APRA proposal targets higher risk home loans

Australian Financial Review Feb 14 2018 11:00 PM

James Frost

The Australian Prudential Regulatory Authority has released a proposal that will require banks to differentiate risk weightings for residential mortgages and potentially increase the cost of writing higher-risk loans.

The proposal makes a series of recommended changes to the risk weightings big and smaller banks should apply to owner-occupier, investor, interest-only and non-standard loans.

The paper also includes several references to the level and intensity of residential property investment in Australia and the growing proportion of mortgages held by the big four banks.

"APRA's view is that there are potential systemic vulnerabilities to the financial system created from high levels of residential mortgages lending for investment purposes," the paper states.

[You can download the APRA discussion paper here, if you’re interested. –RJB]

CLSA analyst Brian Johnson said the proposal was likely to make the writing of higher risk investor and interest-only loans less attractive to the banks.

"While APRA have reiterated that the changes mean no capital raisings will be necessary, the capital intensity of some financial services products goes up," Mr Johnson said.

The paper builds on and will ultimately supersede the unquestionably strong benchmark set by APRA in June 2017 of 10.5 per cent ratio for common equity tier one (CET1) by January 2020.

The changes are still in the consultation phase and will not be implemented until January 2021. APRA says the changes will not pave the way for dilutive capital raisings, but could instead be funded from existing capital holdings.

Large banks had been asked to apply a flat risk weighting of 25 per cent to all mortgages over residential property since 2016. Small banks had applied risk weightings of at least 35 per cent.

For large banks it recommends risk weightings of between 15 per cent to 22 per cent for owner-occupied principal and interest loans and risk weightings of between 20 to 27 for other mortgages over residential property.

For small banks it recommends risk weightings of between 20 and 70 per cent for owner-occupied loans and 30 and 85 per cent for investment or interest only loans. Non-standard loans will require a 100 per cent risk weighting.

Citi analyst Craig Williams identified Westpac and Banks of Queensland as two banks that were likely to be disadvantaged by the changes.

Banks are unlikely to reprice mortgages however given the multiple and concurrent inquiries exploring their conduct.

The Australian Bankers Association CEO Anna Bligh said the new rules would simplify the capital and regulatory burden without compromising stability.

"As APRA notes, Australia's banks are already well on the way to meeting the new capital levels, which is important to ensure our financial system is prepared for any future shocks," Ms Bligh said.

Customer Owned Banking Association CEO Michael Lawrence said the potential reduction in risk weights for smaller banks from 35 per cent to 20 per cent for lower risk loans was encouraging.

"We welcome APRA's statement that the revised risk weight framework is likely to reduce any competitive differential in regulatory capital requirements between large and small banking institutions," Mr Lawrence said.

Bank stocks were largely unaffected by the news, most following the market down. ANZ, NAB and Westpac issued statements to the ASX informing investors of the changes, with both choosing to highlight APRA's expectation it will not lead to further capital raisings. CBA fell 3 per cent of $2.32 after going ex-dividend.