Via UBS:
APRA announces removal of 10% investor cap
APRA announced the removal of the 10% cap on investment property loan growth for ADIs from 1 July 2018 (established Dec 2014). However this removal only applies to ADIs that can demonstrate: 1) Investor loan growth <10% for the past 6 months; 2) CET1 is on target to meet ‘unquestionably strong’; and 3) “ADIs are required to comply with Responsible Lending obligations” (i.e. they must “obey” the Law). APRA also reminded banks that “a return to more rapid rates of investor loan growth at an aggregate level…could lead APRA to consider the need to apply the counter-cyclical capital buffer or some other industry-wide measure”. While on the surface lifting the 10% cap appears to be a loosening in macroprudential policy, we see these new requirements as a material tightening in standards.
Expense benchmarks not a replacement for “reasonable inquiry”
The Royal Commission and APRA have brought a significant amount of attention to banks’ over-reliance on expense benchmarks (HEM) in their loan serviceability assessments. Today APRA has confirmed that “ADIs should not rely on benchmarks…Benchmarks should provide a floor where declared expenses appear low, not a replacement for making reasonable inquiries”. ADIs must also improve the collection of borrower living expenses and the use of benchmarks will be closely monitored. We see this as a prudent development that may take time to achieve given the need for internal training and IT expenditure to upgrade processes and systems.
Cap on Debt to Income above 6x
APRA has asked ADIs to commit to developing an internal limit for “very high Debt-toIncome levels (DTI > 6x) and policy limits on maximum DTI levels for individual borrowers”. While the major banks have not disclosed internal limits on Debt-to Income for their mortgage borrowers, the Royal Commission has recently released APRA’s Targeted Review into Westpac’s mortgage book which showed that 49% of WBC’s sample borrowers had a DTI of 6x or greater. Therefore such a Debt-to-Income limit is likely to have a material impact on credit availability going forward.
We remain very cautious on the banks
Despite the perception of the removal of macro-prudential limits, we see this as further evidence of tightening underwriting standards to comply with Responsible Lending and APRA’s guidelines. As credit becomes more restricted we believe a Credit Crunch scenario cannot be ruled out. We remain very cautious and are underweight the banks.
