Fitch Rtgs: Australian Capital Rules Boost Lower-Risk Mortgages, SME Loans

(The following statement was released by the rating agency) Fitch Ratings-Sydney-09 December 2020: Australia's proposed capital framework revision may encourage changes to banks' asset portfolio mix in the longer-term, Fitch Ratings says, with a greater weighting towards lower-risk mortgages and SME lending, while also improving the competitive position of standardised banks relative to advanced banks. The latter is particularly noticeable in the residential mortgage portfolios, with the risk-weights for lower-risk loans under the standardised approach falling and multipliers applied to model-implied risk-weights for advanced banks to reduce the risk-weight differential with standardised banks. Standardised banks' reductions in risk-weights for SME lending secured by commercial property will vary depending on the loan-to-value ratio, while risk-weights for non-property secured lending will decline to 75%-85%, depending on exposure size, from the current 100%. The Australian Prudential (LON:PRU) Regulatory Authority (APRA) published the proposed framework on 8 December 2020. Fitch believes the proposals to implement the final Basel III rules is neutral for bank credit ratings, as the reduction in the "gold plating" of the global framework's implementation is offset by an increase in buffer requirements. As a result, APRA stated that the current amount of capital in the system should be sufficient to meet the proposals, which will take effect in January 2023. The proposed framework should see an increase in reported capital ratios, as risk-weights across both the advanced and standardised approaches are likely to decline - APRA estimates a 10% risk-weighted asset reduction for advanced banks and 7% for standardised banks, on average - bringing the calculations closer to the international Basel standards. However, APRA's framework would remain more conservative than the global rules, on balance. Fitch already factors in the conservative application of APRA's Basel framework when assessing Australian bank capital, so an increase in ratios by itself is unlikely to result in a change in our capitalisation and leverage scores. The reduction in risk-weights will be offset by an increase in the default steady-state countercyclical buffer to 1% for all authorised deposit-taking institutions (ADIs) and a significant increase in the capital conservation buffer to 4% for banks using advanced models - these are currently 0% and 2.5%. respectively. For Australia's four major banks, this would result in minimum common equity Tier 1 (CET1) ratios, including all buffers, of 10.5%, meaning the banks are likely to target CET1 ratios around 11.5%-12%. The proposed framework will still remain conservative relative to international standards despite the reduction in risk-weights, on average. For the standardised approach, APRA proposes a more granular approach to the risk-weight calculation and higher risk-weight caps for residential mortgages. Capital charges for other retail exposures and project finance will also remain above Basel levels. The advanced approach appears conservative in an international context with APRA's retention of a scalar (1.1x modelled charges), a multiplier for model-calculated mortgage risk-weights and the continued inclusion of interest rate risk in the banking book within Pillar 1. The proposals also take a more conservative approach to the treatment of credit conversion factors for off-balance-sheet amounts. APRA's simplified framework proposal for small ADIs (less than AUD20 billion) is broadly comparable with approaches adopted or currently being discussed in other markets, such as the US and EU which have carve outs for smaller, simpler institutions. Under the proposal, smaller ADIs would have a reduced regulatory reporting burden and centralised Pillar 3 publication, which Fitch believes could alleviate some of the cost pressures for smaller players and promote competition. This could lead to further competition for the four major banks over the long-term, but is unlikely to have much of an impact on their franchises or business models over the next few years. Contact: Jack Do Director Financial Institutions +61 2 8256 0355 Fitch Australia Pty Ltd Suite 15.01, Level 15, 135 King St, Sydney NSW 2000, Australia Tim Roche Senior Director Financial Institutions +61 2 8256 0310 Media Relations: Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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