How APRA just moved to send Aussie bank shares and house prices higher in 2019

The regulator is to scrap restrictions on interest-only loans to investors in a bid to stop Australian house prices falling further.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This morning the Australian banking supervisory regulator APRA moved to prevent further falls in Australian house prices by removing restriction on interest-only investor lending and this could help lift the share prices of banks like Westpac (ASX: WBC) or CBA (ASX: CBA).

Back in March 2017 as house prices rocketed higher in Melbourne and Sydney on the back of investors feeding on cheap borrowing rates and lax lending standards APRA introduced a rule that limited new interest-only lending to 30% of total lending for banks, with further limits on the amount of interest-only lending at loan-to-value ratios (LVRs) greater than 80%.

APRA also required the banks to ensure there was "strong scrutiny and justification" of any instances of where LVRs were greater than 90%.

Unsurprisingly the profit-hungry banks were happy to feed the speculative investor appetite for home loans in the central bank rate-cut-infused years up to March 2017, as mortgage lending is easily the most profitable risk-adjusted business for Australian banks going.

Moreover, interest-only lending is conducted on better net interest margins for the banks compared to owner-occupier lending, with the loans still collateralised against the equity in the physical property.

In other words even though the banks would have to record the high LVR interest-only loans as slightly higher risk weighted assets on their balance sheets, their additional profitability more than offset the requirement to carry incrementally more capital in reserve as a proportion of risk weighted assets on their balance sheets.

The more idle capital a bank has to carry in reserve, the lower its return on equity (as a key measure of profitability), however the higher profitably of interest-only loans more than offsets the downstream capital adequacy adjustments from issuing them.

What does this mean for 2019?

The more banks can practice the financial alchemy of turning short-term deposits or borrowings into long-term asset backed loans the higher their profits. This is because banks profit by paying less on what they borrow than they receive on what they lend.

So APRA's decision to scrap restrictions in interest-only lending is likely to prove a boost to big bank profitability in 2019 and beyond.

Australian house prices are also likely to be supported by the return of investors to auction markets, although whether it's enough to prevent further house price declines in 2019 is yet to be seen.

Motley Fool contributor Tom Richardson has no position in any of the stocks mentioned. You can find Tom on Twitter @tommyr345 The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Share Market News

Happy miner giving ok sign in front of a mine.
Opinions

Which ASX 200 stock offers 'material upside' amid continuing uncertainty over US tariffs?

Blackwattle Investment has identified one ASX 200 large-cap stock that is thriving on the uncertainty.

Read more »

A man sits in despair at his computer with his hands either side of his head, staring into the screen with a pained and anguished look on his face, in a home office setting.
Share Fallers

Why Bapcor, Boss Energy, Macquarie, and Novonix shares are falling today

These shares are having a tough session on Thursday. But why?

Read more »

A woman sits at her computer with her chin resting on her hand as she contemplates her next potential investment.
Financial Shares

2 rising ASX financial shares with 'meaningful upside' still left: fundie

Financials outperformed every other sector in FY25, but there are still buying opportunities left, say these experts.

Read more »

Two happy excited friends in euphoria mood after winning in a bet with a smartphone in hand.
Share Gainers

Why Fortescue, Lynas, PEXA, and Regis Healthcare shares are charging higher

These shares are having a strong session on Thursday. But why?

Read more »

Stock market crash concept of young man screaming at laptop on the sofa.
Share Fallers

Guess which ASX 200 stock just crashed 31% on slumping sales

The $1.3 billion ASX 200 stock is getting hammered today.

Read more »

A woman walks along the street holding an oversized box wrapped as a gift.
Broker Notes

Fundie reveals why these 3 ASX 200 large-cap shares ripped 35% to 96% in FY25

Blackwattle Investment Partners discusses the performance and outlook for 3 ASX 200 shares in its Large Cap Quality Fund.

Read more »

Five young people sit in a row having fun and interacting with their mobile phones.
Broker Notes

This fund manager just delivered a stellar year and he's bullish on these 5 stocks

With standout returns in both Australian and global equities, Andrew Mitchell shares five high-conviction stocks primed for long-term growth.

Read more »

A woman ponders over what to buy as she looks at the shelves of a supermarket.
Broker Notes

Does Macquarie prefer Woolworths or Coles shares today?

Which supermarket giant was recently named the favourite?

Read more »