Lending practices to star in APRA speech, says UBS

APRA chairman Wayne Byres will take aim at the banks over lending practices in a speech tomorrow, tips UBS.

APRA chairman Wayne Byres. Picture: Adam Yip.

Australian Prudential Regulation Authority boss Wayne Byres will take aim at the banks over their lending practices when he speaks at the Australian Business Economists lunch tomorrow, UBS has predicted.

UBS is concerned at the large number of headwinds weighing on the banks, credit availability and the housing market and believes the risk of a credit crunch is rising. With net interest margins under pressure, the brokerage believes banks would want to pass on higher costs to customers by raising mortgage rates, but “political sensitivities” may limit their ability to do this.

Macquarie Bank has become the latest lender to lift interest rates, putting the spotlight firmly on the Big Four, who will be closely reviewing their options. AMP, Bank of Queensland, Suncorp, ME Bank and Pepper Group have also raised rates in recent weeks, as higher funding costs start to bite.

In a preview of the speech centred around APRA’s current views of the mortgage lending market, its regulatory and supervisory strategy and the health of bank balance sheets, UBS banking analyst Jonathan Mott expects Mr Byres will push for banks to move away from expense benchmarks and towards verification of actual living expenses by assessing deposits and credit card spending.

“While the major banks have implemented income-adjusted HEM [Household Expenditure Measure] benchmarks which has contributed to a reduction in owner occupier and Investor maximum borrowing capacity, Wayne Byres has recently stated ADIs should not rely on benchmarks, which may not be a replacement for making reasonable inquiries,” Mr Mott said in a research note.

Fresh in Mr Byres mind will be comments from the banks at the royal commission on the difficulties they face in getting an accurate picture of borrowers’ spending habits.

In its submission to the banking royal commission, ANZ said it was working towards using individual customer data to generate personalised income and expense estimates. But it cautioned that the manual assessment of the data would involve significant operational complexity and comprehensive analysis of the data that could impact on the cost and availability of credit.

Mr Mott expects the banks to soon start using customer data to calculate more accurate living expenses.

The APRA chairman is also likely to give further detail on the regulator’s interpretation of internal limits for “very high” debt-to-income ratios and outline an appropriate cap on the proportion of loans that are approved with a debt-to-income ratio above six times.

“In our view boards and management may have little appetite for allowing such high risk loans to be a larger proportion than ~5-10 per cent of flow,” Mr Mott said.

He cautioned that until comprehensive credit reporting is up and running and unless a customer is forthcoming about their full financial position, the banks may not get an accurate reflection of what a customer’s debt-to-income ratio is.

Alongside lending practices and DTI limits, Mr Mott is looking for an update on the quality of bank balance sheets following revelations the big banks performed poorly in APRA’s targeted review of mortgage serviceability in May 2017.

Westpac’s $400 billion home-loan book in particular was singled out by the royal commission just weeks ago, as it revealed 49 per cent of the bank’s sample borrowers had a DTI of 6x or greater. Following the reviews, Mr Byres labelled Westpac a “significant outlier”, while independent analysis from PricewaterhouseCoopers found eight of the bank’s mortgage “control objectives” were ineffective.

Mr Mott expects further details on APRA’s follow-up review, which Mr Byres hinted at back in March, and expects the findings to be submitted to the royal commission and made public.