Inflation, rate hikes will do APRA’s macroprudential work

The need for further macroprudential measures by APRA has well and truly passed, amid forecasts for housing price declines.

Sometime before the end of June, the prudential regulator will release its new framework for addressing systemic financial risks through macroprudential policy measures.

It was a very different environment last October when the Australian Prudential Regulation Authority put the clamps on a runaway property market by lifting the mortgage serviceability buffer to at least 3 per cent above the loan rate, up from 2.5 per cent.

APRA warned at the time that if the concentration of high debt-to-income loans on bank balance sheets continued to increase, it would consider further measures.

Six months later, the inflation genie has effectively done the regulator’s work, with the Reserve Bank likely to bring forward its first interest rate hike since November 2010 to June.

Debt serviceability would take a hit and the white-hot property market of 2021 would recede further into history.

APRA said its intervention last October would reduce the maximum borrowing capacity of a typical homebuyer by about 5 per cent.

It was seen as a pretty timid move by the regulator, given that rock-bottom interest rates and rapidly increasing house prices had their claws deeply embedded in the system.

Household debt levels relative to income were also sky-high – both historically and internationally – and the rate of household credit growth was forecast to exceed income growth for the foreseeable future, further adding to debt levels.

In the December quarter, the share of new mortgage flows held by high debt-to-income loans of more than six times surged to 24 per cent.

The figure remained at a high level in early 2022.

Since then, and the March concession by the RBA that a rate hike was plausible, expectations have shifted to the magnitude of the likely fall in house prices.

Westpac has predicted a 14 per cent decline over two years from late 2022, while AMP Capital has tipped a 10-15 per cent erosion by early 2024.

The need for further macroprudential measures by APRA has well and truly passed.

The regulator’s new framework for intervention will be an attachment to an existing prudential standard on credit risk management, and will cover both upswings and downswings in the cycle.

Before the recent increase in the serviceability buffer, APRA took action in the 2015 and 2017 upswings to limit growth in bank lending to investors and the concentration of interest-only loans in new lending.

The purpose in a downturn could be to neutralise excessive aversion to risk, such as the additional flexibility to use capital buffers to absorb losses while continuing to lend.

The framework will concentrate on risks in mortgages and commercial property, which account for more than 70 per cent of total credit extended in Australia.

If other risks emerge, APRA could broaden the focus.

CBA’s mortgage breather

Commonwealth Bank is taking a breather in the mortgage market, as it seeks to get the balance right between volume growth and preservation of the net interest margin.

For most of last year, amid booming house prices and a deep pool of low-cost funding through the Reserve Bank’s term funding facility, CBA effortlessly outpaced growth in the wider banking system.

The group’s housing loans grew at 8-9 per cent, reaching a run-rate of 10 per cent in the final quarter of 2021.

The trend, however, reversed in the first two months of this year, with the book expanding at seven per cent in January (8 per cent for the system) and only 4 per cent in February (7.3 per cent).

In contrast to Westpac and ANZ Bank, there has been no suggestion of processing issues crimping CBA’s mortgage growth.

It’s more likely that the nation’s premier home lender has eased its foot off the accelerator to contain some of the margin damage suffered in its first half result announced in February.

While the result was applauded and led to a five per cent surge in the share price, it was the 17 basis-point collapse in the NIM to 1.92 per cent (including nine basis points from the impact of higher but lower-yielding liquid assets) which dominated the investor call.

The NIM was crunched by near-zero interest rates, the mass-adoption of cheap, fixed-rate lending and aggressive competition on variable-rate loans.

Chief executive Matt Comyn made it clear that the pressures would continue, although the squeeze on profitability would ease once the Reserve Bank started to lift the cash rate.

For every 25 basis-point increase in official rates, the group’s margin would expand by four basis points.

“If you take a six-month view, margins will continue to be challenged,” Comyn said.

“Until we start to see an increase in the cash rate, I think it’s very difficult for net interest margins.”

The key issue for CBA in the June half-year, according to Morgan Stanley, will be its ability to manage the volume and margin trade-off.

The investment bank is forecasting annualised mortgage growth of seven per cent compared to the previous half, along with a margin contraction of seven basis points, or 5 basis points excluding liquids.

CBA’s third-quarter trading update on May 12 will be an early indication of how well the trade-off has been managed. 

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