Tag: APRA

APRA Proposes to Report ADIs Liquidity Data

The Australian Prudential Regulation Authority (APRA) today released a consultation package on the proposed publication of liquidity statistics for authorised deposit-taking institutions (ADIs).

APRA proposes to expand the current statistics published in the Quarterly Authorised Deposit-taking Institutions (ADI) Performance publication to include relevant information on the liquidity of ADIs. APRA proposes to introduce liquidity statistics for banks, and expand the existing liquidity statistics published for credit unions and building societies.

APRA invites submissions on the proposal by 30 March 2016. The consultation package can be found on the APRA website at: www.apra.gov.au/adi/PrudentialFramework/Pages/Consultation-on-the-publication-of-ADI-liquidity-statistics.aspx

Of most interest, and welcome, is the Liquidity Coverage Ratio (LCR).

APRA does not currently publish any statistics on LCR ADIs in QADIP. Under the LCR requirements that came into effect on 1 January 2015, LCR ADIs are required to maintain a sufficient level of unencumbered high quality liquid assets (HQLA) to meet their liquidity needs for a 30 calendar day period under a severe stress scenario. Absent a situation of financial stress for locally-incorporated LCR ADIs, the value of the LCR must not be less than 100 per cent5.

The LCR is calculated as the percentage ratio:  Stock of high-quality liquid assets / Total net cash outflows over the next 30 calendar days

APRA proposes to publish aggregate LCR statistics each quarter in QADIP. The statistics would include the components of the LCR: HQLA and other qualifying LCR liquid assets. Expected cash outflows and cash inflows under the LCR stress scenario would also be published.

APRA also proposes to publish statistics at the ADI segment-level for: banks (as well as major banks, other domestic banks and foreign subsidiary banks sub-segments). There are currently no credit unions or building societies subject to the LCR regime, but should this change APRA would include LCR statistics for these segments subject to meeting confidentiality obligations.

APRA proposes to publish statistics on a Level 2 consolidation basis from December 2014 reference period onwards, commencing in the March 2016 edition of QADIP. APRA does not propose to publish statistics for the 30 June 2014 and 30 September 2014 quarters, as the underlying data were submitted on a ‘best endeavours’ basis.

APRA Data Shows Investment Loans Slowing

The APRA monthly banking statistics to end November show that housing loans by ADI’s (a.k.a banks) rose by 0.8% to $1.41 trillion. This was driven by a 1.19% rise in owner occupied loans ($889 billion) and 0.14% rise in investment loans ($517 billion). As we reported, the RBA said that total loans were worth $1.51 trillion, the difference being the non-bank sector. There is still noise in the data (the RBA said that there was a switch of $1.9bn loans between investment and owner occupied loans in the month). Overall, investment lending is below the 10% speed limit.

Looking at individual banks data, Westpac still holds the highest value of investment loans, whilst CBA is the largest lender of owner occupied loans.

SharesByBanknov2015Looking at the relative splits between owner occupied and investment loans, HSBC, Bank of Queensland and Westpac have the highest proportion of investment loans.

BankSharesNov2015The monthly movements highlight that within the numbers there are still some funnies going on, including reclassification of loans.

MovementsNov2015

The Capital Schmozzle

“schmozzle (plural schmozzles). (informal) A disorganized mess; (informal) A melee”.

When the FSI inquiry was handed down last year, with recommendations mostly later accepted by Government, a cornerstone was to avoid the risk of a failing bank needing to be bailed out by tax payers, as happened in a number of countries during the GFC.

A year later, we can look back to see significant changes to the current capital rules for “Advanced” banks (those that use their own approved internal models) and significant capital raisings of more than $30bn by the industry. This has translated into higher interest rates on mortgages, especially investment property loans.

Currently underway are discussions about the next iteration of the capital rules, with the expectations that “Advanced” banks’ rules will be tightened, and the rules for other banks will get more complex, with capital ratios being determined for example by the loan-to-value (LVR) of loans, as well as differentiation between loans serviced by income, and those materially serviced by rental income flows.

APRA last week said they would look to encourage more banks to move towards the “Advanced” methods, with a series of potential interim steps, at the time when the rules are under review. They also said that the current counter cyclical buffer would be set to zero.

Five Australian Banks have “Advanced” capital management, and a number of other banks are already on the journey to “Advanced” capital methods; but it is a complex and twisted path, and the destination is not yet clear. Better data, models and systems are required to meet the necessary hurdles.

What is likely though is that the journey to hold more capital is far from over, whether “Advanced” or “Standard”, and that the light between the two systems is closing, as the “Standard” system gets more complex, and the “Advanced” ratios are lifted higher.

We think that there will be only limited upside to be gained from moving to “Advanced”, as the gap closes, and complexity increases in the standard approach. We also think significant further capital will be required – some are suggesting an additional $30-40bn in the next couple of years, enough to force mortgage prices across the board significantly higher again. As these adjustments are essentially across the board, to a greater or lesser extent, we doubt that smaller players will actually get much differential benefit. Indeed, if investment mortgages require higher capital still. (that depends on the definition of what is “material” – yet to be made clear; and the LVR), some banks could need much more capital than is currently assumed.

It is also worth noting that spreads on overseas bank capital raisings are rising, indeed, spreads are wider now across the market, as we noted last week.

So what is the potential impact of lifting capital ratios? We already mentioned the uplift in mortgage rates, as banks seek to cover the additional costs involved. Households should expect to pay more. Shareholders may also have to take a haircut in future returns, as the economics of banks change. The super profits banks have enjoyed may be trimmed a little.

But a recent paper from the Bank of England has also highlighted that lifting capital may not reduce systemic risks much. The study, a working paper “Capital requirements, risk shifting and the mortgage market” looked at what happened when capital ratios were lifted. They found that whilst the average value of a loan made fell a little, there was no reduction in higher risk lending, despite the requirements for higher capital, because the lender was looking to protect overall margins and still chose to take more risks. If this is true, higher capital requirements does not necessarily reduced systemic risks. Banks may still need Government support in a crisis.

But wait, was that not the whole reason for lifting capital ratios in the first place? Looks like a schmozzle to me!

 

SME Deposits and Basel

APRA has today written to ADIs about best practices in assessing SME deposits accounts. Essentially, in a recent review of 14 institutions, they found significant inconsistencies, based on how individual ADI’s were choosing to flag balances as a “stable deposit”, whether the customer was in a “stable relationship” with the ADI, and which types of account – especially internet based account should be considered “less stable deposits”. In addition “heavily rate driven deposits” need to be correctly classified.

This complexity is a result of the Basel Committee who  introduced a globally harmonised liquidity framework by developing two minimum standards with the objective of promoting short-term and long-term resilience. The Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) were developed to fulfil these objectives and to also enable regulators and investors to make meaningful comparisons between banks. APRA’s expectation is that ADIs with similar business models, balance sheets and customer groups would generate similar cash outflows under the LCR.

The net effect may well be to change the relative attractiveness of rates offered by banks, especially for call deposits offered on line, as they will cost the banks more. On the other hand, deposits, held as part of a longer relationship, with notice periods attached could become more attractive.

Finally, APRA noted that few ADIs benchmarked their offered rates against rates offered by peer competitors for the purposes of this classification and suggests that such benchmarking would constitute good practice.

DFA looked at SME savings balances in our recent report. SME’s have deposits in total worth more than $107bn. The distribution of deposits varies with size. Nearly half is held by the largest firms, and holdings decrease as we look across the smaller-sized firms. The average savings balance varies also between firms which are credit avoiders, and those who are not.

 

 

Major Banks’ Shareholders Highly Leveraged; Profits $37bn, Up 10%

The recently released APRA quarterly banking performance statistics to September 2015 tells an interesting story. We have charted data for the major Australian banks which shows continued housing loan growth, and considerable lifts in the capital ratios in 2015.

However, looking directly at the ratio of gross advances to share capital (ignoring reserves and other factors), we still see the shareholders are highly leveraged, at 4.9% (up from a recent all-time low of 4.7% in June). This is a function of having an ever greater share of home loans in the portfolio, (with lower risk weights). It shows how reliant the banks are on expanding their mortgage books (so directly linked to rising house prices etc.).

Major-Banks-Financals-Sept-2015More broadly, looking at all the ADI’s, on a consolidated group basis, there were 159 firms operating in Australia. The net profit after tax for all ADIs was $37.0 billion for the year ending 30 September 2015. This is an increase of $3.5 billion (10.3 per cent) on the year ending 30 September 2014.

The return on equity for all ADIs was 14.1 per cent for the year ending 30 September 2015, compared to 14.2 per cent for the year ending 30 September 201.

The total assets for all ADIs was $4.58 trillion at 30 September 2015. This is an increase of $420.9 billion (10.1 per cent) on 30 September 2014.

The total gross loans and advances for all ADIs was $2.91 trillion as at 30 September 2015. This is an increase of $237.7 billion (8.9 per cent) on 30 September 2014.

The total capital ratio for all ADIs was 13.7 per cent at 30 September 2015, an increase from 12.4 per cent on 30 September 2014.

The common equity tier 1 ratio for all ADIs was 10.1 per cent at 30 September 2015, an increase from 9.2 per cent on 30 September 2014.

The risk-weighted assets (RWA) for all ADIs was $1.86 trillion at 30 September 2015, an increase of $157.0 billion (9.2 per cent) on 30 September 2014.

Impaired facilities and past due items as a proportion of gross loans and advances was 0.87 per cent at 30 September 2015, a decrease from 1.09 per cent at 30 September 2014. Specific provisions as a proportion of gross loans and advances was 0.22 per cent at 30 September 2015, a decrease from 0.28 per cent at 30 September 2014.

APRA Declares Countercyclical Buffer Rate Is Zero

APRA has today announced that the countercyclical capital buffer applying to the Australian exposures of authorised deposit-taking institutions (ADIs) from 1 January 2016 will be set at zero per cent.

The countercyclical buffer was included within the ADI capital framework as part of the Basel III reforms that were introduced by APRA in 2013. Although the minimum Basel III requirements were implemented from 1 January 2013, the buffer component of the framework will take effect from 1 January 2016.

The capital framework requires ADIs to hold a buffer of Common Equity Tier 1 (CET1) capital, over and above each ADI’s minimum requirement, comprised of three components:

  • a capital conservation buffer, applicable at all times and equal to 2.5 per cent of risk-weighted assets (unless determined otherwise by APRA);
  • an additional capital buffer applicable to any ADI designated by APRA as a domestic systemically important bank (D-SIB), currently set to 1.0 per cent of risk-weighted assets; and
  • a countercyclical buffer which may vary over time in response to market conditions. This buffer may range between zero and 2.5 per cent of risk-weighted assets.

The role of the countercyclical buffer within the Basel III reforms is to ensure that banking sector capital requirements take account of the macro-financial environment in which ADIs operate. It can be deployed by national jurisdictions when excess aggregate credit growth is judged to be associated with a build-up of system-wide risk to ensure the banking system has a buffer of capital to protect it against future potential losses. The buffer can be reduced or removed when system-wide risk crystallises or dissipates. For an ADI with international exposures, the countercyclical buffer applicable to its business will be the weighted average of the countercyclical buffers applied by the jurisdictions in which it operates.

APRA Chairman Wayne Byres noted the decision to set the countercyclical buffer for Australian exposures at zero per cent of risk-weighted assets was made following consultation with the Council of Financial Regulators.

‘Based on APRA’s assessment of current levels of systemic risk, including credit growth, asset prices and lending standards, APRA did not see a case for imposing a countercyclical buffer for Australian exposures at this point in time,’ Mr Byres said. ‘APRA will continue to monitor developments in a range of financial risk indicators, and will revise the determination if conditions warrant it in future.’

The consequence of this decision is that ADIs will generally be required, from 1 January 2016, to maintain a minimum CET1 ratio of 4.5 per cent, plus a 2.5 per cent capital conservation buffer (3.5 per cent for D-SIBs) and a buffer for international exposures in jurisdictions that have set a non-zero countercyclical capital buffer rate. For some ADIs, additional capital requirements are also applied via Pillar 2 (i.e. in response to institution-specific risks and issues). All Australian ADIs currently report CET1 ratios above these requirements: the aggregate CET1 ratio for the banking system as at end September 2015 was 10.1 per cent.

Where an individual ADI does not hold sufficient capital to meet its aggregate buffer requirement, the ADI would be subject to constraints on its ability to make capital and bonus distributions. The distribution constraints imposed on an ADI when its capital levels fall into the buffer range increase as the ADI’s capital level approaches the minimum requirements. This encourages ADIs to maintain a sound capital buffer and provides a mechanism to ensure ADIs conserve capital, and have a strong incentive to restore their capital strength, after a period of loss.

In addition to today’s announcement on the size of the buffer, APRA has also released today:

  • an information paper, The countercyclical capital buffer in Australia, setting out APRA’s approach to assessing the appropriate settings for the countercyclical buffer;
  • a revised and final version of Prudential Standard APS 110 Capital Adequacy (APS 110) that clarifies operational aspects of the countercyclical capital buffer, following consultation earlier this year; and
  • a draft version of Prudential Practice Guide APG 110 Capital Buffers (APG 110) for consultation. The draft APG110 provides additional guidance on the operation of the capital buffers, including some worked examples.

APRA has also informed the Basel Committee on Banking Supervision of the Australian countercyclical capital buffer rate so it can be added to the list of jurisdictions’ buffers that are maintained on the Bank for International Settlements’ website.

The countercyclical buffer information paper, the draft prudential practice guide on capital buffers, and the revised prudential standard APS 110 can be viewed on APRA’s website.

IMF Updates Global and National Housing Outlook, Australian Property Overvalued

In the latest release, the IMF have provided data to October 2015, and also some specific analysis of the Australian housing market. We think they are overoptimistic about the local scene, and we explain why.

But first, according to the IMF, globally, house prices continue a slow recovery. The Global House Price Index, an equally weighted average of real house prices in nearly 60 countries, inched up slowly during the past two years but has not yet returned to pre-crisis levels.

chart1_As noted in previous quarterly reports, the overall index conceals divergent patterns: over the past year, house prices rose in two-thirds of the countries included in the index and fell in the other one-third.

house prices around the world_071814Credit growth has been strong in many countries. As noted in July’s quarterly report, house prices and credit growth have gone hand-in-hand over the past five years. However, credit growth is not the only predictor for the extent of house price growth; several other factors appear to be at play.

house prices around the world_071814For OECD countries, house prices have grown faster than incomes and rents in almost half of the countries.

chart2_House price-to income and house price-to-rent ratios are highly correlated, as documented in the previous quarterly report.

chart2_ Turning to the Australia specific analysis, Adil Mohommad, Dan Nyberg, and Alex Pitt (all at the IMF) argue that house prices are moderately stronger than consistent with current economic fundamentals, but less than a comparison to historical or international averages would suggest. Here is just a summary of their arguments, the full report is available.

Argument: House prices have risen faster in Australia than in most other countries, suggesting, ceteris paribus, overvaluation.

OZ-House-Prices-to-GDPCounter argument 1: House prices are in line on an absolute basis – Price-to-income ratios have risen in Australia and now near historic highs. However, international comparisons suggest that Australia is broadly in line with comparator countries, although significant data comparability issues make inference difficult.
Counter argument 2: The equilibrium level of house prices has also risen sharply – Lower nominal and real interest rates and financial liberalization are key contributors to the strong increases in house prices over the past two decades. The various house price modeling approaches indicate that house prices are moderately stronger (in the range of 4-19 percent) than economic fundamentals would suggest.
Counter argument 3: High prices reflect low supply – Housing supply does indeed seem to have grown significantly slower than demand, reducing (but not eliminating) concerns about overvaluation.
Counter argument 4: It is just a Sydney problem, not a national one – The two most populous cities, Sydney and Melbourne, have seen strong house price increases, including in the investor segment. A sharp downturn in the housing market in these cities could be expected to have real sector spillovers, pointing to the need for targeted measures—including investor lending—to reduce risks from a housing downturn.
Counter argument 5: There are no signs of weakening lending standards or speculation – While lending standards overall seem not to have loosened, the growing share of investor and interest-only loans in the highly-buoyant Sydney market, is a pocket of concern.
Counter argument 6: Even if they are overvalued, it doesn’t matter as banks can withstand a big fall – While bank capital levels are likely sufficient to keep them solvent in the event of a major fall in house prices, they are not enough to prevent banks making an already extremely difficult macroeconomic situation worse.

Let us think about each in turn.

Thus, DFA concludes the IMF initial statement is correct, and despite their detailed analysis, their counterarguments are not convincing. We do have a problem.

Banks Continue the Mortgage Lending Party In A Fog

The latest data form APRA on the banks (ADI’s) portfolios for October 2015 tells us a little, but much is lost in the fog of adjustments which continue to afflict the dataset. In fact, APRA now points to the “corrected” numbers which the RBA publish.

” Some banks have reclassified housing loans that originated as investment loans to owner-occupied based on a review of customers’ circumstances or as advised by customers. See the Monthly Banking Statistics Important Notice for more information. These reclassifications will affect growth rates for investment and owner-occupied housing loans for October 2015. Questions about specific data should be directed to the relevant bank.

The Reserve Bank of Australia publishes industry-level housing loan growth rates in Growth in Selected Financial Aggregates. Table D1 in particular contains investment and owner-occupied loan growth rates, which have been adjusted for these reclassifications. Table D1 is available on the RBA website athttp://www.rba.gov.au/statistics/tables/index.html”

The RBA data shows that investment loans are probably growing a little below 10%, and owner occupied loans at about 6%.

RBA-HL-Growth-D1-Oct-2015The monthly banking stats do not contain these adjustments, so cannot be directly reconciled. However, some interesting points are worth noting nevertheless. First is that total lending for housing rose by 7.5 bn to 1.4 trillion in the month. The RBA lending figure for the whole market (including the non-banks) was 1.5 trillion.  This is another record.  Investment lending sits at 37% on these numbers.  Net movements for OO loans was up 2.73%, whilst investment loans fell 2.95%.

Beyond that, if we take the APRA data at face value, then Westpac continues to reclassify loans. In the monthly movements we see more than $15bn swung into the owner occupied category, with an adjustment to the investment side of the ledger. There were smaller movements in the other banks, but some of this looks like further adjustments.

APRA-MBS-Oct-2015-1So the current market shares are revised to:

APRA-MBS-Oct-2015-2In our modelling of the monthly movements, based on the APRA data, where we sum the monthly movements for the past year (and include adjustments where we can), it appears Westpac is now in negative territory for investment loans, and that the growth rates for the other majors is slowing. The imputed annual market movement is 4.4% against the RBA data above of just under 10%.

APRA-MBS-Oct-2015-4For completeness we also show the owner occupied movements. These too are impacted by reclassifications, and the imputed growth rate is 10%, compared with 6% from the RBA.

APRA-MBS-Oct-2015-3 The net effect of all this is that there is no true information about what individual banks are doing in their loan portfolios. Having tried to talk to a couple of them to clarify the story, I discover they are not willing to share additional data and refer back to the [flawed] APRA data.

The convenient “fog of war” will continue for some time to come. There is also no way to cross-check the RBA adjusted data, and no underlying detailed explanations. We are just supposed to trust them!

 

 

APRA On Securitisation

APRA has released a consultation paper on proposed revisions to the securitisation regime in Australia, including the explicit recognition of funding-only securitisation. The likely net effect will be to encourage greater use of this vehicle by banks as part of their capital management programmes.  The proposals also reflect the Basel III changes. APRA invites written submissions on the proposals by 1 March 2016.

The Australian Prudential Regulation Authority (APRA) has released for consultation a discussion paper on its proposals to revise the prudential framework for securitisation for authorised deposit-taking institutions (ADIs). APRA is also releasing a draft Prudential Standard APS 120 Securitisation (APS 120).

APRA’s objective in revising the prudential requirements for securitisation is to establish a simplified framework, taking into account global reform initiatives and the lessons learned from the global financial crisis. One of these lessons was that securitisation structures had become excessively complex and opaque, and that prudential regulation of securitisation had become similarly complex.

APRA first consulted on initiatives to simplify its prudential framework for securitisation in April 2014. Following consideration of the issues raised in submissions, APRA has amended its proposals in some areas. APRA’s amended proposals include:

  • dispensing with a credit risk retention or ‘skin-in-the-game’ requirement;
  • allowing for more flexibility in funding-only securitisation; and
  • removing explicit references to warehouse arrangements in the prudential framework.

These amended proposals are expected to assist ADIs to further strengthen their funding profile and provide clarity for ADIs that undertake securitisation for capital benefits.

In December 2014, the Basel Committee on Banking Supervision (Basel Committee) released its updated securitisation framework (Basel III securitisation framework). The changes aim to enhance the Basel Committee’s existing securitisation framework and to strengthen regulatory capital standards.

APRA’s latest proposals incorporate the new Basel III securitisation framework, with appropriate adjustments to reflect the Australian context and APRA’s objectives, and will be applicable equally to all ADIs. Subject to consultation on this discussion paper and draft prudential standard, APRA proposes to implement these changes in line with the Basel Committee’s effective date of 1 January 2018.

In proposing revisions to its securitisation framework, APRA has sought to find an appropriate balance between the objectives of financial safety and efficiency, competition, contestability and competitive neutrality. APRA considers its proposals will deliver improved prudential outcomes and provide efficiency benefits to ADIs, particularly through the explicit recognition of funding-only securitisation within the prudential framework.

APRA invites written submissions on the proposals in this discussion paper by 1 March 2016. APRA also intends to release a draft prudential practice guide (PPG) and reporting standards and reporting forms, for consultation in the first half of 2016. APRA expects that the final prudential standard, PPG, reporting standards and reporting forms, will be released in the second half of 2016.

Background

Q: What is securitisation and is it important in Australia?

A: Securitisation is a form of funding where a ‘pool’ of assets, often residential housing loans, is separated from the originating ADI into a special purpose vehicle (‘SPV’). Cash flows from the pool of assets are used to make payments to investors in debt securities issued by the SPV. These payments are effectively secured by the pool of assets, hence the name “securitisation”.

The debt securities issued to investors will typically have a different order of priority claim over the assets in the pool. The senior class will have first claim, while more junior (or subordinated) class(es) will be utilised to absorb losses in the event of non-performance by some or all of the assets. The senior class of debt securities is therefore normally considered to be of lower risk than that of the underlying pool of assets, and this allows ADIs to source funding on attractive terms.

Sometimes an ADI will arrange for only the senior class to be sold to investors. Alternatively, where an ADI arranges to sell the junior class(es) to investors, they have transferred substantially all the credit risk of the pool to external investors. In these circumstances an ADI may also obtain regulatory capital benefits as APRA will, subject to meeting the specific requirements of APS 120, no longer require the ADI to hold capital against the credit risk of the pool.

Having a robust securitisation market therefore allows ADIs to strengthen their funding profile, and can offer capital management benefits as well. For smaller ADIs that may not have efficient access to unsecured wholesale debt markets, securitisation can be a valuable source of funding and, potentially, capital efficiency. As such, securitisation can support competition in the banking industry.

Q: How has APRA simplified the prudential framework?

A: APRA’s main proposals relating to the simplification of the prudential framework for securitisation are:

  • the explicit recognition of funding-only securitisation. A simple structure facilitates a strong funding-only regime, where the originating ADI retains the junior securities and obtains funding from third parties through the sale of the senior securities. The explicit recognition of funding-only securitisation will assist ADIs to further strengthen their funding profiles;
  • well defined thresholds for capital relief securitisation, which better articulate the requirements to be met for regulatory capital relief; and
  • streamlining the approaches to determining regulatory capital requirements for ADIs’ securitisation exposures, and harmonising them for ADIs using standardised or internally-modelled risk weights.

Q: How will APRA’s proposals assist in facilitating a larger funding-only securitisation market?

A: The explicit recognition of funding-only securitisation, including the flexibility for bullet maturity structures that include a date-based call option, are likely to increase the potential size of the term securitisation market by attracting a broader investor base. These structures have not been permitted within the prudential framework previously.

Q: Why is APRA proposing not to include a ‘skin-in-the-game’ requirement in the prudential framework?

A: Skin-in the-game requirements are intended to address the misalignment of incentives whereby lenders may lack motivation to originate higher quality loans, since they may not have exposure to the loans once they are in a securitisation. A variety of skin-in-the-game requirements have emerged internationally and introducing an additional Australian requirement would run contrary to APRA’s objective of creating a simplified framework. In addition, Australian ADIs already have linkages to their securitisation — such as servicing of the underlying loans and entitlement to residual income — that reinforce incentives to maintain the quality of lending standards.

Q: How is APRA proposing to treat warehouse arrangements?

A: Warehouse arrangements allow ADIs to aggregate assets into pools before securities are issued to third parties. This can enable some ADIs to improve access to wholesale funding markets and raise funds at more competitive rates. The current regulatory requirements for warehouse arrangements have, however, created a gap in the prudential framework, such that less capital is held in the banking system relative to the risk retained in the system.

APRA is seeking submissions on viable approaches that maintain the benefits of warehouse arrangements but also address the gap in the prudential framework. In the absence of any such submissions APRA has indicated it will take a principles-based, rather than rules-based approach and will remove explicit reference to warehouse arrangements in APS 120. In these circumstances warehouse arrangements can still be entered into, but would need to meet the relevant requirements in APS 120 to be considered a securitisation.

Banks Still Hooked On Mortgage Loans – New Investment Loans Up 19%

The latest APRA Property Exposure data, to September 2015 provides an additional perspective on the loan books of the ADI’s. Overall property exposures are a record $1.35 trillion, up from $1.33 trillion in June, and up 9% on September 2014. Within the mix, owner occupied loans rose from $810 bn to $841 bn, up 8.9% from 2014; in response to the changed lending environment, whilst investment loans for residential property fell from $517 bn to $514 bn, the first fall in a long long time (APRA data goes back to 2008), but still up 9.1% from September 2014.  Within the data we can see the adjustments which the ADI’s have made as they reclassify loans. A process which is not yet complete.

APRA-Ptpy-Sep-2015-6Investment loans comprise 37.9% of all loans, a fall from 38.9% last quarter, but still worryingly high, and higher than the regulators previously had thought.

APRA-Ptpy-Sep-2015-5Looking at some of the key characteristics of loans on book, 40% of loans (by value) have offset facilities, and 35% are interest only loans. There appears to be a slight slowing in the growth of interest only loans, reflecting the changed lending environment, and a slowing in investment lending.  But see below for data on new loans.

APRA-Ptpy-Sep-2015-4The volumes of new loans being written is still strong, with close to 100,000 being written each month. Owner-occupied loan approvals were $219.0 billion (59.8 per cent), an increase of $13.1 billion (6.4 per cent) from the year ending 30 September 2014;
investment loan approvals were $147.0 billion (40.2 per cent), an increase of $23.4 billion (19.0 per cent) from the year ending 30 September 2014.

APRA-Ptpy-Sep-2015-7The LVR splits show the bulk of loans are in the 60-80% band, and there is a fall in the LVR above 90% being written.

APRA-Ptpy-Sep-2015-2The distribution chart below shows this well, and also shows that around 24% of loans are still be written above 80% LVR – at a point in the cycle where house prices in Sydney and Melbourne are probably close to their peaks, and values are falling in some other states.

APRA-Ptpy-Sep-2015-3 Data on the characteristics of the new loans shows a fall in new interest only loans being approved (but still more than 40% of new loans are interest only, and as we know these contain more potential risks later). The proportion via brokers sits at 47.7%, just a tad lower than last quarter, but it shows how important the broker sector is, in terms of originating new loans. There are a small number of new loans still being approved outside standard serviceability, at 3.6% in the past quarter, slightly lower than then 3.8% in June, but still higher than in previous times. Given the tighter lending standards, this is a concern. Only 0.4% of new loans are low documentation loans via the ADI’s though more are being written via the non-bank lenders, and so are not caught in these figures.

APRA-Ptpy-Sep-2015-1