APRA Satisfied but Still Watching the Defectives

By Glenn Dyer | More Articles by Glenn Dyer

The Australian Prudential Regulation Authority has gently warned borrowers and lenders that the recent upsurge in Covid Delta infections and lockdowns could impact the still-improving health of the finance sector.

In its June quarter wrap of how Authorised Deposit-Taking Institutions (or ADIs, which are the main financial groups in the economy) fared in the June quarter and 2020-21 financial year, APRA confirmed the sector had recovered strongly from the depths of the slump triggered by Covid and the first lockdowns a year earlier.

In short, the sector (143 in number, down from 146 in the June quarter) did well with solid capital, rising deposits and lending, especially home loans, falling bad and problematic debts and improved profits.

The picture painted by APRA – record annual revenues, record deposits and high levels of revenues, plus low bad and falling impaired loans – supports the stockmarket performance of the big four in the past year.

Commonwealth Bank shares are up 51% in the last 12 months, Westpac shares by 44%, NAB shares are the best with a 64% rise and ANZ shares are up 55%.

The Reserve Bank though did it bit to make sure the sector doesn’t face too many strains from the current Covid Delta outbreaks this week by extending its Quantitative Easing bond buying by around three months at $4 billion a week instead of $5 billion a week as originally planned (or an extra $50 billion in support to mid-February, 2022).

But the regulator did make several observations about developments that were in fact veiled warnings about potential problems down the track.

When taken with the current lockdowns in NSW, Victoria and Canberra, it is clear APRA (and presumably the Reserve Bank) does have some concerns at the moment.

For example, APRA did point out that more than a fifth of home loans issued in the June quarter had a debt-to-income ratio of more than six times the borrower’s income.

APRA said the share of new loans where the customer was borrowing more than six times their income jumped from 19.1% to 21.9% in the quarter, the largest increase since it started collecting this data in 2019.

APRA said the increase in this type of riskier lending reflected “increased house prices and continued low-interest rates.”

But while this was a concern, there had been an improvement in other measures of higher-risk lending – such as loans to borrowers with high Loan to Valuation Ratios (or loans made with small deposits as a share of the value of the property).

The regulator said the share of new loans with a loan-to-valuation ratio (LVR) of 90% or higher fell to 8.6%, from 10.4% in the March quarter.

“The share of new lending at higher LVRs continues to remain below levels seen over the past decade,” APRA said.

The figures underlined the surge in property lending this year, with banks reporting the strongest growth in new lending to owner-occupiers.

The regulator also warned that while non-performing loans had improved in the June quarter, thanks to support from repayment deferrals programs, government income support measures and the better than previously-forecasted economic recovery, “the outlook for asset quality is uncertain, as economic conditions have deteriorated, due to the current COVID- 19 restrictions across the country.”

But APRA also pointed out that loans which are between 30 and 89 days-past-due but not impaired, “which can be viewed as a leading indicator of loans that may become non-performing, totalled $9.9 billion as at June 2021.”

This was a fall of 6.4% over the quarter and more than 28% over the year to June – a sign of how what was a shaky financial position had improved dramatically up to the cusp of the latest lockdowns.

But APRA said that overall, “these loans remain low on a relative basis (0.5 per cent of total residential mortgage loans outstanding) and below pre-COVID-19 levels.

“There has been no industry-wide deterioration in asset quality following the expiry of the initial repayment deferral programs introduced in 2020,” which is another big positive note from APRA.

And for the first time in two years, the amount of money held in loan offset accounts by mortgagees fell.

“While remaining near historically high levels, the value of funds in offset accounts decreased for the first time since June 2019, representing 9.2 per cent of credit limits as at June 2021,” APRA pointed out.

“This may be reflective of consumer spending habits returning to pre-COVID-19 levels and the reduction of available government support schemes. The impact of recent lockdowns may see a reduction in consumer spending and therefore see these balances rise again over the coming quarter,” the regulator cautioned.

The financial strength of the 143 ADIs improved again in the June quarter, making 2020-21 into a solid year.

The collective net after tax profit of the ADIs’ jumped 23.5% over the year, to $32.3 billion.

APRA said the improvement “The was largely driven by a material reduction (down $10.4 billion) in charges for bad or doubtful debts, as ADIs have been releasing provisions to reflect the better than previously-expected economic outlook over the past three quarters. The industry return on equity (ROE) also increased by 1.3 percentage points to 9.2 per cent over the same period.”

Total assets increased by 3.4% over the June 2021 quarter, to $5.4 trillion.

This, APRA said was largely driven by a significant increase (up $136.8 billion) in cash and liquid assets, such as Reserve Bank of Australia (RBA) exchange settlement account balances.

Most ADIs drew down their Term Funding Facility (TFF) allowances in June, before they expired on June 30. Gross loans and advances increased by 1.9% to $3.5 trillion over the June 2021 quarter, due to an increase in both housing and business loans.

“The notable loan growth is reflective of the bullish housing market and strong economic recovery in the quarter, prior to the current wave of COVID-19 restrictions.” APRA observed.


About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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