Covered bonds: credit quality robust despite housing risk

In a just-released report on the Australian covered bond market Moody’s said credit quality remained robust despite housing market risks.

The continued robust credit quality of Australia's covered bond programs reflects the sound credit quality of mortgages in cover pools, even though risks in the Australian housing market have increased over recent years, the ratings agency said.

“Significant price appreciation in the core housing markets of Sydney and Melbourne has led to very high and rising household indebtedness,” Moody’s noted.

"Moreover, new regulatory measures introduced in March to restrict growth in riskier mortgages - including limits on the origination of interest-only and housing investment loans - are credit positive and will help to limit the proportion of such riskier loans in cover pools going forward.

"We further note that mortgage lenders have also raised their interest rates on interest-only mortgages since the new regulatory measures were introduced, while the underwriting criteria for such loans have been tightened in some instances.”
 

By the numbers

Interest-only loans accounted for 26.8 per cent of the total loans in cover pools in June 2017, compared with 28.2 per cent in June 2016, the report found.

Furthermore, the ratings firm said loan-to-value ratios in Australian cover pools have remained steady, with the weighted-average LTV at 63.7 per cent in June 2017, compared with 63.6 per cent the year before.

On average, in all cover pools, the proportion of loans with high LTVs has also been falling with just 1.4 per cent having LTVs above 90 per cent  in June 2017, down from 2.4 per cent in June 2016. The good report followed Moody's ratings downgrade in June of the four major Australian banks that sponsor covered bond programs.

Issuers provided an average of 10.7 per cent over-collateralisation on a "committed" basis for Australian covered bonds to mitigate credit risk, Moody's wrote. This figure is well above the current minimum average of 2.3 per cent required to support the Aaa ratings of the covered bonds.

Moody’s said issuance for 2017 is likely to be the same as for 2016.

 

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