The banking regulator has reviewed banks’ lending strategies as part of its heightened supervision to slow the hot Sydney and Melbourne property market, as speculation grows a broader suite of “macro prudential” measures will have to be imposed.
According to banking sources, the Australian Prudential Regulation Authority this week wrote to some lenders responding to their plans for the remainder of the year as it seeks to ensure loans to investors will fall below its 10 per cent growth limit.
While it’s not clear whether APRA took issue with any plans, the regulator in May lashed some lenders for engaging in “less than prudent” practices. An APRA spokesman didn’t respond to a request for comment.
In December, APRA unveiled a range of “guidelines” for banks, including to cap investor lending at 10 per cent a year and ensure borrowers could pay at interest rates of at least 7 per cent.
Yet, lending data this week revealed the banking sector’s overall investor growth continues to breach the speeding limit at 10.4 per cent. In New Zealand, regulators have acted by imposing stricter macro prudential rules including higher risk weights — or more capital — for investor lending and forcing investors in Auckland to have a 30 per cent deposit.
APRA has quietly been more intensely scrutinising banks’ lending to investors in Sydney and Melbourne, along with mortgages at loan to value ratios above 90 per cent, sources added.
It came as RP Data yesterday said house prices surged last month, led by Sydney and Melbourne, up 16.2 per cent and 10.2 per cent in the past year. It followed a warning by Fitch that investment loans “have a higher probability of default” in a downturn as borrowers fight to protect their primary home.
“We expect Australian regulators to step up efforts on the macroprudential front over the coming months — quite possibly via an increase in risk-weights on investor loans,” Goldman Sachs economist Tom Toohey said yesterday.
APRA’s increased warnings have stirred banks into action in recent months, reducing discounts to investors, capping LVRs at 80 per cent and scrapping cash incentives. Last month, Commonwealth Bank and ANZ further tightened their servicing requirements.
But APRA’s May credit data this week showed CBA growing investor lending at 16.7 per cent, month on month annualised, above National Australia Bank’s 14.6 per cent, ANZ’s 12.1 per cent and Westpac’s 9.3 per cent, according to Macquarie analysts.
Macquarie analyst Mike Wiblin, however, said next month’s data would be the “true test” given the recent measures taken by banks to curb investor growth and the typical six week settlement period for loans.
Along with potential macro prudential rules, the banks are sweating on higher capital requirements from the “Basel IV” global reviews and APRA’s imminent response to the Murray inquiry’s call for higher mortgage risk weights.
After investing in advanced internal modelling capabilities to determine the riskiness of loans and how much capital must support them, the big four and Macquarie have average mortgage risk weights of 18 per cent, or less than half the capital all other lenders must set aside.
Morgan Stanley analyst Richard Wiles yesterday told clients the major banks would “reprice” variable mortgages and term deposits in their favour by at least 10 basis points in coming years to offset $31 billion in looming capital raisings by 2017.
Repricing began in May, when CBA, Westpac and NAB held back from homeowners 3-5 basis points of the RBA’s rate cut.
“The main game in banking remains the upcoming increase in capital requirements and resulting repricing,” said UBS analyst Jonathan Mott.
“A slowing housing market would also help the banks, by enabling the RBA to cut rates (if required). This would make net interest margin repricing more palatable. We believe this is likely to lead to opportunities to invest in the banks and benefit from the ensuing return on equity rebuild.”
This article first appeared in The Australian Business Review.