Mortgage brokers are reporting credit conditions in Australian housing lending market have become a lot tougher in the past two weeks according to CLSA’s leading bank analyst Brian Johnson.
Mr Johnson said recent discussions with broking contacts pointed to banks cutting discounts on investment loans and demanding tougher scrutiny on borrowers’ ability to repay their debts.
The crackdown comes only days after data was released showing mortgages had soared to a new record high of $31.3 billion in March.
Lending to property investors is now growing at 21 percent year-on-year, more than double the so-called speed limit of 10 per cent identified by the Australian Prudential Regulation Authority – APRA – earlier this year.
Mr Johnson said brokers have told him that investor borrower serviceability models at those three banks have been tightened over the last week, while ANZ already runs a tougher serviceability regime.
This means the financial benefits from assumed negative gearing tax flows have been removed from the banks’ calculations, lowering the ceiling on borrowings.
Assumptions for rental incomes have also been cut by 20 per cent at NAB and the Commonwealth and by 40 per cent at Westpac, also cutting the amount that can be lent.
“Separately, at least one broker has pointed out to us significantly increased bank verification of broker submitted details,” Mr Johnson added.
The changes appear to be exactly in line with the pressure the banks’ principal regulator, APRA, has been exerting recently.
APRA Survey ‘Disconcerting’
APRA chairman Wayne Byres told a conference of smaller lenders and credit unions last week that a recent borrower survey the regulator had conducted with financial institutions had been “enlightening … and to be frank, a little disconcerting.”
Mr Byres was blunt in his assessment of the easy money the big banks had been offering investors, saying it was not uncommon to find that the most generous banks were prepared to lend 50 per cent more than the most conservative.
There are a few ADIs (Authorised Deposit-taking Institutions, mainly banks, credit unions and building societies) who opted to make their credit assessment based on a lower level of living expenses than that declared by the borrower … that is obviously a practice that should not continue,” Mr Byres warned.
Mr Byres also said the discounts – or ‘haircuts’ – applied to declared income on investment properties’ rental income were not conservative and, in many cases, banks relyied on anticipated future tax benefits from negative gearing to get a borrower over the line for a mortgage.
Mr Byres’ other area of concern was the difference in treatment between the banks on interest only loans.
He said banks were often able to inflate a borrower’s apparent income surplus by up to 5 per cent by making softer assumptions on repayments over the life of a loan.
“We expect to see changes to practices across a range of ADIs,” Mr Byres told his audience. “ADIs have now had long enough to revise their ambitions where needed, and we will be watching carefully to see a moderation in growth in investor lending in the second half of the year as revised plans are implemented. ADIs with more aggressive practices should fully expect to find APRA increasingly at their doorstep.”
That is a visit no bank enjoys and, it seems on recent evidence from mortgage brokers, the banks are doing their best to stop unwelcome, regulatory visitors dropping by.
Mr Byres’ other message to the banks was that, not only will banks be required to hold more capital, it will be a requirement coming down the regulatory pipeline sooner, rather than later.
In his words, APRA will “not wait until every i is dotted and t is crossed” in the anticipated global and local rewriting of the regulatory rulebook before acting.
Mr Johnson warned that Australian bank investors should be under no illusion that APRA is about to increase housing risk weightings as early as next month.
Currently the big four enjoy the benefit of themselves calculating the riskiness of their mortgage portfolio, which in turn allows them to hold substantially lower levels of capital than their smaller rivals.
APRA is looking at pushing up the risk weighting capital requirements of the big banks closer to those of the smaller players, rather than let the smaller lenders’ capital buffers fall back to those of their larger rivals.
“This is potentially a massive issue for Australian banks with potential massive looming capital raisings,” Mr Johnson cautioned.
On Mr Johnson’s figures the big four face a collective need for more than $41 billion in additional capital; the Commonwealth $13 billion, ANZ $11.9 billion, Westpac $11 billion and NAB $5.1 billion.
The capital raisings have already started, with Westpac unexpectedly launching a $2 billion, underwritten dividend reinvestment plan at its interim results presentation.
NAB put its hand out for a $5.5 billion raising during its results, although it was partially linked to an escape from its difficulties in the UK.
“While the banks have enjoyed the benefits of the dividend super-cycle, the opportunity to issue capital at peak cycle earnings, on peak cycle earnings has now passed,” Mr Johnson pointed out.
Any capital raisings have the potential to significantly dilute shareholder value.
Mr Johnson said, on his figures, earnings per share across the board would drop by about 9 per cent, while the banks’ dividend per share capacity would be cut by more than 10 per cent on average.
Bad News for Banks
In recent weeks Australian banks have endured their sharpest sell-off since the GFC, falling more than 12 per cent since late March.
The earlier than expected capital raisings, rising bond yields and less-than-stellar profit results have not helped. Now the tightening in investment lending conditions in housing will only add more pressure to share prices.
Mr Johnson quotes one broker as saying that present conditions in the investment property market feel like a “mini-GFC”.
As Mr Johnson noted, the increase in serviceability tests and subsequent reduction in access to debt for speculative investors, coupled with reduced ‘discounts’ pushing up effective borrowing rates “can’t be good for investment property prices.”
However, Mr Johnson said for now this does not feel disastrous for the banks, given they are passing the pain on and asset growth will remain subdued.
However, CLSA maintains a negative view on all the major banks as the capital raising risks rise.
“Any disruption to the Australian housing investor super-cycle is not great news for banks or housing developers,” Mr Johnson concluded.
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