Deutsche: APRA’s Clayton’s macroprudential

From Deutsche:

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!

David Llewellyn-Smith

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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  1. Looks like a “claytons” approach to me.

    You’d have to question how much heat this will take out of the property market given the RBA is likely to cut interest rates more than once in the first half of 2015…

      • All those speaches and hand wringing has come to ferk all again.
        WBC has 44% of it’s loan book to speculators ! WTF !

        No fire here time to talk to them softly only at this stage it is the rate of growth not the level ?

        My god what a joke. Anyway my 1890s Land Boom destruction seems to be coming so wont matter what these wankers say or do.

        Land price crash brought on by commodity crash and banks losing access to capital … thats all the Mother @^%&[email protected] * Macro Prudential we will need end of story !

  2. mine-otour in a china shop

    Whilst this is another small step in the right direction APRA continues to be behind the curve (mostly because it and the RBA doesn’t believe there is a problem). The credit risk horse has well and truly bolted.

    First we had stress tests, heightened supervision and targeted reviews announced all too late and slow to be activated. Then we have guidance and a letter. The ADI’s must be quaking in their boots! When will we see some real action?

    Turning APRA’s leadership (heavily influenced by the Littrell and Ellis banking thinking and as mentioned in various speeches) is like turning an oil tanker. Where is the regulatory foresight so often trumpeted? We don’t need “dialling up” of supervision now in response – we need to be ahead of the curve.

    With APRA unwilling to act alone and only via the CFR (which worryingly now has ASIC involved) we should be living in fear. The banks will tell APRA what to do, whilst APRA prays it all blows over with a soft landing for the Banking and Housing sector.

    Come on Wayne Byers show us some action….

    • mostly because it and the RBA doesn’t believe there is a problem

      I don’t think this is right anymore. They’ve got to know they have a problem by now. I think they’re terrified of taking any action that could possibly bring forth a collapse. They’ve lost control.

      It’s like trying to get a grizzly bear back in a tiny cage without a tranquilizer gun. How do you do it without killing the bear or getting ripped to shreds yourself?

      • I look forward to the regulator’s employees being personally sued when TSHTF. Responsibility and skin in the game is mandatory for a regulator.

      • mine-otour in a china shop

        I think some elements of senior management in both organisations are still in denial.

        Whilst acknowledging some staff members on the ground continue to have problems with the build up of credit risk, they have little influence over the executive management.

        The Senior Management now have to be seen to be doing something to allow the RBA to engage the lower interest lever, place a few safety bets that it things do go pear shaped they can say they at least warned us, and finally hope the market makes it all blow over.

        Same result though… No action and yes no control.

  3. Its all relatively. For APRA, (the toothless wonder who has allowed the banks to ride rampant thru the economy), this is brave stuff! They have at least found the lettuce leaf to wave about – prior they just sat in the corner and did what they were told by the govt/banking bosses. This is APRA’s way of ‘warning’ the banks they may take action if they see things they don’t like.

    Never expected APRA to have any balls to really DO something, so this is at least a step in the right direction. At least now when it all goes to custard they can say ‘hey we tried, we warned you’.

    Hopefully Mr Murray has some bigger balls and authority to actually get something moving here. Either way, Mr Market will sort out what APRA can’t manage, sooner rather than later.

    • mine-otour in a china shop

      Wet Lettuce leaves in custard on APRA’ current menu doesn’t sound too tasty.

      Still the ADI sector will be dining well this Christmas. All those internal capital models still approved by APRA, and interest only loans being hounded now by ASIC – pass the Grange!!!

      • I can literally see before my very eyes the wheels turning further on those internal models…. banks are scrambling to be even more and more creative and put even greater pressure on APRA and Murray to stop what they are doing.

        I’ve been reading MB for about 1 1/2 years now, while working at a Big 4. All what has been said on this site is eerily coming to fruition, much faster and more readily than any of us I think expected.

        If these predictions continue to hold true, its going to be a f’ing scary 2015-2017.

    • As a latecomer with high growth rates Maquarie has a perfectly reasonable basis for objecting to the investor credit growth rate caps. Seems the regulator is also a cartel enforcer.

  4. Sooooooooooooooooooooo – nothing.

    No macroprudential, nothing from the Murray, nothing from the FIRB, nothing from anywhere.

    There is – literally nothing being done. Lots of talk of course.

    Oh, and guess what – interest rate cuts will of course happen.

    The worst of all possible outcomes….well done, no really, well done.

    The Australian economy has a paralytic drunk at the wheel of the car, everyone agrees they need to sober up, show responsibility, slow down, obey the rules, let someone else drive and be safe.

    Fantastic – we are all in agreement then – shall we implement some of these ideas then ??!!

    “Here, have another can of VB Thelma – don’t listen to those wowsers in the back seat – buckle up !”

  5. Forgive me if this is obvious…but if the focus is on national numbers ie 10% investment loan growth how does that address the problem of the hotspots… Sydney and Melbourne investments?