Bank investors have just been warned that their cherished dividend machines face further pressures from regulators which could curtail the ability of these giants to deliver steady dividend rises in coming years.
APRA, the lead banking regulator, will look at whether banks need to sock away more capital away to handle their escalating exposures to property, especially housing and apartments – a move that would see more rate rises and a slowing in dividend growth – in effect a repeat of what we have seen since early 215when the previous home lending crackdown hit.
He put banks on notice that regulators were conducting a strategic review on how to handle the growing concentration of housing finance to banks and the lenders, and whether this could necessitate increasing capital allocations to home loans in bank balance sheets. News on that is some months away, perhaps even in early 2018.
APRA head, Wayne Byers outlined this review while making it clear regulators, led by his organisation and the Reserve Bank, are not in the business of doing the dirty work of politicians, property people, and the media who are all currently hot under the collar about rapidly rising housing prices especially in Sydney and Melbourne.
In a speech in Sydney on Wednesday Mr Byers made it clear the measures it announced last Friday, the move by ASIC to investigate the selling of interest only loans by lenders and the strong support for these moves by RBA head, Phil Lowe at a dinner in Melbourne on Tuesday night, were all aimed at promoting “a higher-than-normal degree of prudence – definitely by lenders and, ideally, also borrowers – in both credit decisions and balance sheet strength.”
Ad not puncturing the house price surges being seen in Sydney and Melbourne.
“It’s important to be clear that our goal in implementing the additional measures we announced on Friday is not to determine house prices. Housing prices are not within the control, nor the mandate, of the prudential regulator,” Mr Byers said in Sydney yesterday.
"Nor, as the Reserve Bank Governor said last night, can prudential measures address underlying supply-demand issues within the housing market. Rather, our role in the current environment is to promote a higher-than-normal degree of prudence – definitely by lenders and, ideally, also borrowers – in both credit decisions and balance sheet strength.”
In his speech in Melbourne on Tuesday night, Dr Lowe raised the role of the 50% capital gains tax discount for property investing in the current housing rice boom. And he warned that regulators would take more action if the current round of measures were not successful in cooling demand for interest only and investor loans. That was a point echoed yesterday by Mr Byers.
Mr Lowe told the Melbourne dinner that one of the reasons investor loans and interest-only loans were climbing so fast was “the taxation arrangements that apply to investment in residential property in Australia”.
"Not surprisingly, the rising prices have encouraged people to buy residential property as an investment in the hope of ongoing capital gains. With global interest rates so low, many investors have found it attractive to borrow money to invest in appreciating residential property. This has reinforced the upward pressure on prices. This configuration of ongoing increases in indebtedness and rising housing prices has been discussed at length by the Council of Financial Regulators.
"This council, which I chair, brings together the heads of the RBA, APRA, ASIC and the Australian Treasury. The concern has not been that these developments have posed a risk to the stability of our financial system. Our banks are resilient and they are soundly capitalised. Instead, the concern has been that the longer the recent trends continued, the greater the risk to the future health of the Australian economy. Stretched balance sheets make for more volatility when things turn down,” Mr Lowe told the dinner.
In his speech yesterday (http://www.apra.gov.au/Speeches/Pages/Fortis-fortuna-adiuvat-fortune-favours-the-strong.aspx) Mr Byers said:
"We chose not to lower the investor lending growth benchmark at this point in time, given the need to accommodate the increasing supply of housing in the construction pipeline. However, limitations on the volume of new interest-only lending will impact investors more acutely than owner-occupiers, given that around two-thirds of lending to investors is on an interest-only basis.
“Furthermore, although the 12-month annual growth rate for investor lending is currently below the 10 per cent benchmark, the run rate in more recent months has been closer to (if not a little above) 10 per cent on an annualised basis.
"Therefore, even with the benchmark unchanged, lenders are still likely to have to tighten their lending practices and slow lending from that in recent months to ensure they remain comfortably below the desired level.”
"This latest step is a tactical response to current market conditions – we can and will do more (or less) as conditions evolve. We also (sic) developing a more strategic response that recognises that, in the Australian banking system, housing lending risks and capital adequacy are far from independent issues.”
And he warned that this ’strategic response’ could involve (but not a certainty at the moment), higher capital allocations by lenders for housing, which would trigger a (further)rise in interest rates if that happened. he told the conference: “…a longer term and more strategic response will involve a review, during the course of our work on ‘unquestionably strong’, of the relative and absolute capital requirements for housing exposures.
“That should not be taken to imply that there will be a dramatic increase in capital requirements for housing lending: APRA has always imposed capital requirements for housing exposures that are well above international minimum standards, so we do not start with glaring deficiencies.
"By anyone’s standard, however, we have a banking system that has a notable concentration in housing. It is therefore important we give that issue particular attention as we think about how to put the concept of ‘unquestionably strong’ into practice,” Mr Byers added.
For bank investors that is the most important part of Mr Byer’s speech. There is a clear warning that higher capital allocations are being contemplated – they are not automatic. While it should be seen as a warning to banks to slow their home lending (and escape the higher capital demands) by slowing reducing the dominance of their loan books by housing. But APRA will act, as it has done for on capital buffers, if it sees the need and wants to make sure the banks get the message after two years years of paying lip service to the regulators’ macroprudential moves to try and curtail investor loan growth and no interest mortgages.
