Australian mortgage lenders hit by double whammy

Fri, Aug 27, 2010
Reuters


SYDNEY - Australia's small mortgage lenders are fighting simultaneous hits from regulators and a ratings agency that threaten to choke the fragile recovery in the $88 billion securitisation market and hand more business to large banks.

Securitisation is considered vital in providing competition to Australia's four major banks, which raised their share of the home-loan market to 90 percent since the global financial crisis from 75 around percent earlier.

"There has been a double whammy in the past two weeks,"Chris Dalton, chief executive of industry group Australian Securitisation Forum, said on Friday.


Last week, ratings agency Standard and Poor's (S&P) announced drastic changes to residential mortgage backed securities (RMBS) ratings. And on Thursday, the Australian Prudential Regulatory Authority (APRA) warned issuers were taking on too much risk by holding the subordinated tranches of RMBS issues.

The double blow is the biggest threat to smaller banks and non-banks in particular as they rely on securitisation to fund their operations, unlike the nation's major banks, Dalton said.

Smaller banks such as Bank of Queensland, Suncorp Metway and Bendigo Adelaide Bank are among those likely to be the most hurt by APRA's warning.

Rising funding costs have weighed on Australian banks'margins and hit their stocks. Shares of Australia's three

regional banks have on average shed 12 percent this year, versus a little over 10 percent drop in the broader index.

Since the global financial meltdown, subordinated RMBS tranches, the riskiest types, have been the hardest to sell and banks typically opted to keep them on their balance sheets.

"Regional banks with significant securitisation programmes are the most likely to be affected as they may need to raise capital to support market expectations of Tier 1 ratios," said Gus Meideros, credit strategist at Deutsche Bank.

Tier 1 is a measure of banks' financial strength and ability to absorb losses. Holding higher Tier 1 ratios makes banks more stable but also increases their costs.

DOUBLE WHAMMY

S&P has on average doubled the level of subordination it now requires for a top rating. Its move came after similar steps in the United States, where the ratings agencies have been slammed for sudden downgrades of triple A rated securities to default.

Non-bank lender FirstMac estimates it would cost an additional 10 basis points per offer to comply with S&P's subordination ratings requirement.

Subordinated notes absorb the first of any losses and must be wiped out before holders of higher rated bonds lose their money.

Australia's mortgage lenders, however, contest the fairness of the shift as the country has yet to see any RMBS default.

"It's quite disappointing that they are taking offshore, particularly U.S., observations and applying them to the Australian market where it appears there is no statistical data to support the assumptions they are making," said James

Austin, chief financial officer of lender FirstMac.

Bank of Queensland and FirstMac are now considering hiring ratings rivals Moody's and Fitch to rate future issues as their criteria are less stringent.

But this will very much depend on whether both rivals stick to their current criteria or whether they will follow the steps of S&P, the dominant ratings agency in Australia.

"We have an obligation to review annually our methodology but since we went through an extensive review in December, it's unlikely further reviews will result in major changes in the immediate future," said Richard Lorenzo, team leader in structured finance at Moody's.

Fitch said it plans to release its revised criteria by year end. "At this stage, most of our focus for the proposed review will be on property prices," said Natasha Vojvodic, senior director in structured finance at Fitch.