Westpac shares crumble after poor lending practices conceded in internal documents
Westpac’s share price has nosedived after the release of explosive documents detailing widespread failings in not only the quality and riskiness of its home loans, but the way they are processed.
KEY POINTS:
Westpac shares tumble 4pc after APRA finds it has the worst record of the big banks in the integrity of its home loans
APRA “Targeted Reviews” find that around 30pc of Westpac and CBA loans did not meet usual verification processes
Westpac has paid $38m in compensation, while another 64,000 borrowers may require compensation
An internal memo tabled at the banking royal commission showed Westpac had performed very poorly in a Targeted Review of home loans demanded by the Australian Prudential Regulation Authority.
“Westpac’s performance in the APRA Targeted Review was poor, both absolutely and relatively to our peers,” head of portfolio integrity David Watts wrote to his boss George Frazis, the chief executive officer of the consumer banking arm, in a memo last July.
The review of the home lending practices by accounting giant PwC was commissioned by APRA following consultation meetings with all the banks in early 2017.
“APRA chairman Mr Wayne Byres noted that Westpac was a significant outlier in our proportion of high LVR [loan-to-value] and IO [interest only] lending,” Mr Watts wrote.
“APRA also questioned the availability of robust data and the effectiveness of analytics and monitoring to appropriately understand the risk profile of all exposures.”
The review from PwC was a dismal outcome for Westpac.
“The PwC report has disturbed APRA and there is no easy answer to rebuilding trust with them in this area,” Mr Watts said.
APRA has already used the findings of its review to ditch its 10 per cent “speed limit” for investor credit growth in favour of more targeted controls on lending, focusing on the quality of loans and overall household debt.
UBS SLAPS A ‘SELL’ ON WESTPAC
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Lindsay David@linzcom
You can’t make this stuff up. From Westpac’s mortgage book sample in the #Banksrc . Lying about borrowers costs of living to make the mortgage book look more creditworthy is a criminal offence for fooling investors and those that fund the bank
UBS bank analyst Jonathan Mott has crunched the PwC’s Westpac report numbers and found:
29 per cent of minimum income verifications (eg payslip checks) were not completed
66 per cent had not itemised living expenses collected
The median assessed household living expenses represented just 23 per cent of household income
30 per cent of the sample the borrower’s financial position was suggested to have been misrepresented
9 per cent of the sample the loan would not have been approved if the “true financial information” was used in serviceability assessment.
Mr Mott said the data raised questions regarding the quality of Westpac’s $400 billion mortgage book.
“While Westpac has undertaken significant work to improve its mortgage underwriting standards over the last 12 months, we expect it and the other majors to further sharpen underwriting standards given the royal commission’s concerns with responsible lending,” he said.
“Boards and management [are] likely to be much more risk adverse, further tightening of underwriting standards are highly likely across the industry.”
Tighter credit and weaker asset quality left UBS with a very cautious view of Australian banking as investment.
Westpac’s failings in the APRA Targeted Review were enough for UBS to slap a “sell” rating on the bank and scythe its target price from $31 per share to just $26.50.
Investors took the hint and Westpac shares tumbled almost 4 per cent to a two-year low of $28.13 at 3pm (AEST).
CONTRASTING VIEWS
The Westpac memo pointed to contrasting views between the banks and APRA over responsible lending standards.
LIAR LOANS EXPLAINED
The financial services royal commission is expected to devote a lot of attention to “liar loans”, but what are they?
“Poor performance by lenders there may not be showing up in losses now, but, APRA hypothesises, that could change in a material cyclical downturn,” Mr Watts wrote.
“To date most industry thinking about the consequences of responsible lending failures has been centred on the potential for fines, reputation damage and the costs of any remediation necessitated by a breach.
“It is now clear that thinking needs to broaden.”
Mr Watts warned Mr Frazis of the dangers of not acting quickly to resolve APRA’s concerns.
“APRA is expecting to see improvements made as a matter of urgency and advised they will be working with ASIC [Australian Securities and Investments Commission] on next steps and responses to the industry,” he said.
Failure to respond appropriately could lead a more formal investigation, appointing a third party to manage the bank’s affairs and banning executives from senior roles in banking.
WESTPAC’S EXPOSURE UNCLEAR
Mr Watts said the bank’s exposure to customers is not clear.
NEW HOME BUYERS’ CREDIT CRUNCH
Home buyers could see their borrowing capacity cut by as much as 40pc due to reforms likely to be driven by the Hayne Royal Commission
“If management is correct in its reasoning and there have been few instances of loans having been made to customers who can’t afford them, and assuming securities are sound, there should be limited potential for remediation program costs and the underlying principal of loans should be safe,” he said.
“But what if customers who are not stressed now later do become so, not because repayments were always unaffordable, but because they are victims of a general economic downturn, and what if responsible lending breaches at the time of origination in some way impact the integrity of the bank’s security from those customers?”
Mr Watts said in that case, the bank’s exposure would be less benign.
So far the bank has reimbursed customers $38 million to the end of the 2016 financial year, which Mr Watts said was the first time Westpac has been able to track the real costs given the absence of a remediation framework.
In Westpac’s pipeline there are another 22,000 owner-occupier and 42,000 investor loans that may require compensation, the PWC report found.
CBA HAS PROBLEMS TOO
A separate APRA Targeted Review of the Commonwealth Bank, also conducted by PwC, found more than a third of the sample — 94 of 271 loans checked — did not meet the bank’s verification procedures, mainly due to inadequate documentation.
Among the adverse findings, the PwC report found borrowers are not required to confirm the details, completeness or accuracy of the information used in their serviceability agreements.
The report also questioned the CBA’s use of the income-adjusted Household Expenditure Measure (HEM) in serviceability assessments.
“The living expense declarations provided by borrowers are not subject to verification or assessment beyond comparison to HEM,” PwC found.
“This approach does not encourage borrowers to focus efforts on ensuring the completeness and accuracy of their expense estimates.”