Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. We offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. 

Morningstar provides data on more than 500,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 16 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries, with more than $180 billion in assets under advisement or management as of June 30, 2015. We have operations in 27 countries.

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Thematic (Sector/Industry)

Australia Financials / Thematic (Sector/Industry)

Australia’s financial regulator, Australian Prudential Regulation Authority, or APRA, has sensibly increased pressure on the more speculative end of the residential lending market, focusing on investor loans, interest-only loans, and high loan/valuation, or LVR, loans. Banks responded by increasing interest rates on investor loans and interest-only loans and restricting loan refinancing of new home loans from outside existing customer bases. Tighter lending criteria is good policy and will strengthen the banking system but will likely slow new residential lending.Strong growth in interest-only mortgages is about to slow, following restrictions recently imposed by APRA and the major banks. In the next five years, we expect interest-only loans will decline from current levels (around 35%-40% of total home loans) to around 25%-30%. Macroprudential changes and higher interest rates will slow the growth in investor mortgages and interest-only mortgages. We believe investor home loan arrears rates are historically lower than owner-occupier borrowers because investor borrowers have higher incomes on average than owner-occupiers, and lower monthly repayments from mainly interest-only loans reduce potential investor financial stress.APRA’s crackdown on investor and interest-only home loans does not change our risk assessment of major bank financial strength and creditworthiness. Increasing interest rates, clamping down on refinancing, and reducing the flow of riskier home loans demonstrates the major banks' market power. Despite the likely slowdown in lending volumes, the major banks still dominate the residential home loan market, while simultaneously protecting substantial profits in consumer banking divisions. We are encouraged by regulatory initiatives to maintain strong capital levels, and we retain our fair value estimates. At current levels, the major banks are fairly valued, with <a href="https://www.smartkarma.com/entities/444" target="_blank" data-smartkarma-citation="entities:444:1">Westpac Banking Corp (WBC AU)</a> most undervalued, trading 12% below our fair value estimate.Analysts: David Ellis and Ravi Reddy

Australia’s financial regulator, Australian Prudential Regulation Authority, or APRA, has sensibly increased pressure on the more speculative end of the residential lending market, focusing on investor loans, interest-only loans, and high loan/valuation, or LVR, loans. Banks responded by increasing interest rates on investor loans and interest-only loans and restricting loan refinancing of new home loans from outside existing customer bases. Tighter lending criteria is good policy and will strengthen the banking system but will likely slow new residential lending.Strong growth in interest-only mortgages is about to slow, following restrictions recently imposed by APRA and the major banks. In the next five years, we expect interest-only loans will decline from current levels (around 35%-40% of total home loans) to around 25%-30%. Macroprudential changes and higher interest rates will slow the growth in investor mortgages and interest-only mortgages. We believe investor home loan arrears rates are historically lower than owner-occupier borrowers because investor borrowers have higher incomes on average than owner-occupiers, and lower monthly repayments from mainly interest-only loans reduce potential investor financial stress.APRA’s crackdown on investor and interest-only home loans does not change our risk assessment of major bank financial strength and creditworthiness. Increasing interest rates, clamping down on refinancing, and reducing the flow of riskier home loans demonstrates the major banks' market power. Despite the likely slowdown in lending volumes, the major banks still dominate the residential home loan market, while simultaneously protecting substantial profits in consumer banking divisions. We are encouraged by regulatory initiatives to maintain strong capital levels, and we retain our fair value estimates. At current levels, the major banks are fairly valued, with Westpac Banking Corp (WBC AU) most undervalued, trading 12% below our fair value estimate.Analysts: David Ellis and Ravi Reddy

APRA's Macroprudential Initiatives Take Some Heat Out of Australia's Expensive Housing Market