Fitch pounces on rate cut, demands MP

Onya Fitch:

Fitch Ratings-Sydney-05 May 2015: Fitch Ratings says the Reserve Bank of Australia’s (RBA) recent interest rate cut is likely to lead to a strengthened macro-prudential response from the Australian Prudential Regulatory Authority (APRA) for the Australian banking system, although implementation will probably remain targeted and occur on a bank-by-bank basis.

Today’s rate cut is likely to further fuel the Australian property market, particularly in Sydney, at a time when the authorities are trying to take the steam out of the market. Macro-prudential tools allow the regulator to influence banks’ risk appetite, preserving asset quality and limiting potential losses in the event of an economic shock. The Australian banking system benefits from strong loss absorption capacity given the banks’ sound profit generation and provision levels, as well as adequate capitalisation. These strengths could be undermined by further increases in property prices and household debt, given mortgages form the largest asset class for Australian banks.

APRA has targeted certain higher risk areas such as investor mortgages, indicating growth in excess of 10% per annum would trigger closer regulatory monitoring and may lead to tougher capital requirements. In addition, APRA could use a set of other macro-prudential tools which may include a combination of debt-servicing requirements, additional capital requirements and/or loan-to-value ratio (LVR) restrictions, depending on each lender. Given the existence of lenders’ mortgage insurance (LMI), which mitigates the banks’ risk of higher LVR mortgages, debt-servicing requirements and higher capital requirements on a bank-by-bank basis are likely to be the preferred options.

Growing risks in the housing market and the banks’ mortgage portfolios could be exacerbated if further macro-prudential scrutiny is not forthcoming. The recent interest rate cut may lead to further house price appreciation, especially in cities such as Sydney and Melbourne, where there has been greater investor activity over the past 12 to 18 months. The first rate cut in February 2015 was followed by increased activity in these housing markets. The growth in house prices exceeded lending growth up to the end of 2014, but this trend could reverse as interest rates are at historical lows. At the same time, it makes borrowers vulnerable to a potential increase in interest rates in the medium term. Australia has one of the highest household debt levels globally, and if low interest rates contribute to higher credit growth, it could drive up household indebtedness from already historically high levels.

Falling interest rates may also result in further growth in potentially higher-risk loan types, such as interest-only and investor loans. These loan types already represent a high proportion of new approvals for Australian banks, as shown in Fitch’s “APAC Banks: Chart of the Month, February 2015”. The proportion of new interest-only mortgages is higher than new investor mortgages, suggesting that owner-occupiers are increasing the use of these types of loans at a time when historically-low interest rates should encourage borrowers to pay off debt. Serviceability testing at Fitch-rated Australian banks may provide some offset to this risk, with loans assessed on a principle and interest basis and at interest rates well above the prevailing market rate.

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)


  1. It’s macpru or bust now.

    (Well actually it’s macpru and bust, or no macpru and Melbourne c. 1893.)

    • Nope, MP fairy if does become real will now be blamed for the bust.

      Add MP to that ever growing list that has NG at the top that will never be tried in the future for the fear of consequences.

    • If it is going to bust regardless, you might as well as let it rip, sucking in all the potential buyers into the vortex. It will mean less competition when the eventual bust happens and I am out picking up the pieces.

    • Tesla’s Powerwall
      As soon as they’re available in Oz 2016 I’ll be ordering about 30kWh of storage

      • I’m going to get just one of them (10kWh) and wait for the price to drop. The ROI on the first unit is way above that of subsequent ones. A grid connection with no/minimal use starts to look like a cheap backup system for your home solar plant – until they figure it out.

      • Tassie TomMEMBER

        We’re looking at building a holiday house. We will probably connect it to the grid, but build it so that it is easy to convert to “off-grid” – ie, have a room ready for batteries to be put into with the wiring leading to that room ready to go.

        Retrofitting is expensive, but not as expensive if it has been planned for.

      • I reckon I’ll get a couple a couple. Firstly to take advantage of cheaper overnight power, and secondly to use as a full-home UPS. We get a five or ten second outage at least once a week which is a huge pain in the arse. Will also be useful when I replace the crappy solar panels that we inherited when we bought our house a few years ago.

      • Hope you guys plan on air-conditioning your battery room. A temperature rise of only 5 degrees (from a base of 24 degrees) will half your battery life, and batteries get hot when charging.

  2. You all talk about the battery in terms of kWh, but that is not what counts. Tesla is playing an interesting semantic game.
    Quoth the experts:
    “Batteries store energy. Power is energy per time. This also means that energy can be expressed as power times time, like the kiloWatt-hours used to express the electric energy your house consumes during a billing period.
    Batteries are usually rated in units of current times time. This does not directly tell you how much energy the battery can store, but can be a more useful value in deciding how long a circuit will run from a battery. For example, a car battery might be rated for 50 Ah. That means in theory it could source 50 A continously for 1 hour and then go dead. In practise it’s never that simple, and there are various factors that effect battery capacity (the current*time rating), like temperature rate of discharge, previous history, etc.”

    A 100Ahr Lithium ion battery on ebay currently sells for $1300. It is not clear which Tesla is selling.

    • “It is not clear which Tesla is selling.”

      As everything with Tesla… stock buffing imaging~~~

    • It’s very clear what Tesla is selling. For a battery bank supplying an AC system, the output is (for all economic installations) limited by the size of the inverter, not the battery. The powerwall has an inverter capable of 2kW continuous output and 3kW peak. The peak current the batteries can supply is immaterial, since it vastly outstrips the capacity of the inverter.

      • tsport100MEMBER

        According to Tesla Spec, the DC-AC inverter not included. The continuous and peak output factors of any battery pack are based on the the battery cell discharge curve, commonly referred to as a ‘C’ rating. Tesla use Panasonic NCR18650B cells rated at 3200mAh with a charge rate of 0.5C and discharge rate up to 2C. According to Tesla specs the most likely cell configuration is 125S2P so 8.6 amp peak output is only 1.3C.

  3. Great more behind-the-scenes MP. Because everyone knows APRA’s opaque bank regulation has worked so well before..