China Hard Landing Would Hit HK, Korea, Japan Hardest – Fitch

A Chinese “hard landing” would have a significant impact on global growth and economic stability, with economies in Asia and major emerging market commodities exporters among the hardest hit, says Fitch Ratings. Besides China itself, Hong Kong, Korea and Japan would be the most affected major economies in the event of a sharp slowdown in Chinese GDP growth.

Fitch’s base case forecasts China’s economy to expand by 6.8% and 6.3% in 2015 and 2016 respectively. But in the latest Global Economic Outlook report, Fitch assessed an alternative scenario in which China’s economic growth falls below 3% in 2016 driven by a collapse in public and private investment. Our assumptions in the shock scenario included a contraction in public investment of 4% in 2016 and deceleration in consumption growth to 5.6% in 2017 from 8.3% in 2014. This would result in asset-quality deterioration with a spike in the banking system NPL ratio to 8%, a cumulative 10% depreciation in CNY/USD, a double-digit percentage decrease in foreign direct investment and a peak to trough fall in home prices of over 4%.

According to the analysis, which used Oxford Economics’ global macroeconomic model, the impact would be greatest within Asia. The resulting decline in trade combined with the regional investment exposures to China would weigh most on the export-centred economies of Hong Kong and Korea, with the cumulative reduction in GDP from the 2017 baseline amounting to 4.5pp and 4.3pp respectively. Japan would enter a deep recession, with the economy contracting in both 2016 and 2017 and its GDP down by 3.6pp by 2017 versus our base case estimates. Taiwan and Singapore would also face significant slowdowns, though not as severe, with GDP falling by 3.3pp and 3.0pp from the baseline respectively.

GDP growth in the Association of Southeast Asian Nations (ASEAN) economies of Indonesia, Malaysia, Thailand and the Philippines would be less affected by the direct feedthroughs of a China hard landing, though they would still face a cumulative GDP effect of around -2pp.

Australia would be affected to a similar extent as the aforementioned ASEAN economies. Australia has large exposures through its direct trading relationship with China, but it would be able to offset some of the negative impact through counter-cyclical policy. As a ‘AAA’-rated developed economy, Australia benefits from sound fundamentals, which will help to stabilise the economy during a broader global downturn.

At the global level, a Chinese contraction would intensify deflation risks. This is especially the case for the euro zone, where demand has remained persistently weak and inflation low. That said, developed countries other than Japan would fare relatively better than their EM counterparts. Relative to the baseline, the cumulative effect on US and euro zone GDP would be -1.5pp and -1.7pp respectively, implying average annual growth rates of around 1.7% in the US and 0.8% in the euro zone for 2016-2017.

Major emerging markets outside Asia, especially the commodities exporters such as Brazil and Russia, would be doubly impacted by the effects on energy and materials prices and the risk premium shock that would raise borrowing costs and weigh on domestic demand. However, they would not be as heavily affected as the trade-reliant economies within Asia, with a Chinese hard landing likely to reduce GDP from the baseline by around 3pp for Brazil and 2.8pp for Russia.

High Government Debt is Here to Stay – Fitch

There can be no meaningful reductions in government debt without stronger economic growth and better primary balances says Fitch Ratings in their Global Perspectives Series.

The dramatic increase in advanced economies’ government debt due to the financial crisis was quick, but its reduction in most countries will be very slow. Conditions that would facilitate rapid debt reduction appear unlikely to take hold.

In the absence of one-off factors such as privatisation receipts directed at paying down debt or – in extreme cases – agreements with creditors to reduce the debt stock, changes in government debt/GDP ratios depend on the primary balance, the effective interest rate on the debt and economic growth. These three variables form the classic government debt dynamics equation, and encompass all policy “solutions” to high debt, such as fiscal austerity (running a stronger primary position), inflating debt away (high nominal GDP growth relative to interest rates) or growing out of a debt problem (high real and nominal GDP growth relative to interest rates).

Much of the contemporary policy debate surrounding high government debt in Europe centres on the desirability and effectiveness of fiscal austerity. One argument is that it is self-defeating, especially when an economy is weak and growth is fragile – as is typical after a crisis – because the contractionary measures necessary to improve the primary balance will pull growth even lower. The absence of inflation, as we are seeing now, may supplement the view that demand is simply too weak to sustain another negative knock.

A counterargument contends that a tighter fiscal position ultimately fosters growth, first by boosting confidence that post-crisis policymakers are following a more prudent path, supporting private investment, and second by allowing for an increase in the flow of financial resources to the private sector, where they can be more efficiently and effectively deployed.

The austerity debate has largely overlooked how well this approach has worked in the past, and under what conditions. The dataset accompanying Mauro, Romeu, Binder and Zaman’s A Modern History of Fiscal Prudence and Profligacy, IMF Working Paper No. 13/5, provides a useful historical overview, as it contains data on government debt, GDP growth, primary balances and real long-term interest rates for more than 50 countries since 1800, where data availability permits. The episodes of meaningful debt reduction (debt falling 10 percentage points of GDP or more over a five-year period) in advanced economies since 1970 highlight the modern debt dynamics conditions that facilitated such declines, allowing an assessment of whether they might be replicable today.

In 1970-2011 there were 22 instances in 16 countries of government debt falling by 10 percentage points of GDP or more over a five-year period. On average during these episodes, governments ran primary surpluses of 4% of GDP, real economic growth was 3.6% and real interest rates were 3%. We may consider these figures debt dynamics benchmarks.

A comparison of the current and forecast debt dynamics of highly indebted (greater than 60% of GDP) advanced economies with these benchmarks, combining Fitch estimates of effective interest rates and IMF World Economic Outlook forecasts to 2020 for growth and primary balances, reveals that interest rates align favourably with the benchmark, but economic growth and primary balances are typically too low.

The only countries in this exercise forecast to have meaningful reductions in government debt are Iceland and Ireland, both of which are projected to run primary surpluses consistently of 2%-3% of GDP. Japan and Slovenia fare the worst, with debt expected to be higher in 2020 than in 2015. Most other countries are somewhere in between, with reductions in government debt of 5-10 percentage points of GDP, predicated on stronger growth and better primary outturns.

Need for Stronger Growth and Primary Balances 

The policy implications of this review are clear, if difficult to address. For better debt dynamics, the current low level of interest rates must be accompanied by larger fiscal adjustments to improve primary balances, or stronger growth, or both. Enhancing growth prospects may prove difficult. Private debt is still at historically high levels in many countries, reducing the impact of accommodative monetary policies. Advanced economies with “productivity puzzles” abound, and export-led growth, while alluring, cannot be pursued universally, particularly in the context of the profound weakness in global trade flows.

This brings us back to the austerity debate, which is unresolved as yet, but with plenty of supporters on both sides. The situation will become more urgent if neither growth nor primary balances were stronger by the time long-term interest rates eventually begin to rise, at which point all three debt dynamics variables could be working against lower government debt ratios.

If high public debt is here to stay, as seems probable, so too are the consequences. Governments will be less able to enact specific countercyclical fiscal measures, possibly amplifying the next downward shift in the economic cycle and resulting in even higher debt. Policymakers will also find themselves in unfavourable starting positions should the need arise to respond to other potential strains on public finances, such as systemic financial sector stress or a catastrophic event. For the advanced economies as a whole, the probability of debt continuing to climb over the next several years may be at least as high as that of meaningful debt reduction.

No Sovereign Credit Impact From Australia PM Change – Fitch

The change in Australia’s premiership following a Liberal party leadership vote held on Monday will not have an immediate credit impact for the sovereign, says Fitch Ratings. Frequent changes in leadership, with four prime ministers governing the country over the past five years, have made little difference in core economic policies so far. There is no sign that this latest transition will lead to deterioration in policymaking effectiveness.

Notably, there is cross-party consensus at the federal level in favour of fiscal consolidation – there is much less appetite in Australia relative to some other high-grade peers for abandoning efforts to reduce deficits. Recent leadership changes, including the vote against incumbent Tony Abbott on Monday, have been driven more by personality and social or constitutional issues as opposed to differences over economic policy.

Political volatility will, in general, only have a credit impact if it were to result in tangible economic policy changes, loss of foreign investor confidence, reduction in policymaking capacity and/or if it impaired the authorities’ ability to respond to a crisis. But in Australia’s case, there has been little to no signs that the recent frequent changes in power have had any such effects.

Beyond the leadership issues, Australia shares some of the long-term challenges of other high-grade sovereigns, including an ageing population and the need to foster productivity growth. The Australian economy is also facing immediate challenges linked to its reliance on commodity exports, particularly to China. High personal indebtedness – over 150% of disposable income – also means households are more vulnerable to higher interest rates and any substantive worsening in the job market. Incoming Prime Minister Malcolm Turnbull has placed some weight on the need to address long-term economic challenges in his public statements, although it remains to be seen whether this will lead to concrete policy changes.

Any further deterioration in Australia’s macroeconomic position may require more politically difficult policy decisions to keep fiscal consolidation on track. As such, continued political volatility, while not a significant issue thus far, could yet impair authorities’ ability to implement policies should economic conditions deteriorate further.

Turnbull, the minister for communications, defeated Abbott as leader of the Liberal party in a 54 to 44 vote by Liberal MPs on 14 September. Turnbull was sworn in as Australia’s 29th prime minister on 15 September.

IFRS 9 Expected Losses Will Be a Step Change for Banks – Fitch

The introduction of International Financial Reporting Standard (IFRS) 9 will mark a considerable change in the way banks account for credit losses. IFRS 9 requires banks to switch to recognising and providing for expected credit losses (ECL) on loans, rather than the current practice under IAS 39 of providing only when losses are incurred. It will likely dent bank capital significantly and probably add volatility to earnings and regulatory capital ratios . However, it is too early to estimate the full impact that IFRS 9 introduction will have on individual banks or for the industry as a whole.
says Fitch Ratings.

IFRS 9 comes into effect in January 2018 and, as well as introducing ECL provisions, will change the way banks account for a wide range of financial assets.

Disclosure about the process and assumptions made for ECL calculations will be paramount for investors’ understanding of a bank’s financial position. A loan’s ECL will be calculated differently depending on a bank’s risk assessment of the loan during its life and will vary among banks. Preparation for applying the standard requires the development of complex models and data collection so that the final loan numbers reported on banks’ balance sheets under IFRS 9 will be subjective. Reporting of loans across banks will be more inconsistent than is currently the case.

There is a three-stage approach to ECL calculations under IFRS 9. The least predictable is the second stage and we think this could result in substantial additional impairment charges and high volatility at some banks. The second stage will apply to loans that experience a ‘significant increase’ in credit risk and ECL is then calculated on a lifetime rather than a 12-month basis. Banks are working through numerous scenarios to establish a framework for identifying when a ‘significant increase’ (as they define it) has occurred. They then need to derive lifetime losses prior to impairment, including assumptions for example on revolving loans or those with no fixed maturity, such as overdrafts and credit cards.

Banks are required to determine whether there has been a ‘significant increase’ in credit risk on any loan that is not considered low risk when collateral is excluded. This could result in a surge in impairment charges on long-term secured lending, such as retail mortgage books because historic data provided to Fitch by many of the banks we rate shows that most mid- to long-term loans that experience repayment problems do not default in Year 1. Volatility in transferring between 12-month and lifetime losses will work both ways because a loan can also transfer back into stage one, which would trigger a provision reversal.

Loans in stage one (when a loan is first made or acquired, remains low risk or has not seen a significant increase in credit risk) will trigger a capital hit when IFRS 9 is first applied because the standard requires 12-month ECL to be deducted for all loans. The third stage captures loans considered to be credit-impaired, which banks are already reserving so we would not expect any notable impact from the transition to IFRS 9 from these loans. On an ongoing basis, loan loss provisions are likely to be higher than in the past because ECL provisions will be a function of loan growth rather than incurred impairment; this will be especially true for banks experiencing rapid loan growth.

It is unclear whether regulatory capital calculations or ratio expectations will be adjusted to allow for the more conservative loan reporting under IFRS 9. The 12-month ECL concept is a familiar one for banks applying internal risk-based models to calculate risk-weighted assets for regulatory reporting. However, there are important differences, for example for regulatory 12-month ECL, the 12-month PD is multiplied by 12-month LGD but IFRS 9 requires lifetime LGD.

Stability Rules in China’s Response to the Equity Market Correction – Fitch

According to FitchRatings latest in their Global Perspectives series, policy responses to sharp corrections in financial markets should be expected as the Chinese government adheres to a core principle of maintaining stability.

Much Western criticism of Chinese policy responses to the equity market sell-off as clumsy and ineffective misreads critical points on China. Common views expressed are that Chinese officials don’t fully understand how markets operate, are manipulating the market, or have not yet developed policy channels and tools that are sufficiently sophisticated and adept to affect the market.

Stability a Higher Priority than Market Principle

The easiest misconception to take issue with is that intervention by Chinese policymakers confirms a lack of market insight. Even casual observers of China in recent decades would recognise the increased role of foreign firms and private innovation and the diminished role of the state. State enterprises retain a dominant role in critical areas of the economy, but private enterprise and market-based solutions have been vital to the country’s rapid industrialisation and development.

But the Chinese authorities’ deep aversion to instability – broadly defined, including financial instability – means there are limits to their embrace of market-based principles. Although the equity market is small from a macroeconomic perspective, a period of free-fall would sit uncomfortably with a government that does not hide its desire to retain and control the status quo in so many other areas.

In this context, recent equity market interventions were less about denying market principles than about confirming a stronger preference for stability, and for the state to have a primary role in providing it. The preference for stability would have been better placed had it come prior to the equity bubble inflating, but the government actually had an active role last year in encouraging investment in the market. This provided even stronger motivation to intervene during the market correction.

Collective Policymaking and Possibly More Debt

Even if public opinion could be swayed, creditors may take the view that there is still the need for significant policy change in Greece, and that debt relief would simply address the consequences of previous shortcomings, not the root causes. Greece still needs to undertake major reforms to deliver sustainable public finances and more robust economic growth, and creditors may be reluctant to surrender the ongoing conditionality provided by support programmes that could be discontinued if there were wholesale debt forgiveness. The risk would be that Greek imbalances re-emerge, eventually threatening the viability of the eurozone again.The various policy responses to the decline in the equity market have two familiar features – they involve a large number of participants and there is likely to be a resulting increase in debt.

The “national team” of public institutions involved in providing direct and indirect support to the equity markets has been portrayed by some observers as disjointed and ineffectual, primarily because there were several initiatives announced to which there was little or no market response. In addition, it has been argued that with so many institutions involved, including the Ministry of Finance and the People’s Bank of China (PBOC), none took a clear lead or stood out as having the credibility or authority to single-handedly sway the markets in the way that the Federal Reserve and European Central Bank were able to during episodes of stress in their markets.

But this misses the point that China’s patchwork of financial supervision and regulation is consistent with a deliberately diffused policy framework. This arrangement is in place not because a consensus-driven approach to decision-making is favoured – in fact, in some cases responsibilities are overlapping and initiatives at cross-purposes. Instead, policy diffusion is intended to ensure that state organisations operate collectively under the ultimate guidance of the country’s political leaders. As such, China’s authorities are unlikely to conclude from criticisms of the “national team” that they need a Greenspan or a Draghi to personify economic influence and authority. It is equally unlikely that there will be a regulatory overhaul to raise one institution to a coordinating “super-regulator”, as has been proposed by some foreign observers.

Just as the equity market was egged higher during its upswing in part by increases in debt – specifically via margin and peer-to-peer lending – elements of the policy responses to the downturn are also likely to raise debt levels. In July the China Securities Regulatory Commission (CSRC) relaxed some margin lending requirements of brokers, reversing a trend towards tightening earlier this year. The CSRC is also reported to have extended credit of RNB260bn to brokers, with funding from the bond market, banks and liquidity provided by the PBOC. Additionally, the China Banking Regulatory Commission has allowed banks to take a more flexible approach to corporate loans collateralised by equities, and has encouraged them to lend to listed companies engaged in stock buy-backs and to the CSRC.

The specific equity market initiatives that may increase debt should not be interpreted as a change in policy direction, as one of the authorities’ overriding objectives remains a reduction of indebtedness in the economy. The risks of potential solvency problems at current debt levels have been central to the acceptance and adoption of lower economic growth targets. But, as with other immediate policy challenges in China, the authorities see a further build-up in debt as a reliable – and presumably short-term – solution.

Booming Housing Market Shields Sydney Mortgage Arrears – Fitch

Fitch Ratings says that Sydney’s mortgage performance has benefitted the most from the rise in house prices. Metropolitan regions, including those historically worst performing ones in western Sydney, have not experienced the usual deterioration in mortgage delinquency rates caused by Christmas spending.

Budgewoi (2262), on New South Wales’ (NSW) Central Coast, has topped the list for the second time as Australia’s worst performing postcode in terms of missing housing loan repayments. With a 30+ days delinquency rate of 3.2%, Budgewoi has appeared 11 out of 14 times in Fitch’s previous mortgage delinquency reports.

This year, Tasmania replaced Queensland (QLD) as the worst performing state in Australia for mortgage repayments with a delinquency rate of 1.33%. This figure reflects Tasmania’s high unemployment rate and low house appreciation over the past three years.

On average, the delinquency rate across Australia increased 9bp to 0.99% at end-March 2015, up from 0.90% at end-September 2014. The strong house-price appreciation and lower interest rates slightly offset the negative impact of seasonal Christmas overspending, as arrears are 36bp lower than 12 months ago.

Over the past two years, local unemployment and the housing market have been the major drivers in regional mortgage performance, particularly in the current low-interest rate environment.

Most of the 20 worst-performing postcodes were in metropolitan regions, with the only exception being Laidley and Mount Isa in QLD. However, metropolitan regions overall performed better than non-metropolitan areas, especially in Western Australia, Queensland and Northern Territory where the slowdown and job cuts in the mining industry have been detrimental to mortgage performance.

Christmas spending and the general cost-of-living affected the mortgage performance of regions in states that showed strong sensitivity to mortgage rates – such as the north-west of Melbourne and south-west of Brisbane – due to socio-economic factors like high unemployment.

For the first time, Mackay (QLD) became the worst-performing region in Australia by dollar value, replacing Hume City (Victoria, VIC), following a 59bp worsening in 30+days arrears. Mackay’s performance deteriorated the most in the six months to end-March 2015.

The best performing regions in their respective states by value are: Lower Northern Sydney (New South Wales, NSW); Inner Melbourne (VIC); Inner Brisbane (QLD); and Central Metropolitan Perth (West Australia, WA).

Fitch continues to monitor regional mortgage performance as there is still a clear distinction between best- and worst-performing regions in a given time frame, and trends vary with local economic cycles.

Investment Property Loans ARE More Risky – Fitch

Fitch Ratings says that the investment loan reclassification process announced by National Australia Bank Limited will not result in a withdrawal or downgrade of Fitch’s ratings on the National RMBS Trust notes and outstanding issuance under NAB’s mortgage covered bond programme. The reclassification process has been initiated following a review of NAB’s housing loan purpose data which found misclassifications between ‘owner occupied’ and ‘investment’. The full list of ratings follows at the end of this commentary.

Fitch believes that investment-property loans will have a higher probability of default in an economic downturn, as borrowers will fight harder to protect their primary residence. The agency applies a 25% higher base default probability in the case of a mortgage collateralised by an investment property, compared with an owner-occupied property.

However, Fitch has tested the sensitivity of the ratings to an increase in the proportion of loans collateralised by investment properties. The analysis found that the RMBS notes’ and mortgage covered bond ratings are not impacted by an increase in expected foreclosure frequency following the increase of loans classified as investment loans in each of the rated transactions. The levels of credit enhancement (CE) available to each rated note issued under the National RMBS transactions would still be above Fitch’s adjusted break-even CE levels. The transactions are performing within expectations with low levels of arrears and losses.

The change of the proportion of investment loans in the cover pool would not impact Fitch’s ‘AAA’ break-even asset percentage (AP) of 89.5% on NAB’s mortgage covered bond programme. The ‘AAA’ break-even AP calculated by Fitch is mainly driven by the programme’s refinancing needs as a result of significant maturity mismatches and the agency’s refinancing assumptions.

NAB has stated that new procedures are being implemented and that identified gaps in data capturing have been rectified. This work forms part of an ongoing review to improve its statistical reporting process. Fitch has and will adjust its analysis assumptions on the National RMBS transactions and the NAB mortgage covered bond programme to reflect the ongoing work.

The affected RMBS transactions are securitisations of first-ranking Australian residential mortgages originated by Advantedge Financial Services Pty Limited and Challenger Mortgage Management Pty Limited: National 2011-1, National 2012-1 and National 2012-2; and National Australia Bank Limited: National 2011-2 and National 2015-1.

Still Higher Aussie Bank Capital Expected From New Rules – Fitch

A further increase in capital by Australia’s four largest banks is likely over the medium term as regulatory changes stemming from the December 2014 Financial Services Inquiry (FSI) and Basel framework are implemented, says Fitch Ratings. The increase in capital will be supportive of the big banks’ current ratings, though upgrades are not likely given their already high ratings and weaker funding profiles relative to their international peers.

Two of Australia’s “Big 4” banks have announced multi-billion dollar capital raises thus far in August in response to increased regulatory capital requirements. Commonwealth Bank of Australia (CBA) said that it would raise approximately AUD5bn on 12 August while Australia and New Zealand Banking Group (ANZ) declared its own AUD3bn capital raise on 6 August. The additional capital will add 135bp to common equity Tier 1 capital (CET1) for CBA, bringing its CET1 ratio to 10.4% on a pro-forma basis as of end-June. ANZ’s move will add between 65-78bp to CET1 capital, bringing its pro-forma CET1 ratio to 9.2%-9.3%.

The CBA and ANZ announcements come after the Australian Prudential Regulation Authority (APRA) said on 20 July that minimum average mortgage risk-weights for Australian residential portfolios would increase to at least 25% from around 16% currently. Banks have been given until 1 July 2016 to address any capital shortfalls from the higher risk-weights.

Australian banks could have met the increased capital requirement from the APRA decision through internal capital generation given robust profitability. However, Fitch believes that the higher risk-weights are likely to be only the first of a series of new measures to be implemented. In addition to the FSI, the Basel committee is also expected to finalise their proposals for an update to the global framework by end-2015/early-2016. Together, global and domestic regulatory changes are likely to result in yet higher capital requirements.

Fitch believes that the banks’ recent efforts to raise capital in part reflect positioning for a broader range of regulatory changes – in addition to the higher risk-weights announced by APRA – and in anticipation of future growth. National Australia Bank (NAB) had announced plans to raise AUD5.5bn of capital in May, ahead of any regulatory changes. Westpac, too, said in the same month that it would raise an additional AUD2bn in capital through its dividend reinvestment plan (DRP).

The Australian banks are likely to use a combination of retained earnings, discounts on their DRPs, underwritten DRPs, and equity issuance to increase their capital positions.

Free Windows 10 Will Not Salvage Shrinking PC Sales – Fitch

Microsoft Corporation’s new Windows 10 operating system released on 29 July will not reverse declining PC sales, says Fitch Ratings.

Fitch believes that PC demand will remain structurally weak, exacerbated by users’ adoption of touch screen-enabled larger smartphones and tablets. Demand could fall further as vendors look to raise prices in Europe and Japan to offset the effects of a rising US dollar.

Microsoft’s decision to offer Windows 10 as a free upgrade is likely to shrink PC shipments further, unlike in the past – when a new Windows operating system incentivised consumers to buy new PCs. The free upgrade is likely to extend the PC replacement cycle, given that Windows 7 is compatible with Windows 10. However, Windows 10 should benefit sales in the hybrid laptop market which is still a niche area, with its new gesture- and voice-control features. Annual PC sales have been declining since 2012; and shipments will drop by the mid- to high-single digits to 300 million units in 2015, according to market forecasters.

Notably, too, we expect that Asian sales growth will no longer be strong enough to offset declining sales in the US and Europe. Tablets and smartphones present stronger competition for PCs in developing markets, as a smaller proportion of emerging-market consumers own more than one computing device. Steep declines in global PC shipments in 2015 are also due to a rising US dollar and temporary demand growth stimulated by Microsoft’s 2014 decision to end support for Windows XP.

The profitability of most PC vendors is likely to be hurt by shrinking sales; a market which is consolidating but still competitive; rising inventory levels; and unfavourable currency effects. Average operating margins for the top three PC vendors have halved to about 3%-5.5% since 2011-2012. Of the three, Lenovo has the best operating margin at 5.5%, and derives a large part of its profitability from the Chinese business PC market. The PC operating margin of the second-largest manufacturer, Hewlett Packard  has narrowed to 3% (2011: 5.5%). This should expand, however, from expectations of higher-profit-margin product sales, market share gains and cost restructuring. Dell has stopped disclosing PC profitability following its leveraged buy-out in 2013.

We believe that PC market share will gradually consolidate among the top-three vendors, and could drive a modest expansion in profit margins. Market leaders are focusing on profitable growth and a richer sales mix of hybrids, thin and mobile products, the commercial market and services.

The big three firms have gradually gained market share, and now control about 51% versus 45% in 1Q14. Lenovo’s “protect and attack” strategy – whereby it focuses on protecting its Chinese market share while boosting its share in US and European markets – is bearing fruit. The company has increased its PC market share by 200bp to 19.5%, and has been the PC market leader for eight quarters.

Higher Mortgage Risk-Weights First Step to Strengthen Australian Bank Capital – Fitch

Fitch Ratings states that an increase in the minimum average Australian residential mortgage risk-weight for banks accredited to use the internal ratings-based (IRB) approach for regulatory capital calculations was expected, and is only the first step in higher capital requirements for these banks. Greater levels of capital are likely to be required over the next 18-24 months as further measures from Australia’s 2014 Financial Services Inquiry (FSI) are implemented and adjustments to the global Basel framework are finalised.

The announced increase in minimum mortgage risk-weights is the first response to the final FSI report, published December 2014, which also recommended Australian banks’ capital positions be ‘unquestionably strong’. The latter recommendation is aimed at improving the resilience of the banking system given its reliance on offshore funding markets, its highly concentrated nature, and the similarity in the business models of most Australian banks. The change in mortgage risk-weights should provide a modest boost to the competitiveness of smaller Australian deposit takers that currently use the standardised approach for regulatory capital calculations.

The change announced by the Australian Prudential Regulation Authority (APRA) on 20 July 2015 is likely to be the first of a number of changes made to strengthen the capital positions of Australian banks. APRA referred to the higher risk-weights as an interim measure, with final calibration between IRB and standardised models expected once the Basel committee’s review of the framework is completed – this is unlikely to be before the end of 2015.

The move will result in minimum average risk-weights for Australian residential mortgage portfolios increasing to at least 25% from around 16% at the moment. APRA estimates this would increase minimum common equity tier 1 (CET1) requirements by about 80bps for Australia’s four major banks – Australia and New Zealand Banking Group Limited (ANZ; AA-/ Stable), Commonwealth Bank of Australia (CBA; AA-/ Stable), National Australia Bank Limited (NAB; AA-/ Stable), and Westpac Banking Corporation (Westpac; AA-/ Stable). This is equivalent to nearly AUD12bn for the four banks based on regulatory capital disclosures at 31 March 2015. The only other bank to be impacted is Macquarie Bank Limited (A/ Stable) which has estimated a CET1 impact of about 20bps, or AUD150m.

The higher risk weights will be implemented on 1 July 2016, giving the affected banks nearly 12 months to address capital shortfalls. Sound profitability means that shortfalls could be met through internal means – the AUD12bn is equivalent to about 40% of annualised 1H15 net profit after tax for the four major banks. Fitch expects the banks will look at increasing the discount on dividend reinvestment plans, and/or underwriting participation in these schemes to meet shortfalls. However, raising capital in equity markets is also an option to address both the requirement early and in anticipation of future increases in regulatory capital requirements. Banks have already begun increasing capital positions, with a number of the major banks announcing capital management activity at their 1H15 results.

The size of the increased capital requirement will vary across the banks based upon their loan portfolio compositions – CBA and Westpac have the largest Australian mortgage portfolios and therefore their minimum capital requirements are expected to be the most impacted.