Moody’s praises MP tightening, wants more

From Moody’s:


Sydney, May 26, 2015 — Moody’s Investors Service says that recent changes by Australia’s four leading banks to their criteria for residential investment lending are credit positive for these institutions, but they will also need to implement additional changes to fully address the risks in the housing market.

“In our view, these initiatives are credit positive since they reduce the banks’ exposure to a higher-risk loan segment,” says Ilya Serov, a Moody’s Vice President. “In the absence of mitigating actions, the increasing proportion of investment and interest-only loans would, in our view, lead to a weakening of the bank portfolios’ quality.”

“At the same time, it is likely that further initiatives will be required during 2015 to bring investment lending in line with regulatory guidelines, as well as to adjust lending criteria and capital levels to respond to the rising tail risks embedded in the banks’ evolving housing portfolios,” adds Serov.

Serov was speaking on the release of a new Moody’s report, “Australian Banks’ Moves to Curb Residential Investment Lending Are Credit-Positive”.

Moody’s also says that its expectations of more conservative loan originations and increasing capital continue to support its stable outlooks on the ratings of Australia’s four major banks — Australia and New Zealand Banking Group Ltd, Commonwealth Bank of Australia, National Australia Bank and Westpac Banking Corporation.

Media reports and company disclosures indicate that the big four have recently made changes to their lending practices for residential investment lending, including the removal, or reduction, of the mortgage interest rate discounts offered to new investors. In some cases, the changes also include loan-to-value ratio (LTV) caps and other measures designed to tighten investment lending criteria.

“We expect the changes made by the banks will slow investment lending growth closer to regulatory benchmarks. Although a number of Australian banks are currently running above the 10% regulatory benchmark on a 12-month basis, the latest 3-month annualised data suggest the banks have already taken some actions to bring their investment lending growth rates below the 10% cap. The additional lending constraints are likely to slow down investment lending further,” says Serov.

At the same time, the growing imbalances in the Australian housing market pose a longer-term challenge to the Australian banks’ credit profiles, over and above the immediate concerns around investment lending, says the Moody’s report.

The Australian housing market is characterized by elevated and rising house prices, declining mortgage affordability, and record levels of household indebtedness. In this context, addressing the tail risks embedded in banks’ housing portfolios is likely to entail further tightening in the banks’ lending criteria and/or increases to their capital levels.

“Accordingly, we expect the banks to further curtail their exposure to high LTV loans and investment lending over the coming months. Moreover, we expect that over the next 18 months, the banks will gradually improve the quantity and quality of their capital — likely through a combination of upward revisions to mortgage risk weights and capital increases,” says Serov.

“These considerations, in conjunction with the banks’ actions to improve their underwriting standards, support our stable outlook on the major banks’credit ratings,” says Serov.


David Llewellyn-Smith
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  1. Now the banks just need to get the brokers playing from the same song sheet. Good luck with that.

  2. Good move! Go Moodys.
    There’s only 1 wheel nut left on each wheel of the Aussie straight line drag car… better tighten them quick smart!!

  3. Torchwood1979

    Out of interest, does anyone still think we have a chance for an orderly deleveraging and rebalancing?

      • Torchwood1979

        And what if they aren’t enforced? Could the bubble blow a bit longer and the bust manage to be even bigger?

      • “Could the bubble blow a bit longer and the bust manage to be even bigger?”

        No way I’d try to predict the timing (though I think we must be getting close) but I have no doubt the end game is a massive deflationary bust. Bigger than a recession – wouldn’t surprise me if it’s a depression given our massive levels of debt.

      • flyingfoxMEMBER

        From what’s been outlined by APRA etc, I don’t think things will keep going up. I think they are trying to get a flat line in Syd and Melb. The enforcement has already started, the banks have made announcements and started raising equity. The only question is what happens if we start seeing a drop in prices. Do the banks hold or …

    • Not a chance, it will be orderly for a while until it reaches the tipping point, then its going to get very messy very quickly.

    • RBA will slash rates to 0 or beyond, that’ll keep things relatively orderly… 😉

      No, I think there will be a panic, calm in eye of the storm, then SHTF… then Australia will be awesome.

      • Torchwood1979

        then Australia will be awesome.

        I rewatched the original Mad Max the other night. A massive oil shock destroying the economy, authorities working out of dilapidated buildings trying to hold things together as the gangs take over. A cheery dystopian “near future”.

        Replace the oil shock with a credit shock and the bikie gangs with banksters and in some ways Mad Max is coming true. As long as there are awesome cars I can live with it.

      • Ha MM could turn out to be a documentary. It’s amusing that Mad Max’s origins are aussie. I won’t be wearing chaps but each to his/her own.

        Jokes aside I still see oil/petrol to be the major catalyst of mean reversion. I tend to smile when the pump price jumps.

    • Nope. Rudd blew all chances of that when he tied our property bubble to the Chinese bubble(s).

      2012 was the last chance. You’re now strapped to a ballistic missile that is near the top of its trajectory and has run out of fuel. It might keep going up for a while, but the medium to long term fate is a certainty.

      • Torchwood1979

        +1. I lay a decent chunk of the blame at the feet of Rudd. Doubling the FHB grant against Treasury advice was a massive mistake, and one that he should be tarred with forever. And all of this after using the words “affordable housing” ad nauseam in the Kevin07 election campaign.

        What’s worse is that in 2007 he clearly saw the risk of the mining boom would be temporary, realised there was a chronic private debt problem linked to housing and during his first year in office realised the precarious funding situation our TBTF banks were in.

        The most popular PM in Newspoll history as he was in 2009/10 let all the opportunities slide away…