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Macroeconomic, Sovereign Outlook And The Australian Securitisation Market

12 November, 2013

Australia’s Macro Environment & Sovereign Rating Outlook Craig Michaels S&P Sovereign Ratings

Base case: subdued near-term economic growth

Sources: ABS;; Standard & Poor’s

Business conditions are weak, but may have bottomed

Source: NAB

Mining investment falling… what will drive growth?

Sources: ABS;; Standard & Poor’s

Rising resource export capacity should boost growth Export volumes, quarterly (2010-11 prices)

Source: ABS

Rising unemployment and debt-aversion will limit spending

Source: ABS

Lower interest rates and $A should gradually help investment

Sources: ABS; RBA

Residential investment improving but is not stellar Residential building approvals, monthly

Source: ABS

Outlook for non-mining investment is still subdued

Source: RBA

Capex survey, nominal

Stable outlook on the ‘AAA’ rating supported by: • A sound economic outlook • Expected gradual improvement in fiscal performance • Low government debt • Capacity of exchange rate and monetary policy to cushion shocks These offset a very weak external position Main (downside) risk to the rating is from: • Significant increase in external imbalances

Australia’s sovereign rating

Securitisation Market Outlook Vera Chaplin S&P Structured Finance Ratings

13

RMBS Issuance Has Strengthened

$-

$5,000.00

$10,000.00

$15,000.00

$20,000.00

$25,000.00

$30,000.00

$35,000.00

$40,000.00

$45,000.00

$50,000.00

1 2 3 4 5 6 7 8 9 10 11 12

A$(m

il)

Month

Australian RMBS & Covered Bond New Issurance Cumulative Volume 2012 and 2013 Comparison

2012 RMBS 2013 RMBS 2012 Covered Bond 2013 Covered Bond

Source: Dealogic, Standard &Poor's Copyright: Standard & Poor's

14

Housing Loan Approval Is Up

15

Credit Growth Have Slowed But Reached Turning Point

0.0

5.0

10.0

15.0

20.0

25.0

1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013

% (a

nnua

l rat

e - s

easo

nally

adj

uste

d)

Housing Credit Growth

Source: The Reserve Bank of Australia (Table D1) Copy right: Standard & Poor’s

16

Household Debt to Disposable Income Stablised

60.0

80.0

100.0

120.0

140.0

160.0

180.0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Household Debt As A %of Household Income Comparisons

Australia Canada United Kingdom United States

Source: Reserve Bank of Australia, Australian Bureau of Statistics, National Statistics - Financial Statistics, statistics Canada Copyright: Standard & Poor's 2013

17

Lower Interest Rate Contributes to House Price Growth

0

2

4

6

8

10

12

14

16

18

20

-

50

100

150

200

250

300

350

400

Australian Established House Price Index

Price Index of Established Homes Weighted Average of 8 State Capital Cities (left axis)

Bank housing loan lending rate (%) (right axis)

Source: Standard & Poor's, Australian Bureau of Statistics and the Reserve Bank of Australia Base year for Australian House Price Index 1989/90=100 Copy right: Standard & Poor's 2013

18

Higher Debt Means Higher Interest Paid Even At Lower Rate

19

Australian Household Saving Ratio Indicate Household Caution (Percentage Of Disposable Income)

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013

% (s

easo

nally

adj

uste

d)

Household Savings

Household Savings Ratio Average

Source: Australian Bureau of Statistics Catalogue No: 5206, Table1 Copyright: Standard & Poor’s

20

Arrears Are Low But More Sensitive

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1.60%

1.80%

2.00%

1/04

/200

5

1/07

/200

5

1/10

/200

5

1/01

/200

6

1/04

/200

6

1/07

/200

6

1/10

/200

6

1/01

/200

7

1/04

/200

7

1/07

/200

7

1/10

/200

7

1/01

/200

8

1/04

/200

8

1/07

/200

8

1/10

/200

8

1/01

/200

9

1/04

/200

9

1/07

/200

9

1/10

/200

9

1/01

/201

0

1/04

/201

0

1/07

/201

0

1/10

/201

0

1/01

/201

1

1/04

/201

1

1/07

/201

1

1/10

/201

1

1/01

/201

2

1/04

/201

2

1/07

/201

2

1/10

/201

2

1/01

/201

3

1/04

/201

3

1/07

/201

3

Australian RMBS Arrears Comparison

Prime Arrears: > 30days Fulldoc Arrears: > 30days

Source: Standard & Poor's Copyright: Standard & Poor's

21

Performance Responses Are Similar Though By Different Degrees

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1.60%

1.80%

1/04

/20

05

1/07

/20

05

1/10

/200

5

1/01

/20

06

1/04

/20

06

1/07

/20

06

1/10

/20

06

1/01

/20

07

1/04

/20

07

1/07

/200

7

1/10

/20

07

1/01

/20

08

1/04

/20

08

1/07

/20

08

1/10

/20

08

1/01

/20

09

1/04

/20

09

1/07

/20

09

1/10

/20

09

1/01

/20

10

1/04

/20

10

1/07

/201

0

1/10

/20

10

1/01

/20

11

1/04

/20

11

1/07

/20

11

1/10

/20

11

1/01

/20

12

1/04

/201

2

1/07

/20

12

1/10

/20

12

1/01

/20

13

1/04

/20

13

1/07

/20

13

Australian RMBS Arrears Comparison

Fulldoc Arrears: > 30days (left axis) Suprime Arrears: > 30days (right axis)

Source: Standard & Poor's Copyright: Standard & Poor's

22

Performance Divergence Is Magnified

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

1/04

/200

5

1/07

/200

5

1/10

/200

5

1/01

/200

6

1/04

/200

6

1/07

/200

6

1/10

/200

6

1/01

/200

7

1/04

/200

7

1/07

/200

7

1/10

/200

7

1/01

/200

8

1/04

/200

8

1/07

/200

8

1/10

/200

8

1/01

/200

9

1/04

/200

9

1/07

/200

9

1/10

/200

9

1/01

/201

0

1/04

/201

0

1/07

/201

0

1/10

/201

0

1/01

/201

1

1/04

/201

1

1/07

/201

1

1/10

/201

1

1/01

/201

2

1/04

/201

2

1/07

/201

2

1/10

/201

2

1/01

/201

3

1/04

/201

3

1/07

/201

3

Australian RMBS Arrears Comparison

Prime Arrears: > 30days Subprime Arrears: > 30days

Fulldoc Arrears: > 30days Lowdoc Arrears: > 30days

Source: Standard & Poor's Copyright: Standard & Poor's

Factors under monitoring: • Macroeconomic trends

• Lending and servicing practices

• Trends by product type

• Lenders’ mortgage insurance performance

Structured finance ratings expect to remain largely stable: • Asset performance remain stable

• Structural enhancement remain robust

• Counterparty rating is likely to be the main cause of impact

Australian Structured Finance Ratings Performance Outlook

23

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