RMBS Performance Watch Market OverviewAs of March 31, 2019

Australian Macroeconomic Environment

Stable. However, risks are elevated

S&P Global Ratings Economic Outlook

3

f--Forecast. Source: S&P Global Ratings.

2019 2020f Outlook Impact On Credit Quality

Real GDPgrowth (%)

2.5 2.7 Economic growth is slowing as low income growth and negative housing market sentiment weigh on consumer spending.

Neutral. Softer economic conditions are likely to weigh on debt serviceability pressure for some borrowers.

Unemploymentrate (%)

5.0 5.1 Job vacancy rate remains high and the unemployment rate has been steady at 5%.

Favorable. Stable employment conditions underpin low arrearsand losses so far.

CPI (%) 1.9 2.0 Inflation and wage growth remain sluggish, but private sector wage growth is picking up.

Negative. Weak wage growthcould see debt repayment capacity challenged at the margins.

Macroeconomic Environment

– Australia’s economy remains stable, though growth is slowing.

– Outlook for consumption remains a key uncertainty for overall growth.

– Property price declines appear to be moderating.

– Unemployment is no longer falling, but remains low.

– We expect wage growth to build, but remain sluggish.

– A decline in construction activity could be a drag on growth.

Around The Traps

Announcement Credit Impact

APRA proposes removing 7% interest rate floor for debt serviceability calculations

– Most households unlikely to significantly increase borrowing capacity.*

– Could improve access to mortgage credit for some lower-income households and first-home buyers, who borrow closer to the maximum loan limit.*

– Expense-verification processes will still affect access to credit.

Policy certainty around proposed property related taxes

– Policy certainty likely to stabilize property market sentiment and vendor confidence in the short term.

– It’s less likely to affect arrears performance, which is more sensitive to debt serviceability pressures.

5

* https://www.rba.gov.au/publications/fsr/2018/oct/box-b.html

Around The Traps Cont.

Announcement Credit Impact

Introduction of low and middle income tax offsets announced in the Australian Government 2019-2020 Budget

– May provide some short term relief but minimal long term impact on debt serviceability for most borrowers.

Increased likelihood of further rate cuts

– To the extent it’s passed on, it will provide some relief.

– Effect of further rate cuts is likely to be smaller than in the past, given the high level of household debt.

Proposed first home loandeposit scheme

– Too early to tell. Borrowers with no established credit history taking on high loan-to-vale (LTV) ratio loans in a falling property market increases risk of negative equity.

6

Stable Employment Conditions Have Underpinned Low Arrears And Losses

7

Source: Australian Bureau of Statistics.

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

Unemployment rate Underemployment rate

Tepid Wage Growth Has Created Debt Serviceability Pressures For Some Borrowers

8

Source: Australian Bureau of Statistics.

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

Ann

ual %

cha

nge

NSW VIC QLD SA WA TAS National

High Household Debt Increases Borrowers’ Sensitivity To Changes In The Economy

9

Source: OECD.

Household Debt As % Of Gross Disposable Income

0

50

100

150

200

250

Australian Credit And Housing Market

Property prices continue their orderly unwind

Credit And Housing Market

– House prices continued to decline in Q1, but the rate appears to be slowing. Sydney and Melbourne recorded the sharpest declines.

– Total lending to households is down 4.0% year on year.

– First-home buyer activity as a proportion of total sales has increased, indicating an improvement in affordability.

– Population growth has supported economic growth in recent years. We forecast this to decline in 2019.

Prime RMBS Are Less Exposed To Property Price Declines, Given The Equity Built Up In Most Loans

12

LTV--Loan-to-vale. Source: S&P Global Ratings.

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

<60% >60% <70% >70% <80% >80%

% o

f tot

al p

ortf

olio

LTV band

Prime Nonconforming

Around 2% of loanshave an LTV > 90%

National Population Growth Rate

Population Growth Supports Demand

13

Net Interstate Migration

000s--Thousands. Source: Australian Bureau of Statistics.

0.00%

1.00%

2.00%

3.00%

(20)

(10)

0

10

20

No.

of p

eopl

e(0

00s)

New South Wales Victoria Queensland South Australia Western Australia Tasmania Northern Territory ACT

Australian RMBSPerformance

Arrears are rising as debt serviceability pressures persist

Australian RMBS Performance

– Arrears are rising, albeit from low levels, as debt serviceability pressures surface at the margins.

– Longer dated arrears have shown no signs of improvement as borrowers in this category have no where to go in the current lending environment.

– Nonconforming arrears are at historically low levels, reflecting the lower seasoning of the book and their improved credit quality compared with earlier vintages.

– Prepayment rates are slowing as refinancing conditions become tougher.

S&P Global Ratings Performance Outlook

Performance Indicator S&P Global Ratings’ Assessment

Mortgage arrears – Lower interest rates--to the extent that lenders pass them on--will improve debt serviceability for some borrowers.

– Improvement in arrears is more likely to come through in the earlier arrears buckets.

– Longer-dated arrears are unlikely to improve much while economic conditions are soft, wage growth sluggish, and lending conditions tight.

Prepayment rates – Prepayment rates could pick up if lower interest rates help ease repayment stress, but refinancing conditions will also need to improve.

Cumulative gross losses – We expect them to remain low while employment conditions are stable.

Credit support – Credit support levels support S&P Global Ratings’ stable rating outlook.

– Credit support build up is likely to decelerate, with slowing prepayment rates lengthening WALs.

16

Prime RMBS SPIN Continues To Rise

17

Source: S&P Global Ratings.

0.00%

0.50%

1.00%

1.50%

2.00%

31-60 % 61-90 % 90+ %

90+ days arrears now comprise 53%

of total arrears

90+ days arrears comprised 38% of total arrears

Prime arrears peaked at 1.69% in Jan. 2012

Factors Influencing Arrears Performance

March 2012* March 2019

Unemployment rate 5.2% 5.1%

Underemployment rate 7.6% 8.6%

Annual wage growth 3.6% 2.3%

Household indebtedness 159.5% 189.6%

Standard variable interest rate 7.4% 5.4%

Prime 30+ days arrears 1.6% 1.5%

18

* Peak period of rising arrears. Source: S&P Global, Australian Bureau of Statistics, RBA.

Prime arrears have been rising toward previous highs, despite stable employment conditions and low interest rates.

Longer-Dated Arrears Are Well Above Long-Term Averages

19

– 90+ days arrears are 0.79% as of March 2019 compared with their long-term average of 0.42%.

– 50% of loans in advanced arrears are in Queensland and Western Australia.

– The pronounced rise in advanced arrears was magnified by reporting adjustments in recent years.

Source: S&P Global Ratings.

0.00%

0.30%

0.60%

0.90%

90+ % Long term average

Nonconforming Arrears Are At Record Lows

20

Source: S&P Global Ratings.

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

31-60 % 61-90 % 90+ %

Nonconforming arrearspeaked at 17.09% in Jan. 2009

35% of loans werefull documentation

55% of loans are full documentation

Regional Bank Arrears At Record Highs

21

NBFIs--Non-bank financial institutions. WA--Western Australia. Source: S&P Global Ratings.

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

NBFIs Major banks Regional banks Other banks Non-bank originators

Regional RMBS portfolios have a 35% exposure to Queensland and 19% exposure to WA

Prime portfolios have a 25% exposure to Queensland and 11% to exposure to WA

WesternAustralia

↑ 0.16%

NorthernTerritory

↑ 0.16%

SouthAustralia

↓ 0.01%

Queensland

↑ 0.03%

New SouthWales

↓ 0.00%

Victoria

↓ 0.00%

Tasmania

↓ 0.09%

1.60%

3.31%

1.88%

1.24 %

3.03%

1.39%

1.15%

AustralianCapital

Territory

↓ -0.06%

1.17%

AUSTRALIANPRIME SPIN

1.51%

Arrears In Western Australia And The Northern Territory Are More Than Double The SPIN

22

Source: S&P Global Ratings.

The 10 Worst-Performing Postcodes

State Suburb Postcode Loans In Arrears Loan Count

QLD BUNGIL 4455 8.15% 293

NT DARWIN 800 6.60% 271

WA CLOVERDALE 6105 6.35% 400

WA BYFORD 6122 6.25% 405

QLD BLENHEIM 4341 5.83% 406

WA BINDULI 6430 5.68% 568

WA CLARKSON 6030 5.48% 1081

WA MADDINGTON 6109 5.32% 300

SA BUNGAMA 5540 5.32% 397

QLD BLAXLAND 4405 5.10% 420

23

Source: S&P Global Ratings. Data as of Mar. 31, 2019. For a full list of suburbs/localities attached to these postcodes, please refer to the Australia Post website.

Lending Growth Has Slowed Adding To Refinancing Pressures

24

Source: S&P Global Ratings, Reserve Bank of Australia.

0.00%

3.00%

6.00%

9.00%

12.00%

0.00%

10.00%

20.00%

30.00%

40.00%

Prime prepayment rate Annual houeshold lending growth (RHS)

Bank Prepayment Rates Have Fallen The Most In The Past Two Years

25

– Prepayment rates for Major banks RMBS and Other banks RMBS have recorded the greatest declines in the past two years.

– Reduced ability to refinance interest-only loans may have created some repayment shock as more borrowers are now on an amortizing schedule.

– Slowing prepayment rates indicate debt serviceability and refinancing pressures.

Avg.--Average. Amort.--Amortization. NBFIs--Non-bank financial institutions. Source: S&P Global Ratings.

0%

20%

40%

60%

80%

100%

120%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

Major Non-bank Other bank NBFIs Regonal bank

Avg. prepayment rate Mar. 2017 Avg. prepayment rate Mar. 2019

Amort. exposure as at Mar. 2019 (RHS)

Gap Between Investor And Owner-Occupier Arrears Is Narrowing

26

Source: S&P Global Ratings.

0.00%

0.50%

1.00%

1.50%

2.00%

30+ arrears investment 30+ arrears owner-occupied

Interest rate repricing was more pronounced for investor loans after 2016

50% Of Interest-Only Loans Will Convert To Principal-And-Interest Repayments By 2020

27

Bil.--Billions. Source: S&P Global Ratings.

Interest-Only Outstanding Balance

0

1

2

3

4

5

6

7

8

Bil.

Total current loan balance

Cumulative Gross Losses Remain Low For Most Vintages

28

Source: S&P Global Ratings.

Cumulative Gross Loss By Vintage Of Origination Prime RMBS

Cumulative Gross Loss By Vintage Of Origination Non-Conforming RMBS

0.00%

0.05%

0.10%

0.15%

0.20%

0.00%

0.30%

0.60%

0.90%

1.20%

Key Risks

Risk S&P Global Ratings’ Assessment

Further property price declinesSenior tranches – LowAA–BBB tranches – LowSub investment grade tranches – Moderate

Counterparty riskSenior tranches – LowAA and A tranches– High (high proportion of these tranches have no hard subordination and ratings are dependent on LMI ratings)Sub investment grade tranches – Low

Subdued wage growthSenior tranches – LowAA–BBB tranches – LowSub investment grade tranches – Low to moderate as debt serviceability pressures will continue to weigh on arrears

Lending growth continues to slow

– Prepayment rates will continue to slow lengthening WALs

– Credit support will build at a slower rate

– Lower credit support build up is more of a risk for junior tranches of recent transactions with low seasoning levels

29

New Zealand

S&P Global Ratings Economic Outlook

31

f--Forecast. Source: S&P Global Ratings.

2019 2020f Outlook Impact On Credit Quality

Real GDPgrowth (%)

2.7 2.5 Economic growth is slowing as domestic and international headwinds surface.

Neutral to negative. Softer economic conditions are likely to weigh on debt serviceability pressure for some borrowers.

Unemploymentrate (%)

4.4 4.5 Slowing economic growth could dampen employment.

Neutral. Employment rates are low and stable, but employment growth is likely to be more subdued.

CPI (%) 2.3 2.2 Inflation had picked up to just below its historical average.

Negative. Subdued private sector wage growth could weigh on debt serviceability. Lower interest rates will help to offset this.

High Household Debt Leaves Borrowers Vulnerable To Changing Economy

– High household debt levels make some New Zealand borrowers more vulnerable to rising interest rates and falling incomes.

– LTV ratio restrictions have been relaxed recently in light of slower growth in household debt and house prices.

– Proportion of mortgages going to households with high debt-to-income ratios has fallen in recent years.

– Reserve Bank of New Zealand has proposed to gradually raise bank capital requirements to increase the resilience of the financial sector.

– House prices in Auckland have declined slightly, reducing the likelihood of a large and disorderly price fall.

32

New Zealand RMBS Sector Performance Remains Stable

– Credit quality of the New Zealand RMBS sector is strong, as evidenced by:

– Weighted-average LTV ratio of 59%

– Average loan size of $NZ163,047

– Weighted-average seasoning of 61 months

– Low levels of arrears in most portfolios

– All losses to date have been fully covered by lenders’ mortgage insurance.

– A number of pools are now “small pools,” which have greater borrower concentration risk.

33

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Asia-PacificStructured Finance

Surveillance

How To Access RMBS Performance Watch

RMBS Performance Watch including arrears, prepayment and pool statistics data can be accessed using the link below:

34

RMBS Analytical Contacts

Kate Thomson

Analytical Manager | kate.thomson@spglobal.com

Narelle Coneybeare

Sector Lead | narelle.coneybeare@spglobal.com

Erin Kitson

Sector Specialist Research | erin.kitson@spglobal.com

Elizabeth Steenson

Lead Analyst | elizabeth.steenson@spglobal.com

35

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