Risks shift to non-banks as majors tighten up

Referencing statistics from the Reserve Bank of Australia, Martin North, principal of Digital Finance Analytics (DFA), told Mortgage Business that the major banks’ market share has been gradually declining, with smaller lenders “picking up some of the slack” and non-banks “making hay off the back of tighter lending conditions” brought on by increased regulatory oversight and royal commission scrutiny.

He said that there are risks growing in the non-bank sector that need to be monitored by the Australian Prudential Regulatory Authority (APRA) as they have “looser” standards to abide by simply because they are not authorised deposit-taking institutions (ADIs) and don’t hold capital in the same way as banks.

The latest Australian Bureau of Statistics housing finance figures for March 2018 show that the number of owner-occupied mortgages financed by the non-banks was $1.4 billion, accounting for around 6.6 per cent of total home lending to owner-occupiers.

Mr North noted that non-banks are also writing more non-conforming and interest-only loans than they previously were.

“Those are the two risky categories of lending, and therefore, APRA’s clamp-down on interest-only loans through the major banking system means there will be a skew towards the non-bank sector,” the DFA principal said.

“That means some of the risk has been transferred.”

His comments follow the release of ADI performance statistics and property exposures by APRA, which show that interest-only loans approved in the quarter ending on 31 March 2018 dropped significantly to $13.6 billion, compared to $32.4 billion in the previous corresponding period.

Overall, APRA’s statistics show a 6.2 per cent year-on-year increase in residential mortgages provided by ADIs in the three months leading to 31 March 2018, rising by $94 billion from $1.5 trillion to $1.6 trillion.

Of the $1.6 trillion, $1.06 trillion were owner-occupier loans while $540.9 billion (just over 33 per cent) were investment loans. In the March quarter of 2017, owner-occupier loans provided by ADIs totalled $979.3 billion while investment loans totalled $527.2 billion.

The average residential loan size was approximately $269,000 as of 31 March 2018, compared to $258,000 a year earlier.

What was particularly concerning to Mr North was the number of loans approved outside serviceability: APRA’s stats show that ADIs handed out $4.3 billion in loans outside serviceability in the March quarter this year, compared to $1.5 billion in the previous corresponding quarter.

“We’ve now got loans outside standard serviceability [that are] higher than they have been for a long time: more than 5 per cent if you look across all the [ADI] portfolios and more than 6 per cent if you look at the major banks,” the DFA principal said.

“[This] reflects, firstly, that lending standards have been tightened; therefore, more loans are falling outside serviceability. But I’m surprised that they’re still making those loans outside serviceability, so that’s a big deal to me.

“I think we should watch that, because if that continues to rise, that indicates problems.”

ADI performance statistics from APRA show that the net profit after tax for all ADIs was $36.4 billion for the year ending 31 March 2018, up by $3 billion (or 9.1 per cent) from the previous year.

The return on equity after tax for ADIs was also higher at 12.3 per cent for the year, compared to 11.7 per cent in the previous corresponding period.

Total ADI assets rose by $135.9 billion, or 3 per cent, to $4.67 trillion at the end of March 2018, of which 76.4 per cent are held by the major banks ($3.57 trillion), 9.82 per cent by other domestic banks ($458.8 billion), 2.84 per cent by foreign subsidiary banks ($132.6 billion) and 9.76 per cent by foreign bank branches ($456 billion).

Meanwhile, building societies, credit unions and other ADIs held 0.26 of a percentage point ($12.2 billion), 0.78 of a percentage point ($36.5 billion) and 0.1 of a percentage point ($4.8 billion) of the total assets.

However, Mr North remains unconvinced that ADIs will be able to maintain this level of success due to a range of factors, including greater adherence to responsible lending legislation and guidelines following royal commission scrutiny and increased regulatory oversight, which some have said might result in significant credit tightening.

The DFA principal also noted the many penalties that the major banks have been hit with for their involvement in rigging the bank bill swap rate, contraventions to anti-money laundering and counter-terrorism legislation, cartel conduct and other irresponsible lending practices.

His sentiments are similar to those of IBISWorld senior industry analyst Tommy Wu, who previously said that the outcome of the commission will likely have a broad impact on banks and their shareholders, with revenue in the national and regional commercial banks industry expected to decline at an annualised 1.4 per cent over the five years through 2017–18 to $148.2 billion. This is down by $10.8 billion from $159.0 billion in 2012–13.

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