APRA interest-only crackdown a blip for lenders
The Australian 12:00am April 5, 2017
Michael Bennet
The banking regulator’s latest steps to rein in interest-only lending to homebuyers have been dubbed largely irrelevant to bank profitability, amid warnings of a train wreck in coming years as borrowers struggle to refinance.
About 83 per cent of interest-only loan holders expected to roll their mortgage to another interest-only loan, which typically lasted for five years before borrowers had to start paying principal, and keep doing so, researcher Digital Finance Analytics said.
It said 669,000 households, or 21.8 per cent of borrowers, were experiencing some mortgage stress, up 1.5 per cent from the previous month, after stagnant income growth and recent out-of-cycle interest rate increases by the banks.
Morgan Stanley strategist Chris Nicol said mortgage repayments could “step up” between 50 per cent and 70 per cent when interest-only loans switched to principle and interest, a risk the market was underestimating.
While the situation was concerning for bank earnings in the longer term if defaults rise and demand vanishes, several analysts said the Australian Prudential Regulation Authority’s new macroprudential policies to cool interest-only lending would have a small impact on credit growth in the near term.
Also, bank earnings may benefit from further interest rate increases as they adhered to APRA’s order to limit interest-only loans to 30 per cent of mortgage lending, down from 40 per cent.
Ahead of APRA’s crackdown, the major banks last month outperformed the S&P/ASX 200 with a total shareholder return of 3.9 per cent, versus the market’s 3.3 per cent.
Morgan Stanley banking analyst Richard Wiles said: “APRA’s latest measures should reduce the amount of higher-risk lending. However, we are not convinced they will materially slow growth in investment property lending or the build-up of household debt.
“In fact, there is still incentive for banks to lend to investors, as ROEs (return on equity) on investment property loans are now 14 percentage points higher than ROEs on owner-occupier loans.”
Mr Wiles said APRA’s bigger crackdown would probably come midyear, when the “unquestionably strong” capital requirement regime was unveiled, resulting in higher risk weightings on investor and interest-only loans where borrowers were materially dependant on rental income. The big four would then have to raise $12.5 billion-$16bn in fresh equity, he said.
TD Securities labelled APRA’s macroprudential measures last week as “little more than limp lettuce”, noting that aside from the interest-only cap, the regulator had threatened banks with merely “a lot of ‘monitoring’, ‘scrutinising’ and ‘observing’ ”.
UBS analyst Jonathan Mott said slicing interest-only lending to 30 per cent would cut new mortgage flows by $15bn a year, lowering system housing credit growth by 1 per cent.
“From the banks’ perspective, this is manageable,” he said. “What is harder to gauge is the impact on the housing market animal spirits if the marginal buyer is removed from the market.”
Citi banking analyst Craig Williams said it was too early to determine the overall impact on the banks. He said APRA appeared concerned about denting the property market with more onerous lending curbs.
“It is clear APRA wants to tighten their macroprudential measures, but just not in a public manner,” he said. “This announcement seems designed to limit the risk of unintended downside consequences in … the housing market, while offering flexibility to adjust certain settings as required.”
Deutsche Bank analyst Andrew Triggs said the move would have a “modest” impact on credit growth as many borrowers should be able to switch to principle and interest loans.