Introduction

It is a pleasure to be right here with you on the Australian Securitisation Conference. For many years now the
Reserve Bank has been invited to current at this annual occasion and the securitisation market usually
delivers loads to debate.

The Australian asset-backed securities (ABS) market is a vital supply of funding in Australian
monetary markets, significantly for non-bank lenders and the debtors they serve. For
traders, it presents publicity to an more and more numerous pool of issuers and merchandise.

Today I can be primarily speaking about how the securitisation market has advanced over recent years. To
summarise, securitisation markets have continued to adapt to massive adjustments in monetary situations. While
securitisation pricing has responded sharply to tighter financial coverage, and complete credit score progress within the
economic system has slowed, general securitisation issuance has been maintained at excessive ranges. Underpinning the
power in issuance in recent years has been the non-bank sector, which has seen new entrants and
current lenders fast to change consideration to totally different borrower segments to help lending progress.
Against that backdrop, I’ll wrap up with ideas on a number of issues to observe for the interval forward.

In recent years there have been large swings in ABS pricing together with broader monetary
situations

The onset of the pandemic was an anxious time for all, together with securitisation markets. But the restoration
in sentiment was swift amid complete coverage help from governments and others.

Within a 12 months or so of the help measures introduced from March 2020 – together with the Reserve
Bank’s complete bundle – yield spreads to the financial institution invoice swap price
(BBSW) on AAA-rated ABS offers had halved to succeed in the bottom ranges for the reason that world monetary disaster
(GFC) (Graph 1). With BBSW at very low ranges, these have been very low borrowing prices.

By late 2022, nonetheless, these ABS yield spreads have been again to, or above, their degree in the beginning of the
interval. Spreads peaked not lengthy after the graduation of the money price tightening part in May 2022, and
have moved decrease since.

The large swings have been evident within the AAA-rated notes of each RMBS and different ABS, and have been even bigger for
decrease rated mezzanine debt. Relative to previous expertise, actions in AAA-rated notes have been largely
contained to the broad vary of submit GFC pricing, however the velocity of the changes was unprecedented in
the post-GFC interval.

Overall securitisation issuance has been resilient as monetary situations have tightened

Interestingly, at a broad degree, issuance has been little modified even with the shift increased in spreads
and tighter monetary situations in recent years. Annual issuance has been broadly maintained at round
$50 billion over 2022 and 2023, the identical degree reached by means of 2021 (Graph 2). This has
occurred at the same time as system credit score progress slowed; from round 9 per cent a 12 months in the past to round
5 per cent extra not too long ago.

There are two broad shifts underpinning the power in issuance all through this era. One is elevated
issuance by non-banks. And a second, associated growth, is progress in several types of loans being
securitised.

I’ll speak by means of these developments in flip.

Issuance in recent years has been underpinned by an extra shift to non-banks

Non-bank lenders are the main issuers of ABS in Australia. This just isn’t a recent growth, however it has
change into extra pronounced in recent years.

For many years, banks have been the principle issuers of asset backed securities, in order that non-banks accounted for
round one-quarter of issuance (Graph 3). This started altering across the mid-2010s. This partly
mirrored banks decreasing issuance as they turned to different decrease cost funding markets. And partly
non-banks rising issuance as they grew their lending at above system tempo. Non-banks continued to
improve their share of issuance by means of the pandemic interval and so they now account for round
three-quarters of ABS issuance.

One cause for the additional improve within the non-bank share of issuance throughout the pandemic interval was that
banks weren’t issuing a lot wholesale debt in any respect.

The Reserve Bank’s bundle of coverage measures was a giant issue behind this. In specific, the Term
Funding Facility (TFF) provided low-cost three-year funding to banks between April 2020 and June 2021. It
in the end offered $188 billion in funding to banks. As meant, this diminished their funding prices
and helped to cut back rates of interest for debtors.

Banks’ decrease funding wants have been mirrored of their a lot diminished issuance throughout senior unsecured
debt, lined bonds and ABS (Graph 4). In specific, there was no issuance of ABS by the
main banks throughout the TFF drawdown interval. The relative absence of financial institution debt throughout markets was one
issue encouraging traders to buy ABS as an funding with some comparable qualities.

Once the TFF drawdown interval led to mid-2021, mid-sized and smaller banks elevated their issuance
of ABS. The main banks, nonetheless, have issued little or no over a lot of the previous two years. Wider
spreads in RMBS markets over the previous two years have made RMBS issuance much less interesting for banks
in contrast with senior unsecured and lined bond issuance. That mentioned, in recent months we’ve got seen
some extra exercise from bigger banks, together with a big public deal by one of many main banks, as
spreads have narrowed. Given the step up in unsecured and lined bond issuance, diversifying funding
by means of RMBS can also be extra enticing in the intervening time.

A second cause for the rise in non-bank market share has been a rise within the variety of
non-banks issuing ABS (Graph 5). This 12 months round 30 totally different non-bank lenders have issued
ABS, a three-fold improve from the quantity a couple of decade in the past. In distinction, the variety of banks
issuing ABS has declined over the interval, with about 10 banks issuing this 12 months.

One consequence of those new entrants and shifting practices is that focus within the
securitisation market has fallen, significantly for non-mortgage ABS. About a decade in the past, the highest 4
issuers of non-mortgage ABS accounted for practically all issuance. Today they symbolize about half of the
issuance. As a consequence, focus within the non-mortgage ABS market is now just like that within the
RMBS market after being persistently increased for a lot of years after the GFC.

A 3rd cause, as hinted at within the previous level, is that non-banks have been increasing issuance
exterior of prime RMBS, to non-prime RMBS and different ABS.

Non-banks have tailored to altering housing finance market situations with elevated non-prime
RMBS issuance …

Favourable funding situations and a powerful housing market throughout a lot of the pandemic interval supported
non-bank lending. Annual system housing credit score progress elevated from 3 per cent at finish 2019 to
round 8 per cent by May 2022 and non-banks have been capable of proceed to extend their share of
the housing credit score market.

As spreads on RMBS narrowed, non-banks have been capable of be extra aggressive on mortgage charges. For prime
debtors, one necessary characteristic of non-banks was their quick turnaround occasions. Amid rising home costs
in 2021 and early 2022, debtors nervous about ‘lacking out’ have been keen to simply accept considerably
increased mortgage charges to safe a sooner approval. Reflecting this atmosphere, non-bank housing credit score was
rising about twice as quick as financial institution housing credit score throughout these years (Graph 6 – higher panel).

As rates of interest began rising in mid-2022, funding prices for monetary establishments elevated however
by extra for non-banks than for banks. While non-banks supply most of their funding by means of ABS in capital
markets, banks have access to decrease cost deposit funding, which tends to reprice extra slowly. This made
it harder for non-banks to compete on worth with banks, with loans from non-banks changing into extra
costly.

In this aggressive atmosphere, exterior refinancing elevated to report highs, pushed by debtors
trying to find higher offers on supply from a variety of lenders. Much of this refinancing exercise has flowed
to the main banks, per main banks providing price reductions and cashback presents that
non-banks weren’t capable of match. In truth, the rate of interest distinction for brand spanking new loans between non-banks
and banks widened from roughly 40 foundation factors throughout 2021 to round 100 foundation factors in
December 2022.

In addition, the housing market began to chill, which means that debtors have been much less nervous about
‘lacking out’ and due to this fact much less keen to pay a premium for quick turnaround occasions. In this
atmosphere, non-bank housing lending slowed and has been contracting for the reason that begin of 2023, whereas financial institution
housing credit score has continued to develop.

The decline in mortgage lending by non-bank lenders has naturally resulted in decrease RMBS issuance. This
has been pushed by prime RMBS issuance, which has fallen over 2023 to be, to date, round half the tempo of
the previous two years (Graph 7). In distinction, and reflecting the adjustments in non-banks’
lending focus, their non-prime RMBS issuance has elevated by about 50 per cent over the identical
interval.

… and non-banks have expanded private and business lending and elevated issuance of
non-housing ABS

One a part of the response to those aggressive pressures is that some non-bank lenders have targeted on
private and business lending, both as a brand new curiosity or rising an current business.

In specific, lenders have recognized auto loans, private loans, self-managed tremendous fund mortgages, and
‘specialist’ mortgages as progress areas the place competitors with banks is much less intense. Within
private lending, auto loans have definitely been a sizzling phase of the market (Graph 8). New auto
gross sales have picked up materially for the reason that pandemic and have been nonetheless rising at round 16 per cent
for households within the 12 months to October 2023.

In distinction with housing lending, non-bank business lending has continued to develop sooner than financial institution
business lending (Graph 6 – decrease panel). As a consequence, non-banks have elevated their market
share of business lending at a time when business credit score progress stays increased than for housing credit score.
In mixture, the distinction between rates of interest that non-banks and banks cost small businesses has
not moved as a lot as for housing. Also, some market members counsel that tighter monetary
situations have pushed extra businesses, significantly smaller businesses, exterior financial institution danger tolerances
given related prudential necessities. Some portion of this non-bank business credit score is financed
by means of securitisation markets.

Non-bank issuance of auto and tools (A&E) ABS, the important thing class of non-mortgage securitisations,
has risen to report ranges over 2023 (Graph 9). This is a phase of the market the place
non-banks have been the important thing issuers for a variety of years. The main banks haven’t issued, not less than
publicly, an A&E ABS since 2018 and different banks haven’t issued for the reason that first half of final 12 months.
Despite this, the variety of issuers of A&E securitisation has elevated steadily over the previous few
years. Some of the brand new issuers are non-banks which have entered the market after buying lending
businesses from banks which have left the market. In 2023, a report 15 lenders have issued A&E
ABS, with three being new issuers on this phase of the market.

So who’s shopping for it?

Of course, excessive and regular issuance requires keen traders. Available knowledge means that the
investor base stays unfold throughout overseas traders, banks and, to a lesser extent, tremendous funds and
different related long-term traders. We hear from traders in liaison that they like the rise in
the variety of issuers and the range of ABS collateral varieties in recent years. Investors additionally like
the diversification related to having ABS backed by private and business loans since there are
extra loans than in a RMBS (resulting from smaller mortgage sizes), decreasing publicity to individual debtors.

We additionally hear in liaison that issuers, and non-banks particularly, have put a variety of effort into increasing
their investor base, particularly abroad. One instance is dual-currency offers, that are designed to
attraction to overseas traders that in any other case might not purchase Australian paper. The thought right here is that some
overseas traders might discover it tough to hedge the AUD publicity again to their home forex resulting from
prepayment danger, and the overseas forex tranche removes that barrier for the investor. While the issuer
might face an analogous problem with hedging, the issuer is aware of the asset pool higher so arguably it’s in a
higher position to handle the chance than a overseas investor.

Good credit score efficiency so far and a broadly beneficial outlook proceed to help investor confidence.
The sharp improve in ABS spreads throughout the early part of tighter financial coverage prompt investor
warning, significantly with the potential for rising housing repayments and declining home costs to
weigh on housing mortgage efficiency. However, so far, unemployment has remained low, home costs have
rotated and, in mixture, housing mortgage arrears haven’t elevated a lot from their very low
place to begin.

Looking forward

The large swings in financial and monetary situations in recent years are good cause for humility when
opining on what would possibly transpire within the interval forward. I’ll prohibit my crystal-ball gazing to
suggesting three areas that is perhaps topical for dialogue at this convention subsequent 12 months.

First, developments in credit score high quality fundamentals. As outlined within the latest Statement on Monetary
Policy, the Reserve Bank Board’s precedence is to return inflation to focus on, however dangers on
both aspect stay. Repayments are an rising share of family revenue and unemployment is forecast
to rise. And the chance traits of the ABS market dealing with that atmosphere have modified. By product,
there may be much less prime RMBS, extra non-prime RMBS and non-housing ABS, and by issuer, extra non-banks. The
Reserve Bank’s latest Financial Stability Review concluded that the outlook for
non-banks’ housing mortgage high quality is tougher than in recent years as a result of some are stress-free
lending requirements and have discovered it tough to retain extra creditworthy debtors in an atmosphere of
heightened competitors with the banks.

A second potential space of curiosity is funding situations across the remaining TFF maturities. Around
$80 billion of TFF funding has already matured, with banks repaying $64 billion of TFF funding
within the September quarter 2023. This was the primary of two concentrated maturity durations, with the bigger
$96 billion maturity scheduled within the June quarter of 2024 (Graph 10). Banks have managed their
TFF repayments easily so far: as proven earlier, banks have considerably lifted their bond issuance in
recent years and, in recent months, elevated RMBS issuance too. Will their funding plans lengthen to
a bigger re-entry to the RMBS market? Put one other method, whereas the shortage of financial institution debt issuance when banks
have been drawing down the TFF offered extra room for non-bank ABS issuance, will this work within the different
course when banks are paying again the TFF?

A 3rd space of curiosity for ABS markets is the evolution of competitors in lending markets. A interval of
intense competitors in housing mortgage markets has eased in recent months, with fewer cashbacks on supply
for mortgage refinancers and variable housing mortgage charges for brand spanking new loans edging increased by greater than the
money price. The banks’ funding cost benefit over non-banks has additionally diminished considerably with increased
deposit charges as prospects change from at name to time period deposits, and a narrowing in RMBS spreads. Where
to from right here? While a variety of non-banks have confirmed very agile to find markets exterior of prime
mortgage lending, will they keep that versatile strategy or will they give the impression of being to consolidate their
present market segments?

To conclude, ABS markets have proven appreciable dexterity in adjusting to vary. While I’m not
assured to foretell how this may proceed to evolve, I confidently predict that we are going to have loads to
recap this time subsequent 12 months on the ASF’s annual convention.

Thanks in your consideration and I look ahead to your questions.