Westpac clears APRA investor cap

Released yesterday, APRA's banking statistics for July show that the bank's annual credit growth to investors was 9.6 per cent, under the 10 per cent threshold implemented by the prudential regulator earlier this year.

APRA figures value Westpac's investor loan book at $156.3 billion as at 31 July this year. By comparison, in July 2014 the book was valued at $142.6 billion, resulting in annualised growth of 9.6 per cent.

Last month Westpac’s annualised investor loan growth remained above the regulator’s cap at 10.2 per cent.

The latest figures from APRA put Westpac on a better footing in the eyes of the regulator compared to the growth numbers of its big four peers.

CBA’s investor loan book grew by 10.1 per cent in the 12 months to July, just over APRA’s limit. NAB saw a 14.3 per cent increase over the year, while ANZ was also above APRA’s target with 11.8 per cent growth in investor home loans.

Westpac may be the first of the big four banks to record annual investor lending growth below 10 per cent, but it was the last to introduce price changes to investor mortgages.

On 4 August, Westpac announced it would raise the standard variable rate on residential investor loans by 27 basis points to 5.75 per cent, effective from 10 August for new customers and from 25 September for existing customers.

Westpac’s fixed rates on investor home loans also increased, rising by up to 30 basis points, while fixed rates for owner-occupiers will decrease by the same margin.

George Frazis, Westpac’s consumer bank chief executive said, at the time, that the rate changes are an important step in ensuring the bank meets APRA’s benchmark of investor credit growth not breaching 10 per cent year-on-year.

“We have already introduced a range of initiatives, including increasing the deposit required for investment property loans to 20 per cent as part of our commitment in meeting APRA’s benchmark,” Mr Frazis said.

Westpac has traditionally held one of the largest investment loan book of the majors. The bank's investor loans still account for 46 per cent of its total loan book for July, which was valued at $339.4 billion. 

However, analysts continue to point to the bank’s mortgage portfolio as a core strength, rather than a risk.

Earlier this year, Morningstar analyst David Ellis said that investor concerns – centred on Westpac’s large exposure to residential mortgages – are “overdone”.

“Certain commentators view Westpac’s successful home loan growth strategy as a key weakness, but we argue it is a core strength,” Mr Ellis said.

APRA’s investor cap is just one piece of the puzzle when it comes to changes in the group’s lending portfolio and subsequent mortgage repricing; mortgage risk weights and bank capital requirements are equally important.

In a research note this month, Morningstar’s Mr Ellis said that Westpac will need to raise an additional $6 billion before the end of the 2018 financial year in order to achieve a 10 per cent CET1 ratio.

Mr Ellis said each of the four major lenders need a CET1 ratio near 10 per cent to be ranked in the top quartile of global peers based on APRA’s conservative calculation.

“To achieve a 10 per cent CET1 ratio, we estimate Westpac needs a total of $6 billion in additional core equity capital before the end of fiscal 2018, of which $3 billion is needed before 1 July 2016,” he said.

“Either a $3 billion entitlements issue or an institutional placement and share purchase plan is a real possibility in coming months.

“The additional capital required in 2017 and 2018 will likely be raised from future retained earnings, dividend reinvestment plans (DRPs), DRP underwrites and asset sales.”

Last month ANZ raised $3 billion to meet its CET1 capital ratio requirements. NAB announced a $5.5 billion capital raising in May and Westpac raised $2 billion the same month through its dividend reinvestment plan.

Digital Finance Analytics principal Martin North says there is no doubt in his mind that capital will continue to be required.

“We will see more capital raisings,” Mr North told Mortgage Business.

“That means the prices of mortgages will continue to rise irrespective of what happens to interest rates.

"We are in a circle where bigger house prices allow bigger loans to be made, which allows the banks to make more loans and require more capital, like a black hole sucking everything in."