The ANZ is increasing the average credit risk weighting of its residential mortgages

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The ANZ Bank is formally increasing the average credit risk weighting of its Australian residential mortgage lending book.

APRA (Australian Prudential Regulation Authority) last week reaffirmed its objective to raise residential mortgage risk weights from 16% to an average of at least 25%.

The big four banks last year raised billions of dollars to carry against mortgages after APRA reaffirmed the change for home loans.

The exact increase for ANZ will not be confirmed until the bank has submitted and had approved its new mortgage capital model with APRA.

However, it is expected to be within the 25% to 30% range recommended by David Murray’s Financial Services Inquiry. The re-weighting will take place sometime this quarter.

The big four banks last year posted a combined $30 billion in cash profit, but provisions for bad loans are increasing and net margins are being squeezed.

The banks last week kept almost half the official cut in interest rates rather than passing the full 0.25 percentage cut to its home loans customers.

The ANZ posted a weaker than expected full year cash profit of $7.2 billion, a modest rise of just 1%.

Moody’s says risks to Australian banks are increasingly skewed to the downside with bank portfolios at unusually high levels of concentration to residential mortgages.

The ANZ says the impact of APRA’s previously announced changes and the possible impact of additional risk model changes are set out in this table:

Earlier this month, APRA said the big banks have now substantially satisfied the benchmark for capital strength set by the Financial Services Inquiry.

This benchmark — that Australia’s big banks should have capital ratios in the top 25% of internationally active banks — has been satisfied because of the lift in “the major banks’ weighted average comparison CET1 [common equity tier one] ratio” to 13.5% by December 2015 from 11.7% in June 2014.

APRA said: “This increase was the result of a range of factors, but the largest single driver was the substantial capital raisings by the major banks in the latter part of 2015.”

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