APRA announces key mortgage changes

The measure, to take effect on July 1, 2016, will apply to the nation’s top banks, namely Australia and New Zealand Banking Group, Commonwealth Bank of Australia (CBA), Macquarie Bank, National Australia Bank (NAB) and Westpac Banking Corp.

Australia’s biggest banks will need to hold billions of dollars in extra capital against their home loans, following a move by the banking regulator to strengthen the country’s financial system.

In a statement, Apra said the move would require the banks to lift their capital reserves by about 80 basis points on average.

While NAB’s forecast payout ratio (the amount of current year profits paid out as dividends) of 74% doesn’t appear excessive on first glance, I’d find it very hard to envisage the bank materially increasing its payout while simultaneously building up its capital buffer. The amount of capital that will need to be raised by each bank will be different and will depend on the size and nature of their loan portfolios and settings of their internal risk models. For example, a bank can choose to reallocate capital from other areas to their mortgage books.

After climbing in 2014, bank stocks have come off their peaks in recent months, with uncertainty around capital requirement changes widely named as an issue of confidence.

CBA chief financial officer David Craig said Australia’s largest bank had been “working on a number of options for managing our capital over the coming year” in expectation of APRA’s announcement and will provide “more commentary” at the bank’s full year results August 12.

“It clears it out of the way”, said Bell Potter banking analyst TS Lim.

ANZ Bank said it would need to allocate an additional A$2.3 billion to its Australian mortgage lending book. ‘While Westpac is well-placed to meet these changes, increased capital does come at a cost.

The cost of holding higher capital will inevitably be borne by customers and shareholders.

Bank shareholders could be hit by lower dividends after the prudential regulator ordered the big four banks and Macquarie Group to hold more capital against mortgages to make the financial system more resilient.

“After allowing for these initiatives, and if the impact of today’s APRA changes were effective immediately, on a pro-forma basis, the 31 March 2015 Westpac CET1 capital ratio would have been 8.5%”.

ANZ Bank rose 0.6 percent at 10:51 a.m.in Sydney, while Commonwealth Bank rose 0.5 percent, Westpac was little changed and National Australia gained 0.1 percent.

Advisers say the banks are considering a range of responses to protect returns, including higher interest rates on loans, lower rates on deposits, and increasing fees for other financial products. It said a market update would be provided at its annual general meeting July 23. It is not possible to settle on the final calibration between the IRB and standardised mortgage risk weights until changes arising from the Basel Committee’s broader review of this framework are complete.

“The terminology used remains “capital ratios” rather than CET1, showing that the regulator continues to hedge its bets on what exactly needs to change going forward”, Mr Wiblin said.

That would go some way toward the extra 200 basis points of capital APRA wants to banks to hold in order for their reserves to rank among the top quartile of global banks, which was a recommendation of the government’s Financial System Inquiry.