Bank shares had a second good day on the ASX yesterday after their post-election surge on Monday.
Monday it was Prime Minister Morrison’s surprise win, yesterday it was APRA as the financial prudential regulator revealed plans to relax a key restriction on home loans.
As a result, Commonwealth Bank shares were up 2% to a close of $78.97, Westpac gained 2.7% to $28.50, ANZ Bank rose 2% to $28.43, and NAB added 1.5% to $26.20.
Monday saw bigger gains in the post-poll rush.
Commonwealth Bank shares jumped 6.3% to $77.40, Westpac added 9.2% to $27.75, ANZ climbed 7.8% to $27.86 and NAB added 7.9% to close at $25.81.
Those gains have added billions of dollars in value to the four big banks in terms of overly optimistic views by investors of future earnings.
The looming interest rate cut from the Reserve Bank and pressure on the banks to cut home loans will place further pressure on interest margins and share prices once the silly investor optimism disappears.
Yesterday’s boost followed a statement from APRA that it was looking at scrapping a rule that has meant all new mortgage customers are assessed on their ability to manage home loan repayments with an interest rate of 7.25%, which is clearly above current markets levels around 4%.
APRA indicated that it now believed this guideline, in place since 2014, is out of date (a proposition supported by yesterday’s news that the Reserve Bank is almost certain to cut interest rates at its June 4 meeting).
If relaxed the move will increase the maximum amount a new customer can borrow, which will be welcomed by the banking and housing sectors at a time when mortgage growth has been weak.
Senior credit officer at Moody’s financial institutions’ group, Frank Mirenzi, says APRA’s latest move will allow Australians to borrow more money.
“APRA’s proposal to remove the minimum 7 percent interest rate floor that banks use in their assessment of mortgage serviceability will help support credit growth and could stem the fall in house prices,” he wrote in a note to clients yesterday.
“The proposal will likely increase borrowing capacity and potentially allow households to increase leverage. However, banks have progressively tightened mortgage underwriting practices over a number of years, which mitigates the risks of a resurgence in excessive credit growth and another house price boom.”
The floor was introduced in late 2014 in an attempt to contain surging house prices in Sydney and Melbourne especially which was, in turn, being driven by surging housing investor loan growth.
Much of this lending was via interest-only loans, which gradually spread from investors to non-investor buyers, triggering a crackdown by APRA and the Reserve Bank.
It has required banks to test prospective borrowers against the higher of either an interest rate of 7% or a 2% “buffer” over the loan’s actual interest rate.
In practice, this has meant most banks test whether customers can manage repayments if interest rates hit 7.25%.
APRA says it has proposed removing the guidance that banks use this interest rate floor of 7% and instead will allow banks to set their own minimum assessment rates.
“With interest rates at record lows, and likely to remain at historically low levels for some time, the gap between the 7 percent floor and actual rates paid has become quite wide in some cases – possibly unnecessarily so,” chairman Wayne Byres said in a statement.
“The changes, while likely to increase the maximum borrowing capacity for a given borrower, are not intended to signify any lessening in the importance that APRA places on the maintenance of sound lending standards.
“Rather, it is simply a recognition that the current interest rate environment does not warrant a uniform mandated interest rate floor of 7 percent across all products,” he said.