Major banks' risk weighted mortgages soar in September quarter
The consequences of the elevated risk weightings on home loans for major banks is having a marked impact on the reported levels of mortgages on an RWA basis, though less effect on their capital ratios.ANZ's quarterly "pillar 3" disclosure for the September 2016 quarter reveals that mortgages, on a risk weighted basis, soared by A$26 billion or 42 per cent to A$87 billion, mostly for those home loans assessed using the "advanced internal ratings based approach".At Commonwealth Bank risk weighted home loans lifted by $29 billion or 32 per cent to $120 billion.In July 2015 APRA announced changes to the treatment of residential mortgages for banks able to use internal models for capital adequacy purposes (in other words, the four major banks and Macquarie).At the time APRA adjusted the risk weight calculation used and said it "was intended to increase the average risk weight on Australian residential mortgage exposures, measured across all [five banks], from approximately 16 per cent to an average of at least 25 per cent.'The increase in risk weights came into effect from July this year.Macquarie and NAB are yet to release their pillar 3 disclosures for the quarter.Much higher RWAs in this dominant business line made little or no dent on capital ratios.In its quarterly trading update yesterday CBA wrote that even "after allowing for the increase in risk weighting for Australian residential mortgages" and also "the impact of the 2016 final dividend (net of dividend reinvestment)", the CET1 (APRA) ratio increased by 34 basis points in the quarter, primarily driven by capital generated from earnings.On the other hand CBA's CET1 ratio, compared more simplistically, fell to 9.40 per cent from 9.8 per cent.At ANZ the CET1 ratio dropped to 9.6 per cent from 9.8 per cent.For Westpac, the rise in mortgage RWAs was $39 billion or 46 per cent.NAB did not make a sufficient disclosure in its June quarter pillar 3 report nor in its full year 2015/16 report to make a valid comparison over the September 2016 quarter. In its FY2016 investor presentation, however, NAB observed that in the half-year to September, the group's internationally comparable CET1 ratio was up by 98 basis points to 14.0 per cent, "reflecting [the] mainly mortgage risk weight change." (Using APRA's standards to calculate CET1, NAB's ratio rose from 9.69 per cent in March to 9.77 per cent at end September).