Banks counter over APRA’s mortgage capital requirements
(22 July 2015 – Australia) Australian banks have come out about having to beef up their capital to be held against residential mortgage loans following the Australian Prudential Regulatory Authority (APRA)’s decision to increase the minimum risk weighted assets (RWA) requirement.
Macquarie Group Ltd released a statement following the decision on 20 July to say that while the proposed changes do not come into effect until 1 July 2016, based on our current mortgage portfolio, the impact on MGL’s APRA Basel III capital surplus would be approximately A$150 million (at 8.5 percent RWAs), equivalent to a 20 basis point reduction in the Bank Group’s CET1 ratio.
The increased capital requirement for mortgages will be accommodated from the existing capital surplus and retained earnings.
As at 31 March 2015 Macquarie’s capital surplus was A$2.7 billion over regulatory minimum requirement of 8.5 percent.
Macquarie will provide a market update at its Annual General Meeting on 23 July 2015.
Westpac Group said the change for banks that use the advanced internal ratings-based (IRB) approach to credit risk, based on its portfolio on 31 March 2015, the change has been estimated to increase the RWA’s for Australian residential mortgages by A$40.7 billion.
The outcome of this change will lead to the ratio of mortgage RWA to mortgage exposures for the Group increasing from around 16 percent to approximately 25 percent.
Westpac Chief Financial Officer, Peter King, said: "We are well placed for this change having already taken a number of significant steps to boost our capital position, including partially underwriting the First Half 2015 DRP and the recent sale of shares in BT Investment Management.
"After allowing for these initiatives, and if the impact of today’s APRA changes were effective immediately, on a pro-forma basis, the 31 March 2015 Westpac CET1 capital ratio would have been 8.5 percent.
“This would be just below our preferred CET1 capital range of 8.75 percent to 9.25 percent, more than a year prior to the required implementation.
"The impact of this change will require a further A$3 billion of capital to lift the Group’s 8.5 percent 31 March 2015 pro-forma CET1 capital ratio towards the top end of our preferred range," King said.
The Commonwealth Bank of Australia (CBA) acknowledged the release of APRA’s increase to capital requirements for residential mortgage exposures measured under the internal ratings-based (IRB) approach.
“APRA’s release means that from 1 July 2016 the risk weightings of CBA’s Australian residential mortgages will increase to an average risk weight of at least 25 percent,” CBA said in a release.
“For CBA, we expect that this will have the effect of increasing the amount of Common Equity Tier 1 (CET1) required for Australian residential mortgages by approximately 95 basis points from 1 July 2016.
“To the extent that there is any increase of actual capital levels as a result of this change, this will further improve our position relative to international peers.”
CBA chief financial officer, David Craig said: “Financial strength, including a strong capital position, is a pillar of CBA’s strategy. In expectation of APRA’s recent announcements, CBA has been working on a number of options for managing our capital over the coming year.
“We will provide more commentary on these announcements when we present our annual results on 12 August 2015.”
ANZ commented on the changes saying as part of the APRA changes, from 1 July 2016 the average credit risk weight applied to Australian residential mortgage lending for ANZ will increase from ~15 percent to ~25 percent.
Based on ANZ’s 31 March 2015 Financial Report, the APRA change in average credit risk weights to 25 percent will require ANZ to allocate approximately A$2.3 billion of additional capital to the bank’s Australian mortgage lending book.
The impact to ANZ's capital position of approximately 55 basis points is largely as expected following the Financial Services Inquiry and is manageable during the APRA transition timetable to 1 July 2016.
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