Speaking at a Finsia event in Melbourne on Friday, APRA chairman Wayne Byres said there will inevitably be pressure in the current environment to join the ‘search for yield’. This pressure will likely grow the longer low rates persist, Mr Byres said.
To date, APRA has not seen major shifts in asset portfolios designed to bolster returns by accepting materially greater risk.
“That doesn’t mean that risk-seeking isn’t happening at the margins however, and it is at the margins where we need to be most vigilant,” Mr Byres said.
“In my experience, rarely will an organisation consciously decide to ‘roll the dice’ and significantly raise its risk profile in order to bolster profits,” he said.
“More likely, it happens over time in small incremental steps, and each individual step will not be seen to materially change the organisation’s overall risk profile.”
Mr Byres said many of these may be seen as minor, operational decisions that do not even need the scrutiny of senior executives or boards: “small tweaks to investment portfolios designed to chase a few extra basis points of yield, changes to product design that improve sales volumes by weakening terms and conditions, or shaving headcounts and investment budgets to save a few pennies of cost.
“The collective impact of these decisions, however, warrants attention,” he said.
“Like the anecdote about the frog in boiling water, there is a danger no one notices the ever-increasing risk profile until it is too late. I doubt there are many organisations in the Australian financial sector that are not feeling the pressure from a low rate environment. As pressure is applied to find ways to improve returns, it is important that risk considerations remain front of mind.”
APRA’s warning comes after Australia’s major banks reported combined cash earnings of $14. 8 billion for the half year, down 3 per cent, in the face of increasing non-performing loans and higher liquidity and capital requirements.
Analysis from KPMG found that difficult economic conditions, coupled with continued upward trajectory of regulatory capital are now starting to bite for the majors, underpinning a softer half year result.
Low interest rates are also squeezing bank net interest margins (NIMs). While the major banks have been able to preserve NIM to some degree due to mortgage repricing, return on equity has been hit significantly.
According to KPMG, the ROE of the big four banks has fallen by 153 basis points to an average of 13.8 per cent. Ten years ago, the majors had an average ROE above 20 per cent.
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