Tag: Non Banks

Non Banks Bloom As Credit Impulse Slows Again

The February data from APRA for ADI’s and the credit aggregates from the RBA were released today. The headline news is the rate of housing credit growth continued to slow.

This is quite starkly shown in the RBA’s 12 month series, with total credit annualised growth now standing at 4.2%. Housing credit also fell to the same 4.2% level, from 4.4% a month ago. The fall continues. Within the housing series, lending for owner occupation fell below 6% – down to 5.9% and investment housing lending fell to 0.9% annualised.

The seasonally adjusted RBA data showed that last month total credit for housing grew by 0.31%, up $5.6 billion to $1.81 trillion, another record. Within in that owner occupied lending stock rose 0.42%, seasonally adjusted to $1.22 trillion, up $5.11 billion. Lending for investment property rose 0.09%, or $0.5 billion to $595 billion. Personal credit fell slightly, down 0.07% and business credit rose 0.42% to $960 billion, up $4.06 billion.

The APRA data revealed that ADI growth was lower than the RBA aggregates. Some of this relates to seasonal adjustments plus, as we will see a rise in non-bank lending. The proportion of investment loans less again to 33.3% of loans outstanding.

Total owner occupied loans were $1.11 trillion, up 0.38%, or $4.2 billion, while investor loans were $557 billion, flat compared with last month. This shows the trends month on month, with a slight uptick in February compared to January, as holidays end and the property market spluttered back to life. The next couple of months will be interesting as we watch for a post-Hayne bounce in lending and more loosening of the credit taps, but into a market where demand, is at best anemic.

The portfolio movements are interesting (to the extent the data is reported accurately!), with HSBC growing its footprint by more that one billion across both investor and owner occupied lending. Only Westpac, among the big four grew their investor loans, with ANZ reporting a significant slide (no surprise they said they had gone too conservative, and recently introduce a 10-year interest only investor loan). Macquarie and Members Equity grew their books, with the focus on owner occupied loans.

The overall portfolios did not vary that much, with CBA still the largest owner occupied lender, and Westpac the largest investor lender.

The 12 month investor tracker whilst obsolete in one sense as APRA has removed their focus on a 10% speed limit, is significant, in that the market is now at 0.6% annualised.

But the final part of the story is the non-bank lending. This has to be derived, and we know the RBA data is suspect and delayed. But the gap between the RBA and APRA data shows the trends.

Non Bank annualised owner occupied credit is growing at 17.6%, and investor lending at 4.8%. It is clear the non-banks, with their weaker capital requirements, and greater funding flexibility are making hay. Total non bank credit for housing is now around $142 billion or around 7.8% of housing lending. This ratio has been rising since December 2016, and kicked up in line with the tighter APRA rules being applied to the banks.

We have out doubts that APRA is looking hard enough at these lending pools, especially as we are seeing the rise of higher risk “near-prime” offers to borrowers who cannot get loans from the banks.

So to conclude the rate of credit momentum continues to ease – signalling more home prices ahead. The non-banks sector, currently loosely regulated by APRA is growing fast, and just the before the US falls around the GFC, risks are higher here. And finally, and worryingly, household debt is STILL growing… so more stress and financial pressure ahead.

Non-bank lenders’ rapid growth poses risks — report

The rapid growth of non-bank lenders reflects the positive quality of their loan books and residential mortgage-backed securities (RMBS) – but growth should happen in a sustainable way, according to Moody’s Investors Service; via MPA.

Moody’s vice president and senior analyst John Paul Truijens said in a statement that although “investment and interest-only mortgages have historically been riskier than owner-occupier principal and interest mortgages, they are less risky than the non-conforming or alternative documentation loans that most non-bank lenders have traditionally focused on”.

The conclusions are found in Moody’s recently released study, “Financial institutions and RMBS – Australia: Growth opportunities not without risks as non-bank lenders push into investment and interest-only mortgages”. The report was written by Truijens and another Moody’s vice president and senior analyst, Daniel Yu.

The report stressed that the push into investment and interest-only lending has further captured the interest of private equity investors. And this has led to three acquisitions of non-bank lenders in the last nine months.

“If the current rapid growth rate were to be sustained over a prolonged period or even rise, or if non-bank lenders were to push into the riskier segments of the investment and interest-only mortgage markets to maintain growth, this would pose risks,” Truijens and Yu said.

According to them, non-bank lenders may need to rapidly expand their underwriting teams, and this could compromise the quality of their staff experience and risk controls.

If the banks return to pursue strong investments and interest-only lending, increased competition would make it difficult for non-bank lenders to sustain their rapid growth and this could push them to the riskier segments of the mortgage market.

Moody’s still believes non-bank lenders are generally suited to underwrite and risk-price investment and interest-only loans. But borrowers’ financial situations need to be scrutinised even more for these mortgages than for owner-occupier principal and interest loans. The experience of non-bank lenders in underwriting non-conforming loans enables them to demonstrate such scrutiny.

Risks are further lessened by the legislative amendments made in February 2018 that now allow APRA to regulate non-bank lenders.

Funding of non-bank lenders is not guaranteed, according to Moody’s. These lenders depend on “bank funding via warehouse facilities for the initial organisation of loans and RMBS investors for RMBS issuance”. Both funding sources depend on market confidence and economic conditions.

Non-bank lenders are increasingly getting into the investment and interest-only loan market after APRA released a series of measures in 2014 that limit banks from offering such loans. Non-banks accounted for almost 35% of investment loans originated in 2017, up from around 15% in 2014. Their share of interest-only mortgages was around 25%. However, the report said the non-bank mortgage sector still remains relatively small in Australia despite massive growth, accounting for just under 4% of the $1.7trn mortgage market.

Non Bank Lending Up, Overall Growth Lower, But Another Record Hit

The RBA has released their credit aggregates to April 2018. Total mortgage lending rose $7.2 billion to $1.76 trillion, another record. Within that, owner occupied loans rose $6.4 billion up 0.55%, and investment loans rose 0.14% up $800 million.  Personal credit fell 0.3%, down $500 million and business lending rose $6.3 billion, up 0.69%.

Business lending was 32.5% of all lending, the same as last month, and investment mortgage lending was 33.7%, slightly down on last month, as lending restrictions tighten.

The monthly trends are noisy as normal, although the fall in investor property loans is visible and owner occupied lending is easing.

But the annualised stats show owner occupied lending still running at 8%, while business lending is around 4% annualised, investment lending down to 2.3% and personal credit down 0.3%.  On this basis, household debt is still rising.

One interesting piece of analysis we completed  is the comparison between the RBA data which is of the whole of the market and the  APRA data which is bank lending only.

Now this is tricky, as the non-bank data is up to three months behind, and only covers about 70% of the market, but we can get an indication of the relative momentum between the banks and non banks.

We see that non-bank lending has indeed been growing, since late 2016. The proportion of loans for property investors is around 28%, lower than from the banks.  Back in 2015, the non-bank investor split was around 34%.

The percentage growth from the non-bank sector appears stronger than the banks. Across all portfolios, loan reclassification is still running at a little over $1 billion each month.

Finally if we look at the relative growth of owner occupied and investment loans in the non-bank sector we see stronger investment lending in the past couple of months.  Bank investment property lending actually fell on April according to APRA stats.

As expected, as banks throttle back their lending, the non-banks are filling some of the void – but of course the supervision of the non-banks is a work in progress, with APRA superficially responsible but perhaps not actively so.

We would expect better and more current non-bank reporting at the very least APRA, take note!

 

Non-banks winning prime mortgages as majors tighten

From The Adviser.

A credit crackdown among the big four banks has been a blessing for the non-ADI sector, with lenders seeing a significant boost in prime mortgage flows. We discussed this a few weeks back.

 

Credit has been tightening since 2014 and a raft of measures have been introduced to stem the flow of investor loans, interest-only mortgages and foreign buyers.

“A lot of that is narrowing what is prime credit for a bank,” Fitch Ratings’ head of APAC, Ben McCarthy, told the group’s 2018 Credit Insights Conference in Sydney on Wednesday.

“As the bank prime market gets smaller, things that were prime last year will end up in the non-bank space.

“Talking to some of the issuers just recently, some of them have commented on the potential outcomes for them as an individual lender. Non-banks are telling me that their volumes are increasing, but not in the areas that you might think. Interest-only volumes are falling and investor loans are relatively stable.”

Australia’s RMBS market is dominated by the non-banks, which rely on securitisation and warehouse funding to grow their books and continue lending.

In 2017, securitisation issuance was at its highest since the GFC. Last year saw $36.9 billion of RMBS issuance, of which $14.7 billion came from the non-banks. Only $8 billion of issuance was made up of non-conforming loans.

The strength of the non-bank sector has attracted US investors. Last year, KKR snapped up the Pepper Group, Blackrock purchased an 80 per cent stake in La Trobe Financial and private investment firm Cerberus Capital Management, L.P. acquired the APAC arm of Bluestone Mortgages.

With a bolstered balance sheet, Bluestone was recently able to edge closer to the prime mortgage space by introducing a new product and lopping 225 basis points off its rates.

Last month, the non-bank lender entered the near-prime space and made significant rate cuts to the Crystal Blue portfolio, which comprises full and alt doc products geared to support established self-employed borrowers (with greater than 24 months trading history) and PAYG borrowers with a clear credit history.

Speaking of the move, Royden D’Vaz, head of sales and marketing at Bluestone Mortgages, said: “The recent acquisition of the Bluestone’s Asia Pacific operations by Cerberus Capital Management has enabled a number of immediate opportunities to be realised — most notably the assessment of our full range of products and to ensure they fully address market demands.

“We’re now in an ideal position to aggressively sharpen our rates based on the new line of funding and pass on the considerable net benefit to brokers and end users alike.”

With many anticipating a significant slowdown in bank credit growth, driven by the evidence given during the Hayne royal commission, non-banks look well positioned to capture a greater slice of the prime and near-prime markets.

“Non-banks are becoming a bigger part of the market,” Fitch Ratings’ Mr McCarthy said. “That trend will increase.”

Non Bank Mortgage Lending Accelerates

The RBA have released their credit aggregates to March 2018.  Looking at the month on month movements, total owner occupied lending rose 0.6%, or $6.89 billion to $1,157.8 billion and investor mortgage lending rose 0.17% or $1.03 billion to $590.2 billion.  So overall mortgage lending rose 0.46% in the month, up $7.92 billion (all seasonally adjusted) to $1.75 trillion. A record.

Personal credit fell 0.12%, down $0.18 to $152 billion. Business credit rose 0.88%, or $7.99 billion to  $913 billion.

The trends show that the share of investment loans fell a little on the total portfolio to 33.8%, while business lending was 32.5% of all lending, up just a little.

The 12 month average growth rates show that owner occupied loans rose 8.1%, while investment loans grew 2.5%. Business rose 4.2%, and personal credit fell again. Overall growth rates of credit for housing slide just a little to 6.1%. This is 3 times the rate of inflation and wage growth! Household debt therefore is still rising.

The noisy monthly data highlights how volatile the business lending trends are.

They also reported that the switching between investor and owner occupied loans continues to run at similar levels, after the hiatus in 2015.

Now, we can also make comparisons between the total loan pool, and those loans written by the banks (ADS’s) by combining the APRA bank data and the RBA data. There are a few catches, and the ABS suggests that not all the non-banks are captured.

But set that aside, we have plotted the relative value of the mortgage pools at the total level, and the ADI level (not seasonally adjusted). The trend shows around 7% of lending is non-bank, up from 5.7% in 2017.  In value terms this equates to  $124 billion, up from $90 billion in 2016.

Another way to show the data is to look at the rolling 12 month growth trend. This shows that non-bank lending has been growing at up to 30% and significantly higher than the market at 5.94%.

This is highly relevant given Bluestone’s recent announcement and Peppers recent $1 billion securitisation issue.

So this is all playing out as expected. As the majors throttle back on new mortgage lending under tighter controls, the non-bank sector continues to pick up the slack. This is a concern as the regulatory environment for these lenders is weaker, with both ASIC and APRA now involved, ASIC from a responsible lending perspective and APRA from new supervision on the non-bank sector, despite their failure in the core banking sector. So we expect to see significant non-bank lending growth, ahead, which will stoke the current massively high household debts even higher.

The total loan mortgage growth is still significantly higher than income growth. This is not sustainable, and will lift mortgage stress higher again – our new data will be out in a few days.

Brokers expect to write more non-conforming loans

From The Adviser.

Mortgage brokers believe that tighter prime lending policies and changing customer needs will drive up demand for non-conforming mortgages over the next 12 months, according to new data.

A Pepper Money-commissioned survey of 948 mortgage brokers has revealed that 70 per cent expect to write more non-conforming loans in the coming year, while 66 per cent predict a decline in the number of prime loans written.

Surveyed respondents expect the demand for non-conforming loans to rise as a result of tighter prime lending criteria (22 per cent), changing customer needs (21 per cent) and changing legislation/regulations (13 per cent).

“The survey shows clearly there is a greater awareness and understanding of non-conforming loans among brokers,” Pepper Group’s Australian CEO, Mario Rehayem, said.

“Brokers and consumers no longer see non-conforming loans only for people who’ve experienced a credit event; instead they realise they are a valid alternative for consumers who are self-employed, who generate income outside of normal work scenarios, are seeking investor loans or have a high LVR.”

The CEO believes that brokers are servicing increased demand from Australians for flexible lending alternatives.

Mr Rehayem said: “With the big banks tightening their lending criteria on an almost daily basis, they are excluding a whole segment of credit-worthy ordinary Australians from accessing finance. That’s why more brokers are discovering the benefits of a flexible lender with a consistent approach to credit provision.

“We also know more Australians are working for themselves or on a part-time basis, and brokers are looking to provide their growing self-employed customer base with suitable lending options.”

Moreover, the survey found that the number of brokers who have yet to write a non-conforming loan has also reduced, falling by 6 per cent from 18 per cent in 2016 to 12 per cent in 2018.

“We know brokers who have previously written a non-conforming loan for a customer are more comfortable in recommending them in the future, that’s why we have established ourselves as a leader in broker education and the provision of tools that allow them to confidently recommend a non-conforming loan in the future,” Mr Rehayem concluded.

Pepper Takeover Approved

From Australian Broker.

The shareholders of Pepper Group have overwhelmingly approved the scheme implementation deed for Red Hot Australia Bidco, an entity owned by certain funds, clients or accounts managed or advised by KKR Credit Advisors or its affiliates, for Bidco to acquire all of the Pepper shares.

Approximately 99.96% of voting shareholders voted in favour of the transaction at a special shareholder meeting today.

As a result of the positive vote, Pepper shareholders not electing one of the Election Options in the scheme will receive $3.60 in cash per share and a special dividend of 10 cents a share.

The Scheme also included an equity alternative to the Cash Consideration (Scrip Option) allowing shareholders (other than certain foreign ineligible shareholders) to instead receive one share in Red Hot Australia Holdco, which is the owner of 100% of the shares in Bidco, for each Pepper share they hold.

Pepper Group chairman, Seumas Dawes said “We are pleased with the strong vote in favour of the scheme, which directors believe delivers maximum value for shareholders. In addition, we are delighted that many shareholders chose to remain invested in the Pepper business.”

Commenting on what the transaction means for the Pepper Group Business, group CEO Mike Culhane said, “With the support of KKR, we now have the opportunity to accelerate our long term growth plans around the world. KKR’s investment is a strong endorsement of the outlook for our business. We are confident this partnership will position the company for long-term success.”

The scheme will be formally implemented on 4 December when shareholders will receive the cash consideration for their shares or an allocation of shares in Holdco.

Why non-banks could be the new home for non-resident borrowers

From Mortgage Professional Australia.

Lenders eyeing up wealthy foreigners currently locked out of the banks and developing new processes to combat fraud

Non-resident lending could be set for a return as non-bank lenders become increasingly interested in the sector.

According to La Trobe Financial’s vice president Cory Bannister, “non-resident is a great example of a product that suits non-banks generally.” Speaking at MPA’s Non-Banks Roundtable last week, Bannister said that the low LVRs, low arrears and high net-worth associated with non-resident borrowers made them similar to prime clients.

The banks largely pulled out of non-bank lending in early 2016, citing fears of fraud. However, Bannister believes non-banks can operate safely: “we believe it requires manual assessment and that’s the single characteristic which meant the banks had to step out of that space.”

La Trobe, who have lent to non-residents on and off over the past year, have an international desk with bilingual staff which help ‘weed out’ fraudulent cases.

Growing niche in expat lending

Two other lenders at the panel were already lending to Australian expats: Better Mortgage Management and Homeloans Ltd.

Expats often struggle to find finance at the banks because they earn income abroad and in foreign currencies. BMM’s managing director Murray Cowan told the panel that “I think the expat sector may have been unfairly characterised as the same as non-residents and that might have created a bit of an opportunity for us there.”

Aaron Milburn, director of sales and distribution at Pepper Money, said that although Pepper doesn’t currently lend to non-residents “I wouldn’t discount it for the future.” He noted that Pepper’s international spread helped provide the infrastructure to do so.

Can non-banks handle non-residents?

Non-banks at the panel were concerned however that a return to non-resident lending could lead to a surge in business.

In fact, it could cause volumes to triple ‘overnight’, suggested Homeloans and RESIMAC general manager of third party distribution Daniel Carde. The panel broadly agreed that such a surge would be difficult to deal with. “No business is set up for triple volumes,” argued Liberty’s national sales manager John Mohnacheff “we can probably handle 5-10% variability”.

A note of caution was sounded by FirstMac founder Kim Cannon. “The RBA wants to stop [non-residents buying property]; they don’t want to cure it,” he told the panel. He warned that surge in non-residents getting financed by non-banks would be “treading on dangerous ground” with regulators.

Non-banks call for more limited APRA scrutiny

From Australian Broker.

Four leading non-bank lenders have criticised the extensive nature of powers proposed to the Australian Prudential Regulatory Authority (APRA) to be implemented over the non-ADI lending sector.

In a joint submission to the Treasury, Pepper Group, Liberty Financial, Firstmac and RESIMAC addressed these potential new APRA powers.

While the lenders appreciated the need for financial stability and sound lending practices, they pointed out that non-ADI lenders and ADIs are significantly different.

“While non-ADI lenders provide a range of essential functions and products to all Australians, they do not provide as broad a range of products, nor do they accept deposits, nor are they responsible for key pieces of banking infrastructure. Non-ADI lenders promote healthy competition within the finance sector, and service areas and customers that ADIs lenders cannot or are unable to service.”

The regulation of non-banks should thus be limited to “exceptional circumstances” if activity from a non-ADI lender is deemed to threaten the stability of the financial system.

The Treasury’s recent exposure draft on these proposed powers creates “unnecessary regulatory intervention” and “regulatory uncertainty” within the sector, they said.

“It casts an extremely wide net, both in terms of the proposed entities to be regulated and the level of regulatory oversight. We recommend that the legislation be modified to facilitate a more targeted regulatory approach to avoid causing unintended instability in the capital markets, the non-ADI lending sector and the Australian economy more generally.”

The submission, which was prepared by legal firm King & Wood Mallesons, proposes a number of specifics with regards to any future regulatory powers granted to APRA:

  • The definition of non-ADI lenders should be restricted only to those engaging in lending finance or in activities which directly result in the origination of loans
  • When assessing the impact of non-ADI lending practices on financial stability, the activities of non-ADI lenders related to ADIs should be excluded
  • Specific details of when APRA can create a ‘rule’ to further regulate a non-ADI lender should be contained either within the legislation or the guidance notes accompanying that rule
  • APRA will assess competitive issues within the relevant markets prior to exercising its rule-making power
  • This rule-making power will be limited to target macro-prudential concerns rather than regulating overall business aspects of the non-bank lender
  • APRA must consult with any affected non-ADI lender prior to creating a rule relating to that firm
  • A transitional period will be held before a rule comes into effect to ensure that the lender can meet its commitments to borrowers prior to any restrictions
  • Proposed rules that apply to the non-ADI lending sector will be no worse than any specific rule applying to the ADI sector
  • Directions to refrain from lending activities should only be made in the event of repeated and severe non-compliance by the lender

“Given the nature of a non-ADI lender and its industry, the rule making and enforcement power needs to be more specific, and different from the prudential standard and oversight approach taken with ADIs,” the joint submission said.

The statement continued, saying that vague regulation would negatively affect the confidence of the investors funding non-bank lenders, reducing the sustainability of the lender’s business model and thus restricting competition.

“In the absence of certainty as to when, how and why APRA may regulate, investors may question the non-ADI business model which may reduce the availability of capital markets funding and increase funding costs and limit the availability of warehouse funding, which in turn may have the unintended adverse effect on the level of loans and pricing in the retail lending market.”