APRA’s new mortgage standards focused on quality, not quantity of lending In its letter to the banks, APRA indicated that it will increase the level of supervisory oversight on mortgages given recent developments in the housing and mortgage markets. That said it does not propose to introduce across the board increases in capital requirements or caps on particular types of loans.
Whilst at first glance the proposed loan serviceability tests may be slightly more conservative than existing practices, we believe the overall impact on bank profitability is likely to be relatively benign with APRA indicating these proposed buffers are trigger points for further supervisory action and that most ADI’s already operate inline with the proposed practices. That said the upside from further improvement in lending growth is likely to be limited.
APRA indicates heightened focus on mortgage lending standards
APRA indicates an increased focus on the following areas: 1) higher risk mortgage lending, 2) investor lending where portfolio growth materially above % will be scrutinised; and 3) loan affordability tests for new borrowers – an interest rate buffer of at least 2% and a floor lending rate of at least 7% have been proposed. We do note that these proposed thresholds/buffers are nothard targets but rather trigger points for more intense supervisory action. In addition, ASIC will conduct a surveillance into the provision of interest-only loans as part of a broader review by regulators into home-lending standards.
Loan affordability tests not materially different to current practices
Not all banks disclose their current buffers/floors in their loan serviceability tests. WBC has disclosed that it currently applies a minimum interest rate floor of 6.8% and a buffer of 180bps above the standard lending rate while CBA applies a buffer of 150bps in its serviceability test and an undisclosed floor rate. Whilst we do not expect a significant impact on bank profitability from APRA’s proposed loan serviceability criteria, it does appear the higher proposed buffer may impact CBA slightly more than WBC.
Investor housing growth running at around 10%
As shown below, system investor housing loan growth is currently at around 10% and none of the major banks’ investor housing lending growth is running materially above the 10% mark. As such we do not expect the major banks to be significantly impacted by the 10% threshold. That said, it does limit the potential upside to banks’ housing lending growth should the lending demand rise further. Whilst MQG’s growth in investor lending is significant, this reflects the low base and the ratio of investor growth vs owner occupied growth is broadly inline with the peer average.
We’ll know soon enough if APRA has panzied-it-up this badly.
UBS’s excellent Jonathon Mott is more constructive:
10% threshold on Investment Property credit growth is significant
APRA has been focused on mortgage underwriting standards for some time. As a result we believe the banks are unlikely to be impacted by its high loan-to-income, high LVR or affordability tests. However, system Investment Property credit growth is already running at 9.9%. The 3 mth annualised rate is currently 10.9%. This implies any bank growing at or above system in Investment Property risks triggering “intense supervisory action”. This includes higher capital requirements. Over the last 12 months Investment Property credit growth rates have been: ANZ 10.0%; CBA 8.8%; NAB 10.9%; WBC 9.7%; BEN 3.9%; BOQ -0.8%; SUN 7.1%; MQG 55.8% (no, that’s not a typo).
Banks will need to slow new lending flow ~10% to slow credit growth by 2%. (1) Although these actions only apply to banks growing “materially” above 10%, we believe that bank boards and management are unlikely to risk antagonising APRA and will act to slow Investment Property credit growth to a buffer below this level; (2) Banks cannot directly control Investment Property credit growth. They can only directly control new lending flows. Other mortgage flows such as redraws are often contractual facilities, while property sales, external refinancing and mortgage paydowns are largely outside a bank’s control. We estimate that for banks to reduce Investment Property credit growth by 2% they need to reduce new lending flows by ~10%. Although this is not expected to deliver a material earnings hit to the banks, it is likely to have a cooling effect on some of the hottest parts of the housing market.
It’s a Mac Bank smash!