter 10.      The CEO's of the Four Pillars were questioned by a House of Representatives Standing Committee on Economics in Oct 2016

                          Three CEO's, and likely several Senate Committee members, are unaware of the Reserve Bank's above noted  'extensive powers' to gather information from a payment system or from individual participants

                          CEOs would like you to believe that Credit Card Products have very high bad debt write-offs, but do they?  What annual write-off amount is high for a Pillar Bank?

Below are extracts from SMH reports of questions asked of some of the four CEO's by the House of Representatives Standing Committee on Economics - Review of Australia's Four Major Banks in Oct 2016:

LNP's Scott Buchholz asked how much revenue Westpac's credit card business generates.  "Where would you allocate the profit to?"

"We don't have a credit card business," Westpac's CEO, Mr Hartzer responded that credit cards fell within multiple business units.

After a brief circular exchange Committee Chair David Coleman intervened by asking Mr Hartzer to confirm he wasn't answering the question.

"What I'm saying is that we're not able to answer that question because we don't have a credit card business per se," Mr Hartzer said.

David Coleman noted the Committee might be in-touch about this issue.

Labor’s Matt Keogh is curious about the profitability of credit cards and asked ANZ CEO, Shane Elliot, who responded: “I’m not sure that we disclose that, but I’ll give you a rough idea. It would be, after tax, a couple of hundred million dollars,” Elliott acknowledged that it is a large amount of money, albeit a small share of the banks’ overall earnings.

The Australian - 6 Oct 2016 reported that Commonwealth Bank's chief executive, Ian Narev, resisted providing returns across products, claiming these are commercially sensitive for competitive reasons.

A CEO commented that the Credit Card Product has "high risk debt" and did not encourage customers "to take on high amounts of high-risk debt":

"Commonwealth Bank boss, Ian Narev, has defended the bank’s exorbitant credit card interest rates, insisting it’s high-risk debt, AAP writes.

Mr. Narev was grilled today over credit card rates.  He was asked why the cash advance rate on the bank’s low rate card was more than 21 per cent, when the official cash rate is just 1.5 per cent. “To me, that’s gouging, that’s excessive,” coalition backbencher Scott Buchholz said.  “It is a highly profitable part of the business, how is that fair?”

Mr. Narev said he understood the concerns, but argued the bank did not encourage its customers to take on high amounts of high-risk debt.

“I said we came in here with a spirit of openness and listen to suggestions and we will,” Mr. Narev replied."

CBA CEO, Ian Narev, deflected questions on the profitability of Credit Cards:

*        "We don’t disclose the returns on equity by individual products,” he said in response to questioning from Labor MP Pat Conroy.

*        “In highly competitive markets, you don’t want these individual aspects of product profitability disclosed to your competitors.”

Below are extracts from SMH reports of questions asked of some of the four CEO's by the House of Representatives Standing Committee on Economics - Review of Australia's Four Major Banks in Oct 2016 which provides a 'ball park' brake-up of the Credit Card business by the ANZ CEO, Shane Elliot:

 

Shane Elliot has given Liberal MP Scott Buchholz an illustrative breakdown of costs in the credit cards business (re the pie chart on RHS "Costs" in Chapter 8 above):

"If the credit card section were a stand-alone business, he says -

 *        25 per cent of the cost would be the cost of funds.

 *        another quarter would be features - insurance, reward points etc 

 *        while about a third are the administrative systems needed.

 *        the balance, slightly less than 20 per cent, is lost through bad debts and fraud."

ANZ CEO, Shane Elliot, responded to a question about the profitability of credit cards, “I’m not sure that we disclose that, but I’ll give you a rough idea. It would be, after tax, a couple of hundred million dollars,” Elliott says, acknowledging it is a large amount of money albeit a small share of the banks’ overall earnings.

ANZ to consider slicing credit card rates: ANZ Banking Group will consider cutting interest rates on its credit cards and introducing a pricing regime based on "borrower risk".

Shane Elliott, CEO ANZ said:

The bank is currently looking at changing the parameters for credit cards to ensure people can avoid financial hardship. “It’s the right thing for us as well ... It’s not in our interest to have customers with products they can’t service,” he says.  Pressed by Liberal MP Scott Buchholz whether there was “ample opportunity” for card rates to be lower, Mr. Elliott said: “As a general proposition, I think you’re right.” 

“I think there’s an opportunity for us frankly to take a bit of leadership on this and do something better on not just the interest rate but also the fee structure on cards,” Shane Elliott said.  He also said ANZ would look to harness big data to discover low-risk customers that could be offered lower interest rates.

 

Andrew Thorburn, CEO NAB said "The credit card business has some of the 'highest losses in our portfolio' and one third of their customers were on a 13.99 per cent 'low rate' card."

The Four Pillars bad debt write-off rates would be lower and discourage "its customers to take on high amounts of high-risk debt", if all Credit Card Issuers in Australia were regulated to -

A)        limit school leavers from 18 years to a Charge Card for the initial six months, thereby necessitating the Total Amount Owing to be repaid at the end of each monthly cycle, in order to establish/improve their Credit Rating;

B)        then (after six months of repaying the Total Amount Owing each month in arrears) replace their Charge Card with a Credit Card with a prudent Card Limit which could be increased no more than once a year according to the Credit Cardholders' Credit Rating; and

C)       require all Credit Cardholders to pay a minimum of 25% of the Total Amount Owing each month, whereby Cardholders could contact their Credit Card Issuer and request their Credit Card Issuer to reduce the monthly limit to 5% for up to two years dependant upon the normal parameters governing an Unsecured Personal Loan application.

Re C) above, McKinsey Report -  May 2014 categorizes 'Five Segments' of Credit Cardholders in the USA.  Below is an extract from the 'Third Segment' of USA Credit Cardholders, namely 'Financially stressed' Credit Cardholders:

  "Value simplicity and transparency in fees, rates and terms, but their biggest need is for something that NO credit card offers: a mechanism allowing them to impose their own spending limits which would enable them to carry a credit card for larger purchases that take time to pay off, without fearing they might be tempted to use it for non-essentials."

The below three graphs seek to identify write-offs on Credit Cards by the major Australian Credit Card Issuers.

 

The above graph from Reserve Bank's Credit Losses at Australian Banks: 1980–2013 shows annual net write-offs for Credit Cards for three of the Four Pillars in 2013 was 3.1% of Debt Outstanding.  The above RBA graph seems to infer that for every $100 funded by a Credit Card Issuer to a Credit Cardholder, the Credit Card Issuer will not get $3.10 back in 2013.  But are Credit Card Issuers making 17% on ave. before costs on the remaining 96.9% Credit Cardholders?

The above Morgan Stanley Research graph estimates that 'Impairment Charges as % of Non-Housing Loans' will increase -

*        from 0.39 per cent of total non-mortgage loan books in 2015

*        to 0.57 per cent upwards to 0.73 per cent in 2017.

The above Morgan Stanley graph seems to infer that for every $100 funded by a Credit Card Issuer to a Credit Cardholder, the Credit Card Issuer will not get back $0.73 in 2017.

The above graph taken from Submission to the Financial System Inquiry - RBA - March 2014 surprisingly shows that non-housing lending losses -

*        were less than $0.45 per $100 in July 2009 (immediately after GFC); and

*        were about $1.10 per $100 in mid-2013.