APRA response to rising prevalence of interest only loans to help keep cash rate low: bank CEOs
Banks say the prudential regulator's crackdown on interest-only mortgages won't hurt their bottom line and argue it's a better way to cool the housing market than a Reserve Bank official rate hike given high household debt.
With analysts predicting banks will lift rates on interest-only loans to get them under the new cap, Westpac Banking Corp chief executive Brian Hartzer said the additional controls won't hurt the bank's profitability given they are aligned with the bank's desire to ensure customers don't take on excessive debt.
"We are all on the same page here, we have a shared objective with APRA – which is to make sure that customers are not taking on more debt than they can afford," Mr Hartzer told The Australian Financial Review. "The Reserve Bank has a challenge because it wants interest rates to stay low, so that consumers and businesses are continuing to be stimulated, but they don't want that to turn into too much debt on the housing side."
Bendigo and Adelaide Bank CEO Mike Hirst says the moves should contribute to a more stable housing market and allow low interest rates to supporting the economy. The Australian Prudential Regulation Authority said on Friday interest-only mortgages should be less than 30 per cent of new residential mortgage lending, lower than current levels of around 40 per cent. It also called on banks to place strict internal limits on the volume of interest-only lending where the deposit is less than 20 per cent of the value of the property, and to "ensure there is strong scrutiny and justification" of any interest-only lending at a loan to value ratio above 90 per cent.
Provision of a range of banking and other financial services, including retail banking, mortgage distribution through third-parties, business lending, margin lending, business banking and commercial finance, invoice discounting, funds management, treasury and foreign exchange services. (Including trade finance), superannuation, financial advisory and trustee services.
Bendigo & Adelaide Bank CEO Mike Hirst agreed the new caps would assist the RBA to keep official rates low, which would support business. "It's a sensible approach, and hopefully one that will contribute to ensuring a stable housing market while low interest rates are still supporting the economy," Mr Hirst said. He acknowledged the challenges faced by APRA and supported an industry-wide approach not favouring one bank over another.
Both CEOs accepted that while interest-only loans are attractive for many borrowers, excessive interest-only borrowing and inadequate provisioning on behalf of some lenders could cause problems.
"In a time when we have concerns in some markets that prices are getting pretty high, you want to make sure that customers have a pretty good buffer there, and paying down principal is a responsible thing to do," Mr Hartzer said. "I don't see [the measures] having any particular profitability impact because, in the end, we are all trying to make sure that customers are getting the right loan for them…that is in our long term interest, just as it is in the customer's long term interest."
Credit Suisse analysts Jarrod Martin and James Ellis said the new measures would act as a "modest additional constraint on the pace of credit growth" but could be "mitigated by new mortgage flows that would have been interest-only applications now becoming principal and interest loan applications".
APRA told banks on Friday to manage lending to investors "in such a manner so as to comfortably remain below" the benchmark of 10 per cent growth, and to review and ensure serviceability metrics – including interest rate and net income buffers – are set at "appropriate levels for current conditions".
Westpac already assesses interest-only loan applications by looking at the ability of a customer to pay back principal and interest, Mr Hartzer said. "We already assume that customers are doing principal and interest when they take out the loan, regardless of whether they actually end up paying interest only. We underwrite on the basis that they can afford to do it."
With APRA allowing 30 per cent of new lending to be made on interest-only terms, Mr Hartzer said this type of borrowing is important for many borrowers, including investors who can deduct interest payments under negative gearing tax policies, and for business customers pledging property as security.
"Interest only is very appealing to high income customers who want to take advantage of negative gearing, it is appealing to business customers who use property security as part of their business requirements, so there are lots of legitimate reasons for people to have interest only loans. We just need to work through mechanically and operationally how we can implement the changes that APRA wants, and that is fine, we do that sort of thing all the time," Mr Hartzer said.
Analysts are now expecting banks to lift interest rates in interest-only loans to pull them under the new caps. Mr Martin and Mr Ellis said they expected banks "may choose mortgage re-pricing, as well as changes to other terms and conditions, to implement this regulatory required adjustment."
Goldman Sachs analyst Andrew Lyons said "the regulatory pressure to slow interest-only lending potentially provides the banks with further repricing opportunities". He said every 15 basis point increase in the interest rate on interest-only mortgages adds around 2 per cent to a bank's earnings per share.
Figures released by APRA on Friday show that ANZ Banking Group grew its mortgage book at the fastest rate among the major banks in the three months to February, which analysts say could be a result of more aggressive discounting. This was followed by Commonwealth Bank of Australia, National Australia Bank and then Westpac.
Read more: http://www.afr.com/business/banking-and-finance/financial-services/apra-response-to-help-keep-cash-rate-low-bank-ceos-20170331-gvb8xx#ixzz4d8Wnn23U