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Securitisation stays strong through market turmoil, propped by non-bank lending growth
The domestic asset-backed securities (ABS) market has evolved into a critical source of funding in Australian capital markets, helping underserved borrowers while offering an increasingly diverse investment proposition.
Importantly, it has also proven resilient to challenging financial conditions, largely supported by the growing non-bank lending sector.
Carl Schwartz, acting head of domestic markets at the Reserve Bank of Australia (pictured), recently underscored the key role securitisation markets, and the non-bank and private lenders that have come to drive them, play in Australia’s financial picture.
There have been two broad shifts in recent years underpinning issuance strength in ABS markets, Schwartz said in a speech last month at the Australian Securitisation Conference, pointing to the increase in issuance by non-banks and the expanding variety of loan types that can be securitised.
“For many years, banks were the main issuers of asset-backed securities, so that non-banks accounted for around one-quarter of issuance,” he explained.
That dynamic changed beginning in the mid-2010s, in part because banks began reducing issuance as they turned to less expensive funding sources between deposits, senior unsecured bonds and covered bonds while taking particular advantage of the Term Funding Facility offered by the Reserve Bank of Australia during the pandemic.
At the same time, non-bank lenders were increasing ABS issuance as their lending grew above system pace, Schwartz said. “Non-banks continued to increase their share of issuance through the pandemic period, and they now account for around three-quarters of ABS issuance.”
As part of this pronounced growth, the non-bank and private lending space has developed to be quite varied, according to Lauren Ryan, business development manager at specialist property lender Thinktank, who recently discussed mortgage-backed private credit opportunities in a presentation to members of the Australian Investors Association.
Demand for asset-backed securities comes mostly from foreign buyers, banks, superannuation funds and other long-term investors. Private investors can also access ABS through funds and trusts, such as Thinktank’s High Yield trust; these are available only to wholesale and high-net-worth investors, not retail.
While the economic environment of the past few years has been a “seesaw” for businesses that operate in both the lending and investing spheres, Ryan said, Thinktank has managed loan originations at a steady pace, even through the pandemic. She attributed that success to the company’s long-held emphasis on building relationships.
Like other non-bank lenders, Thinktank has also benefitted from the withdrawal of banks from certain parts of the market, as prudential requirements made certain types of loans more expensive from a capital perspective and therefore less attractive for banks to write on their own balance sheets, and they increasingly automated their credit underwriting systems and reduce their branch presence.
She cited lending to self-managed superannuation funds (SMSFs) as an example of borrowers that might have a harder time obtaining financing from a bank.
“If the scenario doesn’t fit into the bank’s largely automated credit assessment process, it can become time consuming and challenging to continue working with that bank. The non-banks have stepped in to reinvigorate a lot of those sorts of opportunities.”
The market is undergoing new changes, though. As Schwartz explained, investors looked to ABS as comparable to high-quality bank debt as bank issuance nearly vanished during the pandemic, but there has recently been more securitisation activity from the larger banks as spreads have narrowed.
“For many non-banks, their growth is built upon their relationships,” says Ryan. “Relationships become even more important as interest rates increase, our relationship service standard remains the same if not more attentive.”
Schwartz noted that both existing lenders and new entrants in the non-bank space are “quick to switch attention to different borrower segments to support lending growth,” making them highly adaptive to the effects of any return by the banks.
And as investors seek to protect their portfolios from volatile markets through diversification, the non-bank and private lending sector provides a valuable access point.
“Through mortgage-backed funds, investors have exposure to a very large number of loans,” she said, noting that Thinktank’s loan portfolio consists of over 9,000 loans, with an average loan size of $600,000.
As Schwartz stressed in his speech, the ABS market plays an increasingly important role in Australia’s financial ecosystem, for both investors and borrowers. The good news for the ecosystem is that the market appears in a healthy state.
“Good credit performance to date and a broadly favourable outlook continue to support investor confidence,” he said, and the continued strong pace of issuance underscores the market’s ability to adapt. “Of course, high and steady issuance requires willing investors.”
