Open Banking May Catalyse Digital Disruption

Last week Treasurer Scott Morrison’s media release on the proposal to introduce an open banking regime in Australia was framed around the requirement for banks to be able and willing (with customer agreement) to share product and customer data with third parties.

The timing is interesting given the disruptive rise of FinTechs and the fact there are new entities emerging across the banking value chain. Until recently banks tended to regard their data as a strategic asset (for example not sharing default data) but with positive credit now in force, this is already changing. So this is a logical next step, and should be welcomed.

From our work whit a number of FinTechs we know that access to data is one of the barriers to success, alongside concerns about data security, and identity fraud. Opening the door to data sharing may be laudable, but there are significant technical issues to work through.

If open banking arrives, it would have the potential to increase competition, and perhaps put pressure on bank product pricing, as well as differentiated servicing; but we will see. It may open the door to more automated product switching, as well as better portfolio management and cross-selling. It certainly is another dimension in the wave of digital disruption already in play, which is ultimately being facilitated by the adoption of mobile technologies and devices.

The Turnbull Government has commissioned an independent review to recommend the best approach to implement an Open Banking regime in Australia, with the report due by the end of 2017.

Greater consumer access to their own banking data and data on banking products will allow consumers to seek out products that better suit their circumstances, saving them money and allowing them to better achieve their financial goals. It will also create further opportunities for innovative business models to drive greater competition in banking and contribute to productivity growth.

The review will be ably led by Mr Scott Farrell. Mr Farrell is a Partner at King & Wood Mallesons and has more than 20 years’ experience in financial markets and financial systems law. Mr Farrell has given many years of service to the public and private sector in advising on, and guiding, regulatory and legal change in the financial sector. He has intimate knowledge of the financial technology (FinTech) sector and is a member of the Government’s FinTech Advisory Group.

Mr Farrell will be supported by a secretariat located within Treasury and will draw upon technical expertise from the private sector as required. The review will consult broadly with the banking, consumer advocacy and FinTech sectors and other interested parties in developing the report and recommendations.

The Review terms of reference have been released and an Issues Paper will shortly be made available for interested parties to provide input to the review.

Purpose of the review

The Government will introduce an open banking regime in Australia under which customers will have greater access to and control over their banking data. Open banking will require banks to share product and customer data with customers and third parties with the consent of the customer.

Data sharing will increase price transparency and enable comparison services to accurately assess how much a product would cost a consumer based on their behaviour and recommend the most appropriate products for them.

Open banking will drive competition in financial services by changing the way Australians use, and benefit from, their data. This will deliver increased consumer choice and empower bank customers to seek out banking products that better suit their circumstances.

Terms of reference

  1. The review will make recommendations to the Treasurer on:1.1. The most appropriate model for the operation of open banking in the Australian context clearly setting out the advantages and disadvantages of different data-sharing models.1.2. A regulatory framework under which an open banking regime would operate and the necessary instruments (such as legislation) required to support and enforce a regime.

    1.3. An implementation framework (including roadmap and timeframe) and the ongoing role for the Government in implementing an open banking regime.

  2. The recommendations will include examination of:2.1. The scope of the banking data sets to be shared (and any existing or potential sector standards), the parties which will be required to share the data sets, and the parties to whom the data sets will be provided.2.2. Existing and potential technical data transfer mechanisms for sharing relevant data (and existing or potential sector standards) including customer consent mechanisms.

    2.3. The key issues and risks such as customer usability and trust, security of data, liability, privacy safeguard requirements arising from the adoption of potential data transfer mechanisms and the enforcement of customer rights in relation to data sharing.

    2.4. The costs of implementation of an open banking regime and the means by which costs may be imposed on industry including consideration of industry-funded models.

  3. The review will have regard to:3.1. The Productivity Commission’s final report on Data Availability and Use and any government response to that report.3.2. Best practice developments internationally and in other industry sectors.

    3.3. Competition, fairness, innovation, efficiency, regulatory compliance costs and consumer protection in the financial system.

Process

The review will consult broadly with representatives from the banking, consumer advocacy and financial technology (FinTech) sectors and other interested parties in developing the report and recommendations.

The review will report to the Treasurer by the end of 2017.

 

 

Bankwest Tweaks Mortgage Rates

From The Advisor.

In a note to brokers late on Friday, Bankwest announced that for customers with existing interest-only loans, the following changes will take effect in October 2017:

• 0.25 per cent p.a. increase for interest-only investor home loans; and
• 0.35 per cent p.a. increase for interest-only owner-occupier home loans.

Effective Tuesday, 25 July 2017, the following changes will apply to applications for new lending:

• 0.15 per cent p.a. reduction for new principal and interest investor lending on the Complete Variable and Premium Select Home Loans;
• 0.12 per cent p.a. reduction in the standard rate for principal and interest owner-occupier lending on the Premium Select Home Loan to match the existing acquisition special; and
• 0.05 per cent p.a. increase for new interest-only owner-occupier lending on the Complete Variable and Premium Select Home Loans.

Bankwest said that customers with existing interest-only lending will receive correspondence from the lender closer to the effective date, and that construction loans paying interest-only until fully drawn (IOUFD) will not be impacted by this change.

“Bankwest is mindful of its broader obligations as a responsible lender and aims to balance the needs of customers, shareholders and regulators when reviewing products and pricing,” the bank said.

“These changes are being made in line with regulatory guidance and customers can consider moving to our lower principal and interest rates so they pay less interest over the life of their home loan.”

Australian Banks’ Stricter Capital Requirements Are Credit Positive – Moody’s

From Moody’s

On 19 July, the Australian Prudential Regulation Authority (APRA) announced that it will raise the minimum common equity Tier 1 (CET1) ratio for banks. The stricter capital requirements will make the banking system more resilient to any weakening of credit conditions, a credit positive.

Australia’s four biggest banks, the Australia and New Zealand Banking Group Ltd. (Aa3/Aa3 stable, a22), Commonwealth Bank of Australia (Aa3/Aa3 stable, a2), National Australia Bank Limited (Aa3/Aa3 stable, a2), and Westpac Banking Corporation (Aa3/Aa3 stable, a2), which use internal ratings based models for calculating risk-weighted assets, will be most affected. APRA increased the four banks’ minimum CET1 ratio 150 basis points to 9.5%, including a 1% charge for domestic systemically important banks (D-SIBs). Although the higher capital requirements will take effect in early 2021, APRA said that it expects banks to exceed the new requirement and have CET1 ratios of 10.5% by 1 January 2020 at the latest.

The minimum CET1 ratio for Macquarie Bank Limited (A2 stable, baa1), which also uses an internal ratings-based approach but is not a D-SIB, was similarly raised 150 basis points to 8.5%, effective 1 January 2020. For all the other banks, which use standardized models, the minimum CET1 ratio is 7.5%, a 50 basis point increase.

The new minimum CET1 ratio is an incremental increase from the banks’ current capital levels. The APRA has for some time indicated that it would tighten capital rules, and our Australian bank ratings fully reflect that possibility. To meet a CET1 target of 10.5%, the four big banks will need to raise their CET1 ratios between 40 and 90 basis points from their reported levels at March 2017 (see Exhibit 1). That translates into an aggregate capital shortfall of about AUD9.1 billion. However, the banks’ normalized annual internal capital generation is already around AUD6.5-AUD7.5 billion after dividend payments and dividend reinvestments. Also, in practice, they may need less additional capital because they have been actively reducing their risk-weighted assets by changing their business mixes.

Macquarie Bank’s CET1 ratio was 11.1% as of March 2017, well above its new 8.5% minimum. Smaller banks subject to a 7.5% minimum also mostly have CET1 ratios exceeding the requirement, so any capital shortage for them will be minimal.

The tighter capital requirement reflects the APRA’s concern about Australian banks’ reliance on foreign wholesale funding, which makes them vulnerable to sudden shifts in foreign investor sentiment. Australian banks issue around 70% of their long-term debt and 40% of their short-term debt to foreign investors (see Exhibit 2).
 The APRA has also flagged further increases in capital requirements in 2021. The regulator plans to increase the risk weights of certain assets, particularly for investor property loans and higher loan-to-value ratio loans. Although loss rates on mortgages remain low, housing loans make up 60% of Australian banks’ loan portfolios. Furthermore, a high and rising level of household debt has elevated risks within the household sector, making Australian banks’ credit quality more vulnerable to a shock. APRA also stated that its assessment of bank capital assumes that a framework for total loss-absorbing capacity will be introduced at a later date.

Global Growth IS Recovering – IMF

Latest estimates from the IMF suggest global growth is gaining momentum. But US growth estimates are down because of the slower growth agenda being prosecuted there thanks to the current political dynamics.

Overall, there is a more consistent pattern of upswing.

The recovery in global growth that we projected in April is on a firmer footing; there is now no question mark over the world economy’s gain in momentum.

As in our April forecast, the World Economic Outlook Update projects  3.5 percent growth in global output for this year and 3.6 percent for next.

The distribution of this growth around the world has changed, however: compared with last April’s projection, some economies are up but others are down, offsetting those improvements.

Notable compared with the not-too-distant past is the performance of the euro area, where we have raised our forecast. But we are also raising our projections for Japan, for China, and for emerging and developing Asia more generally. We also see notable improvements in emerging and developing Europe and Mexico.

Where are the offsets to this positive news on growth? From a global growth perspective, the most important downgrade is the United States. Over the next two years, U.S. growth should remain above its longer-run potential growth rate. But we have reduced our forecasts for both 2017 and 2018 to 2.1 percent because near-term U.S. fiscal policy looks less likely to be expansionary than we believed in April. This pace is still well above the lacklustre 2016 U.S. outcome of 1.6 percent growth. Our projection for the United Kingdom this year is also lowered, based on the economy’s tepid performance so far. The ultimate impact of Brexit on the United Kingdom remains unclear.

Overall, though, recent data point to the broadest synchronized upswing the world economy has experienced in the last decade. World trade growth has also picked up, with volumes projected to grow faster than global output in the next two years.

There do remain areas of weakness, however, among middle- and low-income countries, notably commodity exporters who continue to adjust to reduced terms of trade. Latin America still struggles with sub-par growth, and we have lowered projections for the region over the next two years. Growth this year in sub-Saharan Africa is projected to be higher than last year, but remains barely above the population growth rate, implying stagnating per capita incomes.

Risks

There are risks that the outcome could be better or worse than we now project. Near term, there is the possibility of even stronger growth in continental Europe, as political risks have diminished.

On the downside, however, many emerging and developing economies have been receiving capital inflows at favorable borrowing rates, possibly leading to risks of balance of payments reversals later. Strains could emerge if advanced economy central banks show an increasing preference for monetary tightening, as some have in recent months. Core inflation pressures remain low in advanced economies and measures of longer-term inflation expectations show no indications of upward drift beyond targets, so central banks should proceed cautiously based on incoming economic data, reducing the risk of a premature tightening in financial conditions.

Supportive policy has promoted China’s recent high growth rates, and we have upgraded our 2017 and 2018 forecasts for China, by 0.1 and 0.2 percentage point, respectively, to 6.7 and 6.4 percent. But higher growth is coming at the cost of continuing rapid credit expansion and the resulting financial stability risks. China’s recent moves to address nonperforming loans and to coordinate financial oversight therefore are welcome.

Finally, the threat of protectionist actions and responses remains salient in the near and medium terms, as do geopolitical risks.

The longer horizon

Despite the current improved outlook, longer-term growth forecasts remain subdued compared with historical levels, and tepid longer-term growth also carries risks.

In advanced economies, median real incomes have stagnated and inequality has risen over several decades. Even as unemployment is falling, wage growth still remains weak. Thus, continuing slow growth not only holds back the improvement of living standards, but also carries risks of exacerbating social tensions that have already pushed some electorates in the direction of more inward-looking economic policies. In emerging economies in contrast, despite generally higher inequality than in advanced economies, substantial income gains have accrued even to those low in the income distribution.

The current cyclical upswing offers policymakers an ideal opportunity to tackle some of the longer-term forces behind slower underlying growth. Suitable structural reforms can raise potential output in all countries, especially if supported by growth-friendly fiscal policies including productive infrastructure investment, provided there is room in the government budget. In addition, investment in people is critical—whether in basic education, job training, or reskilling programs. Such initiatives will both increase labor markets’ resilience to economic transformation and raise potential output. The same policy measures that can help economies adjust to globalization—as described in the recent report we co-authored with the World Bank and World Trade Organization—are more broadly necessary to meet the challenges of technology and automation.

Strengthening multilateral cooperation is another key to prosperity, in a range of areas including trade, financial stability policy, corporate taxation, climate, health, and famine relief. Where domestic developments have a strong international impact, policies based narrowly on national advantage are at best inefficient and at worst highly damaging to all.

Expect a Flurry of Mortgage Rate CUTS!

The round of mortgage rate repricing which we have been tracking for the past few weeks, with investor loan portfolios being strongly repriced, and owner occupied loans less impacted, has created a significant well of opportunity for banks to selectively offer attractor rates to principal and interest borrowers.

In addition, funding costs are now lower, and the yield curve is less strongly indicating future increases, thanks to changes in the US financial markets and news that the ECB will continue its bond buying programme.

So we expect to see a flurry of selective, targetted offers, aimed at acquiring new business and supporting loan portfolio growth.

ANZ for example is offering a 31 basis point drop for new two-year fixed residential investment loan for customers paying principal and interest (P&I), falling from 4.34 per cent per annum (p.a.) to 4.03 per cent p.a.

First time buyers may also benefit from keen rates, but only in some cases by asking for them.

Remember this will be for new loans. Existing borrowers will still be saddled with higher costs.

 

Auction Clearances Maintain Their Momentum – Again

From CoreLogic.

The combined capital city preliminary clearance rate increased to 74.8 per cent this week, up from a revised final clearance rate of 69.4 per cent last week, while auction volumes increased week-on-week. There were 1,712 properties taken to auction this week, up from 1,627 last week, and higher than this time last year, when 1,329 auctions were held and a clearance rate of 67.9 per cent was recorded.

Based on the preliminary collection, all but one of the capital cities saw the clearance rate increase week-on-week.  Melbourne’s auction market has continued to show some resilience to softer auction conditions, recording the highest preliminary clearance rate at 79.4 per cent, although this is likely to revise lower when the final auction results are released on the following Thursday.  While Melbourne’s clearance rate has remained comfortably above 70 per cent since July last year, final auction results show Sydney’s auction clearance rate has been tracking below 70 per cent over the past six weeks, so it will be interesting to see if the preliminary clearance of 74.9 per cent is again revised below the 70 per cent mark.

East Coast States Top of the Pile – CommSec

The latest CommSec State of the States Report, to end June 2017 shows continued buoyancy in the in NSW and VIC, as well as Canberra.

The data shows housing finance in Canberra is growing at a faster rate than anywhere else in Australia. The number of new mortgages there grew 22.4% above the long term (decade) average, streets ahead of New South Wales, (15%) and Victoria (14.3%0. Plus ACT has a strong construction rating, growing at a rate 21.4% above the decade average, only behind NSW. In fact ACT was the only state or territory to  increase construction levels compared to 2016!

NSW has retained its top rankings on both retail trade and dwelling starts. NSW is second on five of the eight indicators. The lowest NSW ranking is third on construction work.

Victoria has lifted from third to second on the economic performance rankings with momentum provided by its leading position on population growth. Victoria is second on two indicators and in third spot on another two indicators.

The ACT has dropped from second spot to third on the rankings. The ACT is top-ranked on housing finance, second on dwelling starts and in third spot on another three indicators. But the ACT has slipped to seventh on the unemployment ranking.

There is little to separate four of the other economies with a further gap to Western Australia.

Tasmania retains its position in fourth spot but is joined by Queensland. And South Australia has edged its way into sixth on the performance rankings from the Northern Territory.

The highest positions for Tasmania are third on population growth and unemployment. Queensland is benefitting from strong export growth which will boost overall growth of Gross State Product (economic growth). Exports are growing at a 56 per cent annual rate.

South Australia is now top-ranked on business investment. But the next best ranking is fifth on dwelling starts and housing finance.

The Northern Territory eases from sixth to seventh position on the economic performance rankings.

The Territory is still ranked first on construction work done, unemployment and economic growth. But on forwardlooking indicators like population growth, housing finance and home starts the Territory lags other economies.

The economic performance of Western Australia continues to reflect the ending of the mining construction boom. But unemployment has eased over the last three months.

Ideally Gross State Product (GSP) would be used to assess broad economic growth. But the data isn’t available quarterly. And we have previously used state final demand (household and business spending) and exports less imports to act as a proxy for GSP. But the Bureau of Statistics has ceased calculation of state trade data in real terms. So we now use state final demand plus trade in nominal terms and rolling annual totals are used to remove seasonality.

The Northern Territory has retained top spot on economic growth. Economic activity in the ‘Top End’ is 29.4 per cent above its ‘normal’ or decade-average level of output.

Next strongest is NSW, with output 25.3 per cent higher than the decade average level of output. Then follows the ACT (up 25.2 per cent) from Victoria (23 per cent).

At the other end of the scale, economic activity in Tasmania in the March quarter was just 10.2 per cent above its decade average while Western Australian activity was up 10.8 per cent, behind South Australia (up 14.6 per cent) and Queensland (up 17.5 per cent).

The Northern Territory also has the fastest nominal annual economic growth rate in the nation, up by 10.4 per cent on a year ago, ahead of the ACT (up 7.3 per cent), NSW (up 6.9 per cent) and Queensland (up 5.9 per cent).

The weakest nominal annual growth rates are in South Australia (up 1.6 per cent) and Tasmania (up 1.9 per cent).

In terms of economic growth, if trend State Final Demand in real terms is used, comparing the latest result with decade averages reveals some subtle changes in the rankings. Queensland performs better using the nominal data including trade due a strong lift in exports. In the year
to March, Queensland exports were up 56 per cent on a year ago. Similarly Western Australian exports were up by 27 per cent on a year ago.

Will Mortgage Rates Rise Further? – The Property Imperative Weekly 22 July 2017

How much will mortgage rates rise, and when? Welcome to the latest edition of the Property Imperative Weekly, our digest of important finance and property news.

Today we are looking back over the week to 22 July 2017. Banks, Mortgage Rates and Household Finances were all in the spotlight.

We start with APRA’s announcement that they will require banks to lift their capital ratios over the next few years, to ensure they are, to quote the Financial System Inquiry “Unquestionably Strong”. APRA focussed on the CET1 ratio, and they chose to take a long-term, through-the-cycle approach, rather than tying capital ratios to the top quartile of international banks.

Major banks will be required to hold an additional 150 basis points by 2020, whilst those on the standard capital approach, typically, smaller banks, will need a 50 basis point lift. In fact, most regional banks are already operating well above the target minimums, and the majors have been lifting their capital already, with some like ANZ likely to be at the required levels, whilst others, like CBA will need to bulk up, either using dividend re-investment plans, or by issuing more capital.  It does tilt the playing field slightly towards the smaller guys, but those who are investing big to migrate to the advanced IRB capital method will be a bit miffed.

APRA did not address the question raised by the Basel Committee and the new international framework still in the works, which is likely to raise internal-ratings based risk weights for investor mortgages and mortgages with high loan-to-value ratios. This change would further add to Australian banks’ capital needs.

Two points to make on all this. First, APRA has come out with a relatively small lift and below the expectations of many analysts, which is one reason why the bank stocks rose this week. It had all been well signalled. Second, APRA says the net impact will be around 10 basis points on income, and they flag this may be recovered from borrowers or from reduced dividends. If all of this was applied to mortgage portfolios, we think an uplift of 20 basis points or more would be needed. In practice there are so many moving parts in the banks treasury operations, we will never be able to isolate the impact of a single factor. But it does put more pressure, not less, on future mortgage rates

Also this week, the RBA released the minutes of their July meeting. It contained on interesting discussion on what the neutral interest rate in Australia at the moment. The “neutral” official cash rate they estimate is 3.5 per cent – a full 200 basis points above where the cash rate is now. This has two implications, first the current settings are stimulatory, and second, it was taken by many as hinting that rates will rise in the months ahead. The media spoke about a 2% rise in mortgage rates, coming soon.

We have been highlighting for some time now the current cash rate will rise at some point and the RBA language certainly reduces the likelihood of a further cut.  How soon a rise will hit though is uncertain, with Malcolm Turnbull on one hand warning households that they should prepare for higher rates, whilst on the other, later in the week, Deputy Governor Guy Debelle seemed to be hosing down expectations of a rise anytime soon.  He also indicated that the neutral cash rate is probably lower now than in the past, despite a trend towards rising rates elsewhere.

All of this may be confusing, but our perspective is the next move to the cash rate will be up, not down, and it could come anytime in the next few months, especially if inflation rises, and the growth in employment, as reported this week continues. What this means is that households do need to start planning for higher future rates, and we know from our mortgage stress work that around a quarter of mortgage holders have no wriggle room. Personal insolvencies have risen in the past year.

Whilst the current round of bank led mortgage repricing may have abated – there were no significant hikes for the first time for weeks – we do not think this is the end of rate lifts.

We think there are three groups of households who should be taking great care just now.

There are some amazing offers around for first time buyers, and lenders are falling over each other to try and attract them. This is because banks need new loans to fund their growth. But these buyers should beware. They are buying in at the top of the market, when rates are low. Banks have tightened their underwriting standards, but still they are too lax. Just because the bank says you can afford a loan does not mean it is the right thing to do. Any purchaser should run the numbers on a mortgage rate 3% (yes 3%) higher than the current rates on offer. If you can still afford the repayments, then go ahead. If not, and remember incomes are not growing very fast – best delay.

Second, there are people with mortgages in financial difficulty now. Well over 24% of households do not have sufficient cash-flow to pay the mortgage and other household expenses. The temptation is to use the credit card to fill the gap – but this is expensive, and only a short term fix. Households in strife need to build a budget (less than half have one) so they know what they are spending, and start to cut back. Talk to your lender also, as they have an obligation to assist in cases of hardship. And be very careful about refinancing your way out of trouble, it so often does not work.

Third there are property investors who are seeing rental incomes and mortgage repayments moving in opposite directions. As a result, despite tax breaks, investment property looks a less good deal. Of course recent capital gains are there – and some savvy investors are selling down to lock in capital value – but be careful now. New property investors are in for a shock as mortgage rates rise further. And multiple investors, are most at risk. Should property values decline, then this will mark the real turning point; but we think the investment property party may be over.

Cutting to the chase, mortgage rates will continue to rise, but the speed of such increases is hard to predict.

Next, the noise about mortgage broker commissions continued with consumer groups reinforcing their view that brokers are conflicted and current commission structures mean consumers are not getting the best outcomes, whilst industry associations continue to rubbish the criticism, and argue that brokers help to propagate competition in the mortgage market, and mortgage rates would be higher without brokers.

We think the right route is to reinforce disclosure. If brokers were to fully disclose their commissions, consumers could make a more informed choice. Some may choose to go with brokers who charge an advice fee, others may run with those offering the current “free” advice in return for payments from lenders. Mortgage brokers do actually offer a valuable service and should be remunerated for their efforts, but conflicts of interest which beset the current arrangements according to ASIC must be addressed. We are not sure the current industry led committee approach will get to the right outcome.

Finally, we published our latest household surveys which shows that whilst there are segmental movements in play, overall demand for property remains intact, despite rising mortgage interest rates and concerns about stalling income growth.

Results from our latest 52,000 survey show that first time buyers are being encouraged by the more generous first home owner grants on offer in several states. On the other hand, the relative benefit of home purchase relative to renting has reduced.

 

The biggest changes in the barriers first time buyers are experiencing relate to the availability of finance, whilst concerns about future interest rate rises, and rising costs of living reduced a little compared with our May results. Overall first time buyer demand is up.

Turning to property investors, the barriers to purchase are changing with a rise in those concerned about rising mortgage interest rates and availability of finance. The reasons to transact have shifted, with a significant rise in those saying they were driven by tax benefits (both negative gearing and capital gains) whilst there was a fall in those looking to appreciating property prices and low finance rates. Overall, investor demand is down a bit.

Another important group are those refinancing. After a strong swing in 2016 to get a better loan rate, there has been a rise in those seeking to reduce their monthly repayments.

So plotting the change of transaction intention over the next 12 months, we see a significant fall in both portfolio and solo property investors, but a rise in first time buyer purchasers expecting to transact.

Finally, we see that in relative terms, there is a fall in the proportion of property investors expecting to see home prices rising in the next 12 months, whilst first time buyers are a little more positive, and there has been little change in expectation across our other segments.

Putting all this together, we think demand for finance, and for property will remain quite strong, and on this read, it is unlikely home prices will fall much at all in the major eastern state markets. Other states are more at risk of a fall, which once again underscores the diversity in the market across Australia.  As a result, lenders will still be able to write more business, though the mix is changing. But affordability will remain a challenge.

Auction Results 22 July 2017 Remain Firm

The preliminary results from Domain show a continuing trend, with slightly lighter volumes, but strong preliminary clearance rates. Melbourne continues to lead the main centres, in terms of volume, but Sydney has a higher clearance rate. Rates are higher than this time last year.

Brisbane achieved 55% on 81 listings, Canberra made 72% from 36 and Adelaide 69% of 62 listed.

New Capital Requirements Will Strengthen Australian Banks – Fitch

The new higher target set for Australian banks’ common equity Tier 1 (CET1) ratios will support their credit profiles and bolster the banking system’s resilience to downturns, says Fitch Ratings. The four major banks should all be able to meet the requirements comfortably through internal capital generation and existing dividend re-investment programmes.

The Australian Prudential Regulation Authority (APRA) has increased the minimum CET1 ratio from 8% to 9.5% for the major banks – ANZ, CBA, NAB and Westpac – and has given them until January 2020 at the latest to meet the new targets. The capital requirements have been raised in response to the recommendation by a 2014 financial system inquiry (FSI) that Australian banks’ capital ratios should be “unquestionably strong”. The decision to focus on CET1 and take a long-term, through-the-cycle approach, rather than tying capital ratios to the top quartile of international banks, was in line with our expectations.

The major banks already have CET1 ratios that are 150bp-200bp above the current minimum in anticipation of the changes. This capital surplus is likely to fall to a more normal 100bp as the new standards are implemented, which implies CET1 ratios will rise to at least 10.5%, from an average of around 9.5% at end-2016.

It is possible that the major banks will issue fresh equity if they see a benefit in raising the extra capital ahead of schedule. There is also a chance that lending rates could be increased to offset the cost of holding more capital. However, the new capital requirements are unlikely to create significant pressures for any of the four major banks, with APRA estimating that the additional capital could be raised by the deadline without any changes in business growth plans or dividend policies.

The minimum CET1 ratio for smaller banks using standardised models is set to rise by about 50bp, but most already run surpluses above the current requirement and are unlikely to need additional capital.

APRA had hoped that the FSI recommendation could be addressed together with revisions to the risk-weighting framework that are currently being debated by the Basel committee. The new international framework is likely to raise internal-ratings based risk weights for investor mortgages and mortgages with high loan-to-value ratios. This change would further add to Australian banks’ capital needs, but strengthened capital requirements for mortgage lending are already part of APRA’s future regulatory plans to ensure banks are unquestionably strong – and it expects any further capital requirements to be met “in an orderly fashion”.

The paper that APRA released to announce the new minimum capital ratios also noted that capital is just one aspect of creating an unquestionably strong banking system, with liquidity, funding, governance, culture, risk management and asset quality also important. APRA reiterated that its supervisory philosophy will continue to assess all of these factors – as well as the operating environment – when assessing bank risk profiles. It also highlighted improvements since the 2008 global financial crisis in some of these areas, such as liquidity and funding.