JP Morgan’s Australian Mortgage Industry Report, released last week, considered the potential impact of Basel 4 risk weight changes on the investor loan books of Australia’s big four banks.
The report found that the larger the discrepancy between Basel 4 risk weight outcomes and the 25 per cent portfolio average floor, the greater likelihood of churn.
JP Morgan banking analyst Scott Manning explained that a loan originated in 2011 at 70 per cent LVR through a normal repayment cycle would have an LVR of just below 60 per cent today.
“That would actually release a little bit of capital under the new rules and arguably you could actually provide that customer with an additional discount of 20 basis points and still retain the same ROE because of that lower capital level,” Mr Manning said.
“Banks specifically cannot revalue their assets in their portfolio for these capital allocations. It is clear in the draft standard – it is there in black and white. However, if a new provider comes into the market and wants to refinance that off you, they will get a live marked to market valuation of that property.”
As a result, the dynamic LVR including changes in house prices actually sits below 40 per cent, which triggers another, even lower level of capital for the bank and therefore a potentially even bigger discount for the borrower.
Mr Manning highlighted that CBA and Westpac have the largest proportion of old loans that would exhibit these characteristics. He noted that these banks are also more exposed to NSW, where house prices have surged by 68 per cent since 2011, putting further downward pressure on LVRs.
“If heightened churn becomes a reality, banks like CBA and Westpac with the largest, oldest back books will have the most to lose. ANZ on the other hand, is best placed to take advantage of these changes, given its current low growth rates and the highest amount of capital to deploy,” he said.
The report singled out ANZ as being the best positioned of the major banks to grow its investor loan book. The bank’s market share in the investor lending segment is the lowest of the major banks at 15 per cent. Westpac has the greatest share of investor loans at 26 per cent, followed by CBA (25 per cent) and NAB (19 per cent).
Importantly, ANZ’s current growth rate in investor mortgages leaves it with significant room to fund growth relative to the current 10 per cent cap imposed by APRA and compared to the higher growth rates of its major bank peers.
JP Morgan’s analysis comes at a critical time for the major banks as further regulatory measures to rein in investor lending look increasingly likely.
The Reserve Bank of Australia recently warned that efforts to curb investor lending could be fading and that the central bank was prepared to “do more if needed”.