Profit

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<div><span>Given that APRA's crackdown on investor lending has skimmed so many high loan-to-value ratio (LVR) investors out of the property market, it was always going to take a super-human 1Q 2016 investor update from Genworth Mortgage Insurance (GMA) to keep its share price buoyant.</span></div>
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<div><span>In the event, GMA reported statutory net profit after tax (NPAT) of $67.3 million and underlying NPAT of $61.8 million for the quarter ended 31 March 2016.</span></div>
<div><span> </span></div>
<div><span>Overall this was a solid set of results given that Gross Written Premium was down by a thumping 33.4 per cent from 1Q 2015, having declined dramatically from $127.7 million to $85 million.</span></div>
<div> </div>
<div>This statistic is a fabulous measure of the impact of the regulatory intervention - the riskier loans have largely been crimped out of the property market.</div>
<div><strong><span style="text-decoration: underline;"><br>Delinquencies</span></strong></div>
<div> </div>
<div>Genworth's portfolio delinquency rate was marginally higher at 0.40 per cent, up from 0.36 per cent in 1Q 2015.</div>
<div> </div>
<div>Overall mortgage delinquencies remain remarkably low, and can realistically only move in one direction from here, particularly given that numerous resources towns in regional Queensland have effectively become ghost towns.</div>
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<div>Unfortunately many investors were sucked in to buying in mining towns and regions lured by superficially "stronger" yields, but unfortunately in many cases there is now nobody to rent the houses to, and as equity turns negative foreclosure rates will inevitably rise.</div>
<div> </div>
<div>The lesson here is that "yield" and "income" are not the same thing, and that as an abstract spot calculation yield is largely useless as an indicator of future returns. This applies to all asset classes.</div>
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<div>Even in some of the larger conurbations there are likely to be some severe challenges ahead, with unemployment in Townsville having risen to a <a href="https://petewargent.blogspot.com.au/2016/04/townsville-unemployment-at-13-year-high" target="_blank">13 year high</a> last month.</div>
<div> </div>
<div>Despite these bleak statistics, overall delinquency developments have shaped up quite favourably since 2009, with mortgage delinquencies by book year having cascaded lower over time. </div>
<div> </div>
<div>The 2008 book year saw heightened mortgage stress among self-employed borrowers as a result of the financial crisis (0.98 per cent), while flooding in Queensland saw elevated delinquency rates in the 2011 book year.</div>
<p><a href="/images/2016/05/02/GMA.jpg" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/05/02/GMA.jpg" alt=""></p>
<p> </p>
<div>At the state level delinquency rates are incredibly low in New South Wales (0.29 per cent).</div>
<div> </div>
<div>Delinquency rates are notably higher in Queensland (0.55 per cent), in part due to mining town foreclosures, and largely related to the literal wash-up from the severe 2011 flooding in the state.</div>
<div> </div>
<div>The largest year-on-year rise in delinquency rates of 16 basis points was seen in resources rich Western Australia, where portfolio delinquencies have increased to 0.53 per cent.</div>
<div> </div>
<div>Nevertheless, Genworth sees the mortgage market remaining strong in aggregate, reporting in its investor update:</div>
<div> </div>
<div><em>"The outlook for the Australian residential mortgage market remains strong, supported by sound fundamentals including low unemployment, record-low interest rates and a continued focus by regulators on lending standards."</em></div>
<div> </div>
<div>And notably Genworth expects further constraints on high LVR lending in 2016 and beyond:</div>
<div>
<br><em>"The high LVR market continues to be constrained in 2016 and Genworth continues to expect GWP to decline by approximately 20 per cent due to these market conditions."</em>
</div>
<div><em> </em></div>
<div>Share market analysts were fairly unmoved on the news, the share price steady at around $2.39.</div>
<div> </div>
<div>
<p><span><em>PETE WARGENT is the co-founder of <a href="https://allenwargent.com/" target="_blank" rel="nofollow">AllenWargent</a> property buyers (London, Sydney) and a best-selling author and <a href="https://petewargent.blogspot.com/" target="_blank" rel="nofollow">blogger</a>.</em><br></span></p>
<p><em>His latest book is <a href="https://www.bigskypublishing.com.au/Books/General-Interest/Four-Green-Houses--and-a-Red-Hotel/1015/productview.aspx" target="_blank" rel="nofollow">Four Green Houses and a Red Hotel</a>.</em></p>
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Genworth mortgage insurance update: Pete Wargent

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<p>The Commonwealth Bank of Australia has posted a full-year cash profit of $9.233 billion, down some 4.8 percent.</p>
<p>The last time the bank posted a weaker profit was in 2009.</p>
<p>The result includes $400 million in regulatory costs. The decline was mostly driven by a $700 million penalty paid to AUSTRAC after it breached anti-money laundering laws.</p>
<p>CEO Matt Comyn said the results concluded what had been "a difficult 12 months" for the bank.</p>
<p>"I wanted to start by thanking all of our people right throughout the business who have worked incredibly hard in challenging circumstances to deliver a result of $9.2 billion, which at a headline level is down 4.8 percent, although there has been a number of one-off items that have impacted the result, including a couple of large penalties that we have resolved," said Comyn.</p>
<p>"If you strip some of those out, actually the result looks more from an underlying perspective up 3.7 percent."</p>
<p>Comyn said he recognised the impact the bank's mistakes were having on customers.</p>
<div data-module="video" data-class="video-js video-js--network" data-param-page-name="finance:finance:home:default" data-video="5778774177001" data-category-name="MSNVideo_Cat" data-category-value="ausydney" data-sticky-enabled="false" data-sticky-target-selector=".layout__utility" data-show-description="data-show-description">
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<div id="player_vl6eu" lang="en-au" data-param-page-name="finance:finance:home:default" data-param-video-name-prefix="finance|" data-param-ad-unit="finance/web" data-video-id="5778774177001" data-player="H190EXsjW" data-account="664969388001" data-embed="default">"We just have to recognise we have not done a good enough job for our customers. We got some things wrong. We have made mistakes," said Comyn.</div>
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<p>"We absolutely need to make sure we do not make them again. And a big part of my job of course is making sure we are a simpler and better bank for our customers, working closely with any customers who have not had a good experience, but most importantly making sure that those sorts of issues do not recur.</p>
<p>"Ultimately it is going to be something that our customers need to decide, and I am very comfortable, and feel very accountable, for ensuring that we deliver great experience and outcomes for our customers over the long term."</p>
<p>The Commonwealth Bank board declared a full year, fully franked dividend of $4.31.</p>
<p>It noted switching from interest-only mortgages was stressing some borrowers.</p>
<p>The number of home loan borrowers late on repayments spiked, but Comyn said customers have been able to get payments back on track by paring back their spending elsewhere.</p>
<p>CBA advised a 10 basis point increase in the number of customers more than 90 days late on their home loan repayments - from 0.60 per cent to 0.70 per cent of borrowers. </p>
<div>
<p>Comyn said he did not expect the arrears levels would deteriorate further and that "over time, the customers adjust to the new payments".</p>
<p data-gtm-vis-first-on-screen-7770372_137="391847" data-gtm-vis-total-visible-time-7770372_137="4000" data-gtm-vis-has-fired-7770372_137="1">Analysts asked Mr Comyn about the rising arrears during the results briefing, with Macquarie's Victor German observing the number is a "historical leading indicator for deteriorating credit quality". </p>
<p>CBA is the largest mortgage lender in Australia, with 1.5 million home loan accounts with a total balance of $374 billion.</p>
<p>Of these, 64 per cent of borrowers are owner occupiers. </p>
<p>Some 30 per cent of CBA mortgage customers are on interest-only loans, down from 39 per cent a year ago. </p>
</div>
<div>Around 27 per cent of CBA's interest only borrowers are expected to switch to principal and interest loans in FY2019 with the bank writing to interest only borrowers 12 months before their loans reset to warn them of the changes.</div>
<div> </div>
<div>The AFR noted the briefing was advised 79 per cent of customers coming to the end of an interst only period have an opportunity to extend the interest-only terms for a further year. </div>
<div>
<p>CBA said the uptick in mortgage arrears reflects "pockets of stress" in the economy, mostly in Western Australia, where the bank saw "continued softness in outer metro and regional" areas rather than mining towns, and in the Northern Territory, where its small book was hit by rising unemployment as resource projects were completed.</p>
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CBA profit dips for first time in decade as mortgage arrears spike

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<p><span>Lendlease delivered profit after tax for the half year ended 31 December 2015 of $353.8 million, versus the prior corresponding period profit after tax of $315.6 million, up 12 percent.</span></p>
<p><span>“Significant momentum has driven first half of 2016, with increasing cash generation and a positive growth outlook,” CEO and managing director, Steve McCann said.</span></p>
<p><span>The highlights were signalled as:</span></p>
<p><span>Estimated development pipeline end value of $46.6 billion, up 15 percent</span></p>
<p><span>Residential pre sales revenue of $5.4 billion, up 49 percent</span></p>
<p><span>Residential settlements of 2,128 up 45 percent</span></p>
<p><span>Construction backlog revenue of $18.6 billion, up 19 percent, with a further $6.1 billion of </span><span style="line-height: 1.3em;">construction new work secured, up 30 percent</span></p>
<p><span>Funds under management of $22.0 billion, up 26 percent, including $1.2 billion of third party capital</span></p>
<p><span>“We remain on a strong growth trajectory, with greater visibility to earnings and cash over the coming years,” he said.</span></p>
<p><span>“Our development pipeline has grown to $46.6 billion, with approximately 75 percent represented by urbanisation related projects. During the half we had strong sales momentum at residential projects at Victoria Harbour in Melbourne and Elephant &amp; Castle in London and we secured planning approvals for a new urban regeneration project in Chicago,” he said.</span></p>
<p><span>Residential pre sales reached a record $5.4 billion, up 49 percent and residential settlements rose 45 percent to 2,1285 .</span></p>
<p><span>“In the last six months we have settled over 650 apartments, with non-settlement at less than 1 percent versus our historic average of less than 3 percent.</span></p>
<p><span>"We maintain a disciplined approach to delivery risk and pre sales.”</span></p>
<p><span>Lendlease today announced the appointment of David Craig to its board.</span></p>
<p><span>Mr Craig is the Chief Financial Officer (CFO) of Commonwealth Bank of Australia, and has also served as a Non Executive Director of The Australian Gas Light Company Limited (AGL) and Colonial Mutual Life Assurance Limited.</span></p>
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Victoria Harbour sales momentum assists Lendlease profit

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<p><span>Industry super fund-owned bank ME has reported an underlying net profit after tax of $60 million for FY2015, a rise of 27% on the previous reporting period.</span></p>
<p><span>The increase was driven by growth in home loan settlements, up 22 per cent to $4.6 billion, as well as disciplined management of net interest margin.</span></p>
<p><span>ME chief Jamie McPhee, said it was a strong performance.</span></p>
<p><span>ME’s cost-to-income ratio continued to fall, reducing 260 basis points to 68.5%.</span></p>
<p><span>McPhee said cost-to-income had been on a downward trajectory since June 2009 when the ratio was 84.5%.</span></p>
<p><span>Customer numbers grew 8% to 338,000 with customer deposits increased 7 per cent to $8.8 billion.</span></p>
<p><span>Total on and off balance sheet assets grew 7 per cent to $23.3 billion, with total loans on the balance sheet growing 19% year-on-year to $17.8 billion.</span></p>
<p><span>The broker sales channel surpassed $2.2 billion, up from $1.2 billion last year, an increase of 83%.</span></p>
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ME Bank profit up 27%

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<p><span>REA Group has reported a full-year underlying net profit after tax of $185.4 million, up 24% on a year ago, with revenues up 20% to $523 million.</span></p>
<p><span>Ad sales were slightly below consensus forecasts of $528 million, as were net profits, which analysts had forecast at $192 million, according to Bloomberg.</span></p>
<p><span>The shares, which got to a year high of $51.28 in February, are trading at around $41.20.</span></p>
<p><span>REA Group chief executive Tracey Fellows told investors and analysts on a conference call the business had "achieved 20% revenue growth despite listing volumes in the Australian market being down 4%" for the year ended June 30. </span></p>
<p><span>"Listing volumes recovered in June and this recovery has continued into July; giving us some indication of improving market conditions for the first half," Ms Fellows said.</span></p>
<p><span>“We’ve accomplished this by providing our customers more choice and better value and by giving the 3.4 million people who use our sites monthly an exceptional experience.</span></p>
<p><span>“Our strategy to take our expertise both internationally and to new markets gathered pace this year.</span></p>
<p><span>"We have expanded into the world’s largest property market, the US with Move; as well as one of the fastest growing regions through our iProperty investment in Asia.</span></p>
<p><span>“And we launched our utility connections service that is helping movers compare and connect services to their property, such as gas, electricity and subscription TV."</span></p>
<p><span>Australian revenue</span>s increased by 21% to $472.8 million this year.</p>
<p>Its agent customers increased by 5% to 9,922 for the year ended 30 June 2015.</p>
<p>Average monthly visits to realestate.com.au main and mobile sites grew 26% with the average number of monthly page views on realestate.com.au at around 991 million, that REA claims is some six times higher than the number two site, Domain.</p>
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REA Group sees emerging higher property listing revenues - and utility connections 

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<p><span>House renovators hoping for a quick profit run the risk of underestimating the cost of the flip.</span></p>
<p><span>But Cherie Barber, a professional renovator who runs a company providing renovation courses, remains optimistic about buying for renovation and sale.</span></p>
<p><span>Barber says it is always possible to renovate for a profit.</span></p>
<p><span>"You cannot talk about a single Australian market," she recently told <em>The Australian Financial Review</em>.</span></p>
<p><span>"There are more than 4000 suburbs and as many markets."</span></p>
<p><span>She says renovating to sell or hold depends on individual markets, which means analysis of the costs and benefits of the property, street and suburb.</span></p>
<p><span>Research suggest about 6 per cent of residential properties sold in Australia sold again in less than two years.</span></p>
<p><span>Across the country, CoreLogic RP Data noted homes that resold recently at a loss had an average length of ownership of 6.0 years.</span></p>
<p><span>Across resales of homes throughout the March 2015 quarter, those homes that were held for only a short period of time proved to be much more susceptible to loss.</span></p>
<p><span>Although home values increased over the past 12 months, 13.0% of owners who purchased and resold in the same year recorded a gross loss.</span></p>
<p><span>Any flip investment needs to estimate value the time involved and also the risks on the costs of acquisition, holding, renovating and selling.</span></p>
<p><span>Cherie Barber says she can complete a 10-day complete makeover of a house that would take other renovators between six and 12 months at double the cost.</span></p>
<p><span>She suggests not to pay the invoices in full until you are 100% happy with the works being completed.</span></p>
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The renovation flip is still doable: Cherie Barber

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<p><span>The Frank Costa family will retain 10.5% of Australia's biggest horticulture company, which is expected to list on the ASX with an $840 market value in August.</span></p>
<p><span>The <em>Australian Financial Review</em> report the IPO is priced at $2.20 to $2.70 a share, which is 14.9 to 17.6 times Costa's forecast net profit for the 2016 financial year.</span></p>
<p><span>The pricing has implied a dividend yield of between 3.4% and 4.1% for the same period.</span></p>
<p><span>The <em>AFR's Street Talk</em> column suggests based on the mid-range price of $2.45, the Costa family will make $158 million from selling down their stake in the 127-year-old company</span></p>
<p><span>Costa has been pitching the company to investors as an industrial technology company rather than purely an agriculture company following its move into protected cropping, which accounts for about 75% of its earnings now.</span></p>
<p><span>Costa owns five blueberry farms in Morocco in a joint venture with three minor shareholders and has also partnered with US berry company Driscoll's to build a farm in China.</span></p>
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