Tag: APRA

Home Lending Accelerates In December

The latest data from APRA, the monthly banking stats for ADI’s shows a growth in total home loan balances to $1.6 trillion, up 0.5%. Within that, lending for owner occupation rose 0.59% from last month to $1.047 trillion while investment loans rose 0.32% to $553 billion. 34.56% of the portfolio are for investment purposes.

The monthly ADI trends show this clearly (the blip in August was CBA adjustments). Growth accelerated across all loans, and within each type.

The portfolio movements within institutions show that Westpac is taking the lions share of investment loans (we suggest this involves significant refinancing of existing loans), CBA investment balances fell, while most other players were chasing owner occupied loans. Note the AMP Bank, which looks like a reclassification exercise.

Overall market shares remain stable, with CBA holding the largest share of owner occupied loans and Westpac leading on investment loans.

The 10% speed limit for investment loans is less interesting, given the 12 month average grow of 2.4%, but most of the majors are well below the 10%. Westpac is the major growing its investment book fastest, while CBA is in reverse. Clearly different strategies are in play.

Standing back, the momentum in lending is surprisingly strong, and reinforces the need to continue to tighten lending standards. This does not gel with recent home price falls, so something is going to give. Either we will see home prices start to lift, or mortgage momentum will sag. Either way, we are clearly in uncertain territory. Given the CoreLogic mortgage leading indicator stats were down, we suspect lending momentum will slide, following lower home prices. We publish our Household Finance Confidence Index shortly where we get an updated read on household intentions.

The RBA data comes out shortly, and we will see what adjustments they report, and momentum in the non-bank sector.

Irresponsible Mortgage Lending A Significant Risk For Seniors

From NestEgg.com.au

Surging property prices in Australia’s capital cities can be attributed to irresponsible lending, but it’s not just young buyers suffering the consequences, a consumer organisation has said.

In its submission to the royal commission into Misconduct in the Banking, Superannuation and Finance sector, the not-for-profit consumer organisation, the Consumer Action Law Centre (CALC) said the number of Aussie households facing mortgage stress has “soared” nearly 20 per cent in the last six months, and argued that lenders are to blame.

Referencing Digital Finance Analytics’ prediction that homes facing mortgage stress will top 1 million by 2019, CALC said older Australians are at particular risk.

The organisation explained: “Irresponsible mortgage lending can have severe consequences, including the loss of the security of a home.

“Consumer Action’s experience is that older people are at significant risk, particularly where they agree to mortgage or refinance their home for the benefit of third parties. This can be family members or someone who holds their trust.”

Continuing, CALC said a “common situation” features adult children persuading an older relative to enter into a loan contract as the borrower, assuring them that they will execute all the repayments.

“[However] the lack of appropriate inquiries into the suitability of a loan only comes to light when the adult child defaults on loan repayments and the bank commences proceedings for possession of the loan in order to discharge the debt,” CALC said.

The centre referred to a Financial Ombudsman Service (FOS) case study in which retiree and pensioner, Anne, entered into a loan contract with her son Brian. The repayments were to be made out of Brian’s salary and Anne’s pension. The loan was requested in order to extend her home so that Brian could live with her.

Following loan approval, the lender provided more advances under the loan contract. The advances were used to pay off Brian’s credit debt and buy a car.

When Brian left his job to travel, Anne could no longer afford the repayments and the lender said it would repossess her home.

“Anne lodged a dispute with FOS. After considering the dispute, FOS concluded that Anne was appropriately a co-debtor in the original loan contract, as she had received a direct benefit from the loan (the extension to her home and therefore an increase in its value),” CALC said.

“However, FOS considered that she was not liable for the further advances as she did not directly benefit from the application of the funds. Even though the repayment of Brian’s credit card debts may have provided more towards the household income, FOS concluded that this was not a direct benefit to Anne.

“Neither was the purchase of a car for Brian, as there was no information to show that Anne used the car or relied on Brian to transport her.”

CALC also expressed concern that the Household Expenditure Measure (HEM) is not a robust enough living expense test.

Noting that the Australian Prudential Regulation Authority shares their concern, the centre said the reliance on the HEM test raises concerns about the robustness of the actual measure.

“APRA states that it has concerns about whether these benchmarks provide realistic assessments of a borrower’s living expenses.

“In the same vein, ASIC has issued proceedings against Westpac in the Federal Court for failing to properly assess whether borrowers could meet repayment obligations, due to the use of benchmarks rather than the actual expenses declared by borrowers.”

CALC warned that over-indebtedness has ramifications for the economy but also for individuals and families.

Highlighting the link between high levels of debt and lower standards of living, CALC said it can have significant long-term effects as well, with the capacity to damage housing, health, education and retirement prospects

APRA Mortgage Curbs Permanent?

Calls to reduce the current regulatory restrictions, for example on investor and interest only loans, will probably fall on deaf ears. Last year, the Bank of England confirmed that its own version of APRA lending curbs will become a “structural feature” of the British housing market, forcing Australian economists to begin questioning whether APRA’s macro-prudential measures could be permanent. This from the excellent James Mitchell via The Adviser.

A leading mortgage professional has criticised the prudential regulator for not providing a clear time frame for its macro-prudential measures or explaining what it is ultimately looking to achieve.

Speaking to The Adviser on a recent Elite Broker podcast, Intuitive Finance managing director Andrew Mirams said that he can’t see the complexities in the mortgage market easing up “anytime soon”.

Australian banks are still required to limit their investor mortgage growth to 10 per cent, while interest-only loans can only account for 30 per cent of new lending.

“Late last year, [APRA chairman] Wayne Byres came out and said these are all temporary measures,” Mr Mirams said. “But he’s never articulated to anyone about how temporary or what measures might change in the future or what their actual outcome.

“I think a lot of the things they’ve done, they’ve got right. An investor getting a 97 per cent interest-only loan just didn’t make sense. You’re just putting people at risk should the markets move, and we all know markets move at different times.

“But they haven’t articulated what they were trying to achieve, what sort of timeline and what outcomes they are hoping to get. I think that would help all of us manage client expectations. Because all of us will have lots of clients that are getting frustrated with being told ‘no’. And you can’t really give them an outcome of what or when they might be able to move again.”

In October last year, Mr Byres spoke at the Customer Owned Banking Convention in Brisbane, where he indicated that the regulator would like to start scaling back its intervention, provided that banks can continue to lend responsibly.

“We would ideally like to start to step back from the degree of intervention we are exercising today,” Mr Byres said.

“Quantitative benchmarks, such as that on investor lending growth, have served a useful purpose but were always intended as temporary measures. That remains our intent, but for those of you who chafe at the constraint, their removal will require us to be comfortable that the industry’s serviceability standards have been sufficiently improved and — crucially — will be sustained.”

Macro-prudential measures are a relatively new instrument but have becoming increasingly popular across the globe. In addition to Australia, lending curbs are also being used in the UK, New Zealand and Hong Kong.

Last year, the Bank of England confirmed that its own version of APRA lending curbs will become a “structural feature” of the British housing market, forcing Australian economists to begin questioning whether APRA’s macro-prudential measures could be permanent.

AMP Capital chief economist Shane Oliver believes that APRA’s measures, or at least some of them, will become permanent.

“I suspect that, as time goes by, they will likely become a permanent feature because of the control over risky behaviour that they allow over and above that achieved by varying interest rates and because the regulatory framework necessary to administer them will become more entrenched,” Mr Oliver said.

Mr Oliver believes that APRA’s mortgage curbs may be seen as increasingly attractive from a social policy perspective, in that they can “tilt lending away from non-first home owner-occupiers”.

There are other reasons why APRA’s measures are likely to remain.

“Poor affordability and high household debt levels, neither of which are likely to go away quickly,” Mr Oliver said.

APRA Releases New Mortgage Lending Reporting Requirements

APRA has released the final version of the revised reporting requirements for residential mortgage lending. It comes into effect from March.

Gross income will need to be reported (excluding super contributions).  Reporting on self-managed superannuation funds (SMSFs) and non-residents should be included, as well as all family trusts holding residential mortgages. Reporting of refinanced loans should include date of refinance (not original funding date) and APRA says the original purpose of the loan is not relevant to reporting when refinanced.

On 24 October 2016, the Australian Prudential Regulation Authority (APRA) released proposed revisions to the residential mortgage lending reporting requirements for authorised deposit-taking institutions (ADIs), Reporting Standard ARS 223.0 Residential Mortgage Lending (ARS 223.0) and accompanying reporting guidance.

On 23 May 2017, APRA released a revised ARS 223.0, which responded to submissions received and proposed a small number of additional data items. APRA sought feedback on these additional data items.

APRA received six submissions from ADIs and industry associations in response to the May 2017 proposals. No submissions objected to the proposals, but changes and clarifications were suggested.

Today APRA released the final ARS 223.0. Reporting will commence:

  • for ADIs that currently report on Reporting Form ARF 320.8 Housing Loan Reconciliation (ARF 320.8), from the reporting period ending 31 March 2018; and
  • for ADIs that do not currently report on ARF 320.8, from the reporting period ending 30 September 2018.

CHANGES TO REPORTING REQUIREMENTS

Loan-to-income (LTI) and debt-to-income (DTI) ratios

APRA received feedback in two submissions that using gross income for LTI and DTI may not reflect ADIs’ risk management practices. However, ADIs that apply more conservative discounts or ‘haircuts’ to income will report higher LTI and DTI measures, limiting comparability. In APRA’s view, using gross income for reporting purposes is necessary to allow comparison between all ADIs, acknowledging that it does have limitations.

Two submissions asked for additional guidance on the definition of gross income. The definition of gross income for LTI and DTI reporting has been amended to exclude compulsory superannuation contributions. Further detail has been included in the reporting guidance.

Additional increases in lending

One submission sought clarity on whether loans to self-managed superannuation funds (SMSFs) and non-residents should be included in this item. The instructions have been updated to include such loans.
Two ADIs noted in submissions that they do not expect to report this item, as all increases in credit limits are already captured as new loans funded. APRA confirms that loans subject to a credit assessment should be reported as loans funded, and not as an additional increase.

Lending to private unincorporated businesses

APRA proposed that ADIs report two data items on loans to private unincorporated businesses that are secured by residential mortgages. The definition of private unincorporated businesses is consistent with the Economic and Financial Statistics (EFS) proposed by APRA, the Australian Bureau of Statistics and the Reserve Bank of Australia.

Three submissions stated that collecting information on ‘family trusts with a controlling interest in a business’ would be problematic. APRA has amended the definition to include all family trusts, not just family trusts with a controlling interest in business. The EFS definitions were also amended accordingly.

Two submissions suggested expanding the reporting to cover loans to all trading companies, to provide a more complete picture of ADIs’ lending activity. APRA does not propose to expand reporting beyond private unincorporated businesses. ARS 223.0 is intended to capture household (and similar) lending only. Commercial lending for property is captured on other reporting forms.

External refinancing

The current definition of external refinancing is limited to loans for substantially the same purpose as the loan they replace. One submission noted that it is not feasible for an ADI to know the predominant purpose of external loans. In line with EFS, the reference to the loan being for substantially the same purpose has been removed from the definition in ARS 223.0.

Loan vintage

Two submissions questioned if loan vintage should be measured from the date of a refinance or from the date of the original loan. As per the instructions, loan vintage is to be reported from when the loan is funded, meaning the date of a refinance should be used.

More Evidence of Poor Mortgage Lending Practice

The Australian Financial Review is reporting that New ‘liar loans’ data reveal borrowers more stretched than some lenders suspect.

One in five property borrowers are exaggerating their income and nearly half understating their spending, triggering new concerns about underwriting standards and vulnerability to sharp economic corrections, according to new analysis of loan applications by online property lender Tic:Toc Home Loans.

The number of ‘liar loans’ exceeds original estimates by investment bank UBS that last year found about 30 per cent of home loans, or $500 billion worth of loans could be affected.

Tic:Toc Home Loans’ founder and chief executive, Anthony Baum, said loan applications are representative of larger lenders in terms of location, borrower and loan size, which range from about $60,000 to $1.3 million.

Mr Baum, a senior banker for nearly 30 years, said in many cases applicants did not have to over-state their income for the required loan.

“Our portfolio looks like other organisations,” he said.

Analysis of their applications reveals about 20 per cent overstate their income, typically by about 30 per cent, and 50 per cent state their expenses are lower than the Household Expenditure Measure, also by about 30 per cent.

Property market experts claim the latest analysis, although based on a smaller sample than UBS’s survey, are credible and consistent with independent analysis of the lending standards.

“They do not surprise me,” said Richard Holden, professor economics at University of NSW Business School, who argues the potential problems are compounded by more than one-in-three loans being interest only.

Martin North, principal of Digital Finance Analytics, an independent consultancy, also backed the latest ‘liar loan’ numbers.

Mr North said standards had slipped because of lenders’ readiness to “jump over backwards” to increase business and commission incentives for mortgage brokers rewarding bigger loans.

“Not all lenders are the same but these numbers do not surprise me at all,” he said.

Mr North said there was strong evidence that salaries are overstated by between 15 and 20 per cent by borrowers using a range of tactics, such as over-stating bonuses or, for variable income earners, using peak rather than average income.

More Evidence of Slowing Mortgage Lending

The APRA ADI data for November 2017 was released today.  As normal we focus in on the mortgage datasets. Overall momentum in mortgage lending is slowing, with investment loans leading the way down.

Total Owner Occupied Balances are $1.041 trillion, up 0.56% in the month (so still well above income growth), while Investment Loans reach $551 billion, up 0.1%. So overall portfolio growth is now at 0.4%, and continues to slow (the dip in the chart below in August was an CBA one-off adjustment).  Total lending is $1.59 Trillion, another record.

Investment lending fell as a proportion of all loans to 36.6% (still too high, considering the Bank of England worries at 16% of loans for investment purposes!)

The portfolio movements of major lenders shows significant variation, with ANZ growing share the most, whilst CBA shrunk their portfolio a little.  Westpac and NAB grew their investment loans more than the others.

On a 12 month rolling basis, the market growth for investor loans was 2.8%, with a wide spread of banks across the field. Some small players remain above the 10% APRA speed limit.  This reflects a trend away from the majors.

Finally, here is the portfolio view, with CBA leading the OO portfolio, and WBC the INV portfolio.

We will look at the RBA data next.

APRA welcomes finalisation of Basel III bank capital framework

APRA has welcomed the Basel III announcement and expects to commence consultation on revisions to the ADI capital framework in early 2018.

Despite the 2022 date, APRA also reaffirmed that Australian banks should be following strategies to increase their capital strength to exceed the unquestionably strong benchmarks by 1 January 2020.

The Australian Prudential Regulation Authority (APRA) today welcomed the announcement that the Basel Committee on Banking Supervision had finalised the Basel III bank capital framework.

The announcement confirms the final set of measures designed to address deficiencies in the internationally-agreed capital framework following the global financial crisis and are primarily focused on addressing undue variability in risk-weighted assets, and therefore capital requirements, across banks.

Key elements of the final framework include changes to the standardised approach to credit risk capital for real estate, restrictions on modelled risk estimates by banks using the internal ratings-based (IRB) approach to credit risk capital, and the removal of provisions for banks to use internal models to determine their operational risk capital requirements. The Basel Committee has also agreed to introduce a ‘floor’ to limit the reduction in capital requirements available to banks using capital models relative to those using the standardised approaches.

APRA Chairman Wayne Byres said APRA’s ADI capital framework, including the adjustments made to IRB risk weights in 2016, is well-equipped to accommodate the final Basel III framework. APRA has been involved in the international work to agree the final Basel III reforms.

“We welcome the finalisation of these measures which represent the final stage of a decade’s financial reform work aimed at building resilience in the financial system following the global financial crisis.

“Importantly for Australian ADIs, these final Basel III reforms will be accommodated within the targets APRA set in July this year in our assessment of the quantum and timing of capital increases for Australian ADIs to achieve unquestionably strong capital ratios,” Mr Byres said.

The Basel Committee has agreed to an implementation timetable commencing in 2022 for the final Basel III reforms. APRA will consider the appropriate effective date for revisions to the ADI prudential standards in light of the Basel Committee’s announcement and expects to commence consultation on revisions to the ADI capital framework in early 2018. However, consistent with its July 2017 announcement, APRA reaffirms its expectation that ADIs should be following strategies to increase their capital strength to exceed the unquestionably strong benchmarks by 1 January 2020.

The 2018 consultation will be based on the final Basel III framework but with appropriate adjustments to reflect APRA’s approach and Australian conditions, most notably adjustments to capital requirements for higher risk residential mortgage lending, consistent with the achievement of unquestionably strong capital ratios.

Warnings over home loans not meeting serviceability requirements

We discussed Mortgage Lending Standards on 6PR Today.

Banking analysts have raised concerns after the number of home loans being approved despite not meeting serviceability requirements jumped to its highest point since before the global financial crisis.

Digital Finance Analytics Principal, Martin North told Mornings with Gareth Parker, we could be headed for some strife if rates go up.

Listen to the discussion.

Major Banks Are Still Highly Leveraged

The latest ADI performance data from APRA to September 2017 shows that profitability rose 29.5% on 2016 and the return on equity was  12.3% compared with 9.9% last year. Loans grew 4.1%, provisions were down although past due items were $14.3 billion as at 30 September 2017. This is an increase of $1.5 billion (11.8 per cent) on 30 September 2016.

On a consolidated group basis, there were 147 ADIs operating in Australia as at 30 September 2017, compared to 148 at 30 June 2017 and 153 at 30 September 2016.

  • Summerland Financial Services Limited changed its name from Summerland Credit Union Limited, with effect from 1 August 2017
  • The Royal Bank of Scotland plc had its authority to carry on banking business in Australia revoked, with effect from 31 August 2017.

The net profit after tax for all ADIs was $35.9 billion for the year ending 30 September 2017. This is an increase of $8.2 billion (29.5 per cent) on the year ending 30 September 2016. The cost-to-income ratio for all ADIs was 48.2 per cent for the year ending 30 September 2017, compared to 48.3 per cent for the year ending 30 September 2016. The return on equity for all ADIs was 12.3 per cent for the year ending 30 September 2017, compared to 9.9 per cent for the year ending 30 September 2016.

The total assets for all ADIs was $4.56 trillion at 30 September 2017. This is an increase of $41.9 billion (0.9 per cent) on 30 September 2016. The total gross loans and advances for all ADIs was $3.13 trillion as at 30 September 2017. This is an increase of $123.6 billion (4.1 per cent) on 30 September 2016.

Note: ‘Other ADIs’ are excluded from all figures other than population and total assets. Foreign branch banks are excluded from return on equity and capital adequacy figures.

The total capital ratio for all ADIs was 14.6 per cent at 30 September 2017, an increase from 13.7 per cent on 30 September 2016. The common equity tier 1 ratio for all ADIs was 10.6 per cent at 30 September 2017, an increase from 9.9 per cent on 30 September 2016. The risk-weighted assets (RWA) for all ADIs was $1.95 trillion at 30 September 2017, a decrease of $18.2 billion (0.9 per cent) on 30 September 2016.

For all ADIs Impaired facilities were $11.9 billion as at 30 September 2017. This is a decrease of $3.3 billion (21.7 per cent) on 30 September 2016. Past due items were $14.3 billion as at 30 September 2017. This is an increase of $1.5 billion (11.8 per cent) on 30 September 2016; Impaired facilities and past due items as a proportion of gross loans and advances was 0.84 per cent at 30 September 2017, a decrease from 0.93 per cent at 30 September 2016; Specific provisions were $6.1 billion at 30 September 2017. This is a decrease of $1.0 billion (14.2 per cent) on 30 September 2016; and Specific provisions as a proportion of gross loans and advances was 0.19 per cent at 30 September 2017, a decrease from 0.24 per cent at 30 September 2016.

As normal we chart the key ratios for the four major banks.  We see significant rises in gross loans, largely housing related. The capital ratios are higher, but the ratio of gross loans to shareholder funds still sits at 5%, which underscores how leveraged (and so profitable as the lending book grows).

Finally, it is worth reflecting on that fact that the big four comprise around 25% of the ASX 200 in terms of market capitalisation, and financial services overall comprises 35% of the capitalisation. In addition more than half of all dividends comes from the financial services sector, so we are economically very reliant on these players and their highly leveraged mortgage book.

 

APRA ADI Data Highlights Lending Tightening

Continuing our analysis of the APRA ADI data to September 2017, we will look across the various metrics for new loans, and by lender category.

APRA reports new flows by Major Banks, Other Banks, Foreign Banks and Mutuals (Credit Unions and Building Societies).

Looking first at third party origination, we see that origination from foreign banks is sitting at 70% of new loans, mutuals around 20% and other banks around the 50% mark.  Overall, volume through brokers is climbing.

New interest only loan approvals have fallen from, in the case of the major banks, around 40% to 20%, and we see the regulatory pressure has reduced the mix across the board.

Investment loan volumes have fallen, though major banks still have the largest relative share, above 30%.  Mutuals are sitting around 10%.

There has been a spike in loans being approved outside serviceability, with major banks reporting 5% or so in September. This may well reflect a tightening of standard serviceability criteria and the wish to continue to grow their loan books.

Finally, we look across the LVR bands for new loans. There has been a small rise in loans between 60% LVR, but around 30% of all new loans are in this range.

We see a small fall in the relative proportion of loans in the 60-80% range, but close to half of all loans written are still in this range.

Turning to the 80-90% LVR range, we see a rise in lending by foreign banks, with more than 20% of their loans falling in this range. Other lenders are averaging 10-15 %.

Finally, there is a rise in loans above 90% being written by mutuals, (as they they to grow share), while the banks are around 7% and foreign banks lower still.

So overall, we see the impact of regulatory intervention. The net impact is to slow lending momentum. As lenders tighten their lending standards, new borrowers will find their ability to access larger loans will diminish. But the loose standards we have had for several years will take up to a decade to work through, and with low income growth, high living costs and the risk of an interest rate rise, the risks in the system remain.