Fitch Ratings: Australian Banks to Have No Problems Meeting Capital Proposals

(The following statement was released by the rating agency) Fitch Ratings-Sydney/London-June 18: Australian banks should have no problems meeting the latest proposed revision to the regulatory capital framework, Fitch Ratings says. Some of the proposals appear less conservative than the Basel Committee on Banking Supervision endgame standards, but the Australian Prudential (LON:PRU) Regulation Authority (APRA) appears to be taking a nuanced line, with a more conservative approach in other respects. The proposals are unlikely to affect banks' credit profiles significantly in the short term, and we expect banks to make only modest adjustments to the mix of their loan portfolios as a result of new risk weights. APRA has proposed an aggregate-level risk-weight floor for banks that use the internal ratings-based approach. This is less conservative than Basel, which applies the floor at asset-class level, limiting the capital benefit from diversification effects. APRA says it wants the floor to operate as a backstop to limit capital differences between banks using the internal ratings-based approach and the standardised approach, rather than as a binding constraint on capital allocation. APRA has also backpedalled on its approach to the classification of non-standard mortgages, choosing a narrower definition that will lead to lower risk weights under the standardised approach compared with Basel. The new classification will not be retroactively applied to existing mortgages - not a significant issue in itself, but a deviation from international norms, which adds to the fragmentation of international rules recently highlighted by the Financial Stability Board. APRA's proposals are weaker than Basel in their treatment of several types of higher-risk exposure. APRA proposes a 100% risk weighting for non-standard residential mortgages, compared with 150% under Basel. It also proposes a 90% risk weighting (if lender's mortgage insurance is in place) and 95% (without lender's mortgage insurance) for standard investment, interest-only or SME mortgages secured by residential property with loan-to-value ratios greater than 100%. The corresponding Basel risk weighting is 105%. APRA's more lenient stance on some of these standards, and its easing of various mortgage underwriting requirements over the past 12 months, bolster banks' lending capacity as economic and credit growth slow, and mitigate falling house prices. The regulatory easing could lead banks to increasing risk in their loan portfolios but given the high level of household indebtedness in Australia, we expect the regulator to reimpose underwriting limits if risks start to grow significantly. Nonetheless, most of APRA's proposals are in line with or more conservative than Basel standards. They include higher risk weights for most of the standard residential mortgage categories not mentioned above, and for retail lending other than credit cards. APRA also proposes a multiplier for residential mortgages under the internal ratings-based approach, which is not required under Basel. Australia's four major banks are in a comfortable position to meet the new capital framework. APRA does not expect authorised deposit-taking institutions that already meet the 'unquestionably strong' targets (two of the four main banks) to have to raise additional capital as a result of the new measures. We still believe APRA's proposals may lead to greater pricing differentials between products and, ultimately, a modest adjustment of banks' loan portfolios by type and loan-to-value ratio. However, we do not expect significant changes to banks' business models. APRA expects the revised capital framework to take full effect on 1 January 2022, with no phase-in period, after a consultation period that ends on 6 September 2019. Contact: Jack Do Director, Financial Institutions - Banks +61 2 8256 0355 Fitch Australia Pty Ltd Level 15, 77 King St, Sydney, 2000 Monsur Hussain Senior Director, Financial Institutions - Banks +44 20 3530 1793 David Prowse Senior Director, Fitch Wire +44 20 3530 1250 Media Relations: Louisa Williams (NYSE:WMB), London, Tel: +44 20 3530 2452, Email: louisa.williams@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. 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