UBS issued a report that the UK banking regulator, the prudential Conduct Authority (PRA), issued an advisory opinion on September 30, proposing two new requirements on how to set the capital requirements for home mortgages based on the internal rating basis (IRB) model, that is, the risk density (risk weighted assets / default risk exposure) of any single loan should not be less than 7%. And the average of the entire portfolio must not be less than 10%, which is expected to take effect from January 1, 2022.
The bank estimates that the most affected UK banks are HSBC Holdings PLC (00005.HK) and Nationwide Building Society, NBS, which are lower than their UK counterparts because of the internal rating basis (IRB) models of 5 per cent and 6.3 per cent, respectively. The bank sensitively estimates that if the risk density of any single loan is no less than 7 per cent, capital requirements for its UK retail mortgage business are expected to rise by 102 per cent, compared with 59 per cent for the National Home Mortgage Association.
UBS said that whether the return on equity (ROE) of banks will be higher than the cost of equity (COE) depends on the issue of mortgage spreads in the Basel Capital Accord, which means that it will be included in the calculation of risk-weighted assets (RWA) or will not change capital requirements as a whole, but the bank believes that this will remind all lenders that when debt spreads are close to zero, capital requirements through the Basel Accord will rise. Broader credit spreads are a way for banks to provide reasonable medium-term returns. UBS pointed to the data showing that even if the amount of mortgage loans has been normalized, the outlook for COVID-19 has improved after the epidemic, with mortgage spreads at a very high level, and said it is important to maintain pricing discipline.
The bank pointed out that the UK authorities raised the requirement to include risk-weighted assets (RWA) to reduce the related lending risk, making mortgage spreads more important, and it is expected that the relevant loan pricing will improve when the UK economy and epidemic stabilizes and Brexit. The bank has a "neutral" rating on the UK-listed currency control and a target price of 410p (about HK $41.12). (wl/da) ~
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