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Australian Securitisation SeminarLondon

13 June 2016

Agenda

1. Welcome Vanessa Docherty – Partner, K&WM London

2. Outlook for the Australian economy, banking and residential property markets

3. Australian RMBS performance trends and outlook

4. Outlook for ABS sector and other market developments

5. Closing remarks

Outlook for the Australian economy, banking and residential property markets

Speaker Position Organisation

Moderator

Chris Dalton Chief Executive Officer Australian Securitisation Forum

Panellists

Nick Parsons Head of Markets Strategy, Europe National Australia Bank

Gavin Friend Senior Market Strategist National Australia Bank

Housing – prices

Capital city prices are up a cumulative 37% this growth cycle (started May 2012) and are 27% higher than its previous peak (Oct 2010).

Sydney prices are up 50% from its previous peak (Nov 2010), Melbourne 25% (Oct 2010) higher, Brisbane is up 4% from its previous peak (Nov 2009) while Perth is down 7% from its previous peak (December 2014).

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Dwelling Value Index

8 Capital City Dwell Syd Melb Bris Perth

Source: NAB, CoreLogic

AUD 000's

What has been driving house prices?1. Record low mortgage rates – still falling2. Foreign demand – slowing3. Supply / demand imbalance – rapid apartment construction (as well as current pipeline)

has reduced undersupply in major capital cities

House prices – over the longer term

Source: CoreLogic, Quarterly Review – The Australian Residential Property Market and Economy – Released May 2016

Sydney Houses UnitsMedian Price $885,000 $680,000Quarterly Value Change 3.8% 4.4%12 month Value Change 8.4% 11.5%5yr Value Change 8.3% 6.9%10yr Value Change 6.2% 2.8%15yr Value Change 6.9% 5.6%Change Prev Peak 46.2% 36.9%Median Rental Rate $619 $546Gross Rental Yield 3.1% 4.0%

Melbourne Houses UnitsMedian Price $642,000 $489,000Quarterly Value Change 1.0% -0.7%12 month Value Change 10.8% 4.7%5yr Value Change 4.7% 1.9%10yr Value Change 7.2% 5.2%15yr Value Change 8.2% 6.0%Change Prev Peak 21.2% 7.5%Median Rental Rate $463 $405Gross Rental Yield 2.9% 4.0%

Brisbane Houses UnitsMedian Price $500,000 $382,500Quarterly Value Change 3.2% -1.5%12 month Value Change 6.7% 1.2%5yr Value Change 2.2% 0.5%10yr Value Change 3.9% 3.1%15yr Value Change 8.0% 5.6%Change Prev Peak 4.7% -3.5%Median Rental Rate $436 $406Gross Rental Yield 4.2% 5.3%

Perth Houses UnitsMedian Price $523,500 $415,000Quarterly Value Change 0.8% -3.1%12 month Value Change -2.2% -0.1%5yr Value Change 1.3% 0.2%10yr Value Change 2.8% 2.8%15yr Value Change 7.9% 6.9%Change Prev Peak -4.2% -6.6%Median Rental Rate $441 $393Gross Rental Yield 3.7% 4.3%

Australian housing – affordability

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House Price to Income Ratios

8 Capital City Dwelling Price / GDP per Capita

8 Capital City Dwelling Price / Avg FT Earnings

Source: ABS, CoreLogic, NAB

Multiple

10yr Averages

Households –income and balance sheets

Household indebtedness has been steady since 2005‐2006. Household indebtedness rose in 1990’s due to:(1) Australia’s transition from high inflation in 70’s & 80’s to low inflation in 90’s, (2) Interest rates fell, (3) Prices kept rising and (4) Availability of finance improved.

Household indebtedness was tested through the Global Financial Crisis and through two periods of slowing domestic economic growth (Jun‐07 – Sep‐09 and Mar‐12 – Mar‐13).

Recent increases has taken indebtedness to historic highs (again interest rates have fallen), but a breakout does not seem likely, nor does a fall. Owner occupied debt has been steady indicating that recent rises have been due to investors.

Rise in indebtedness has made households more sensitive to interest rates.

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Household Indebtedness

Total Household Debt to Disposable Income

Housing Debt to Disposable Income

Owner Occupied Debt to Disposable IncomeSource: RBA, NAB

% %

Housing – demand and supply

Population growth, from overseas migration, is forecast to be the major source of increased demand.

People want to live in the cities. At just under 80%, Australia is one of the most urbanised countries in the developed world.

Increase in supply of apartments is part of a long term adjustment to meet demand.

From one of the lowest bases in the developed world, population density (in cities) is rising.

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Dwelling Approvals

Houses Apartments Total Dwellings

Source: ABS, NAB

12mth Roll

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Population Growth Natural IncreaseNatural Increase (f)Overseas MigrationOverseas Migration (f)Total IncreaseTotal Increase (f)Estimated Population

Source: ABS, DIBP, NAB

AnnualChg 000's 000's

Housing – demand from offshore

Foreign Investment Review Board –Applications Decided ($ Value)

Foreign Investment Review Board – Real Estate Applications Decided

Note: the statistics presented by the FIRB should be treated with caution as they merely reflect foreign investor intentions and not their actual purchases of Australian assets.

By value FIRB investment in residential real estate approvals rose 75% from $34.7bn to $60.8bn. $11.5bn (2013‐14: $7.5bn) of these approvals were for developed properties and 49.3bn ($27.2bn) were for development.

Commercial real estate approvals fell slightly from $39.9bn in 2013‐14 to $36.2bn in 2014‐15.

By country, China was the largest source country for approved proposed investment in 2014‐15 with total approvals of $46.6bn and within this amount $24.3bn for real estate approvals. The next highest was the US with $25.1bn for total approvals and $7.1bn for real estate approvals.

Housing – demand from offshore –what are they buying?

Source: NAB Residential Property Survey 1Q 2016

Housing – demand and supply

Investment lending credit has slowed and as a proportion of the overall level of housing credit is tailing off.

As has interest only lending, but not offset facilities.

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ADI Interest Only & Offset Facilities

Interest Only Offset FacilitiesInterest Only (RHS) Offset Facilities (RHS)

Source: APRA, NAB

AUD Mill

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ADI Residential Property Exposure

Investment Owner-occupied

Investment % Owner-occupied %

AUD Mill

Source: APRA, NAB

Housing finance

More owner occupied and less investment lending –but overall steady metrics

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ADI New Housing Loans

Owner Occupied Loans Investment LoansInterest Only LVR<80%LVR 80%-90% LVR>90%3rd Party Originated Loans

Source: APRA, NAB

Australian RMBS performance, trends and outlook


Moderator

Jacqueline Fox Head of Securitisation Origination National Australia Bank

Panellists

Gwenneth O’Shea Head of Securitisation, Group Treasury AMP Bank

Liam Carden Group Treasury Commonwealth Bank of Australia

Mary Ploughman Executive Director Securitisation and Executive Director of the Board

Resimac

Peter Casey Deputy Treasurer ING Bank (Australia)

Australian RMBS – a “snapshot”

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CY2012 CY2013 CY2014 CY2015 CY2016

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‐ 5,000

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2009 2010 2011 2012 2013 2014 2015 2016YTD

Prime Non‐conforming

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Regional and Large Bank Major Bank Other ADI Non‐ADI

AU RMBS Issuance by Issuer Type (A$m Equivalent)

2013 2014 2015 2016

Australian RMBS issuance

AU RMBS Issuance (A$m equivalent) AU RMBS Issuance (A$m equivalent)

Source: NAB PoolMasterBig 4 Banks - excludes NAB’s NRMBS 2016-1 –priced 9-Jun-16

Australian RMBS market

Australian Prime RMBS market

Source: NAB PoolMasterBig 4 Banks - excludes NAB’s NRMBS 2016-1 –priced 9-Jun-16

Source: Standard & Poor’s

Australian RMBS market –S&P rated pool metrics

Arrears statistics – prime


(Bil. A$)

at 31 March 2016RMBS Performance Watch | Australia

Financial institutions comparison



Cumulative gross losses as percentage of total initial issuance by year of issuance



Arrears statistics – non‐conforming



(Bil. A$)

Cumulative gross losses as percentage of total initial issuance by year of issuance



Australia74.0%

Europe 13.0%

US 8.5%

NZ 2.8%

Japan1.5%Asia (excl Jap)

0.3%

Australia 76.5% Europe 14.0%

US 5.9%

NZ 3.2%Asia (excl Jap)

0.4%

All RMBS CY2015

RMBS Investor Location: 2015

Australia 77.1% Europe

15.4%

US 3.2%

NZ 3.9%

Asia (excl Jap)0.4%

Australia72.4%

US 20.0%

Europe 4.4%

NZ 3.2%

NC RMBS Investor Location: 2015

Source: NAB

Investor distribution by jurisdiction

RMBS Investor Location: 2015 & 2016 Prime RMBS Investor Location: 2015

RMBS Investor Location: 2016YTD

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A‐1+ AAA AA+ AA AA‐ A+ A BBB+ BBB BB+ BB B

Chart Title

Japan

US

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Europe

Australia

2016 YTD RMBS

Prime RMBS Investor Location: 2016YTD

Australia64.9%

Japan 12.0%

US 13.6%

Europe 8.4%

NZ1.0%Asia (excl Jap)

0.1%

Australia62.3%

US 20.0%

Japan 8.5%

Europe 8.1%

NZ1.2%

Asia (excl Jap)0.04%

Australia 55.8%

US 35.2%

Europe7.4%

NZ 1.6%

NC RMBS Investor Location: 2016YTD

Investor distribution by jurisdiction

Source: NAB

Pricing

Source: NAB

RMBS panel discussion

IDOL Programme –investor distribution

Source: ING Bank Australia

Arrears – typical timeline (e.g. AMP Bank)

From Day 30To Day 30

Arrears process is managed in accordance with Australia’s National Credit Code guidelines

–Arrears notices automatically sent to both borrowers and guarantors at 5 and 10 days

–Collections Officers contact the borrower from 15 days

Days 45‐90 Days 90‐120

–Final notices are sent demanding payment

– LMI informed at 60/90 days

– If no arrangement in place or repeatedly broken, move to exercise power of sale

– Move to exercise power of sale from 90 days.

–Collections Officers continue to contact the borrower to ensure payment arrangements are met

Loans are considered in arrears when the loan balance exceeds the scheduled balance

Source: AMP Bank


Moderator

Michael Moloney Director Structured Finance Westpac

Panellists

Kevin Lee Division Director Macquarie Bank

Matthew O’Hare Deputy Group Treasurer Pepper

Richard McCarthy General Manager,Sales, Strategy and Marketing

Perpetual

Stephen Magan Executive Director, Securitized Products Group

J.P. Morgan Australia

Outlook for ABS sector and other market developments

Whilst other markets have contracted post GFC, the number of issuers in the ABS space has increased with new issuance programmes from a broad range of entities and varying asset types ...

... as well as the return of less traditional issuers in this asset class …

2009 2010 2011 2012 2013

… though consolidation continues to occur which could reduce supply.

Westpac acquired Lloyds Banking Group’s Australian asset finance business, Capital Finance Australia Limited (CFAL), and its Australian corporate loan portfolio, BOS International (Australia) Ltd in 2013.

BOQ acquired Investec Bank (Australia) Limited’s Professional Finance and Asset Finance & Leasing businesses in 2014.

2016+

Possible new sources of ABS issuance.

Other ABS – issuer trends

2015 was the strongest year for issuance of ‘Other ABS’ on record with just over AUD6.1bn issued across 10 transactions.

Investors have been attracted to this asset class by the shorter dated tenors, the higher yielding underlying assets, lower extension risks and the more generous levels of subordination.

2016 issuance has been strong with $3.4bn issued to date across five transactions.

Other ABS issuance

A diverse range of receivables have been securitised in 2016, though auto lease receivables have dominated issuance.

The Flexi 2016‐1 transaction featured a “Green Bond”, the proceeds of which are linked to funding the solar photovoltaic systems in the pool of receivables.

Other ABS issuance

Despite the high volumes of issuance in recent years, only ~AUD11.7bn is currently outstanding. The bulk of this is concentrated amongst a few issuers.

The short term nature of the underlying securities ensures that the stock outstanding diminishes quickly in periods of low issuance.

Other ABS – stock outstanding

Other ABS Balance Outstanding

Pricing relative value

Spreads on domestic RMBS have traditionally been tighter than other ABS asset classes despite the longer tenor of the notes. Crusade 2012‐1 ABS that was placed in Dec‐12 broke this nexus, trading inside RMBS.

Since this time high quality ABS from large issuers have priced at or inside major bank RMBS benchmarks.

Question time

Questions from the audience

Closing remarks

Chris DaltonChief Executive Officer

Australian Securitisation Forum

www.securitisation.com.au

Thank you for attending Australian Securitisation Seminar – London

Australia Macroeconomic Outlook

Economy doing well in the face of challenges

Gavin Friend, Senior Market StrategistJune 2016

2

Australia – No recession in almost a quarter of a century

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Source: ABS

Per c

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• Only three negative quarters since 1992 - no technical recession.

• Australia has had the capacity to act during the downturns.

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Australia continues to have low levels of net debt relative to other advanced economies

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Source: IMF World Economic Outlook Database, April 2016

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The Australian economy has continued to perform well versus its peers

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Non-mining economy has been growing above trend

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• Australia is transitioning through the aftermath of the mining boom.

• RBA estimates the investment downturn peak is now.

• Q1 GDP +1.1% q/q; +3.1% y/y, with no growth from mining sector.

• In its latest Statement the RBA noted; “other areas of domestic demand, as well as exports, have been expanding at a pace at or above-trend.” It’s been a long-time since the RBA has said this.

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NAB business conditions well above long-term average

• NAB’s monthly Business Survey reveals business conditions well above average.

• Conditions (profitability, employment, orders) performing well in big-picture context .

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The pick-up in the non-mining economy is reflected in NAB’s business survey

• NAB’s Business Survey shows Household Services, Finance, Property & Business near series highs.

• Manufacturing, Transport now recovering, Construction steady, Mining in doldrums but stabilising.

• By State WA (mining) depressed, Qld (part mining) improving, remainder (non-mining) doing well.

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Tourist arrivals have had a positive influence on the economy

• Tourism continues to do well, aided by strong tourist inflows from China, but US, Japan, and UK also rising.

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Tourism and Education two key drivers of economic rebalancing

• Lower AUD is aiding tourism by making Australia a cheaper destination for foreign travellers, while promoting domestic vacations for Australians.

• Education also been boosted by the weaker AUD. Tourism and Education now second largest export.

• The AUD has fallen by over 30% vs the USD from 1.10 peak in 2011 and by over 20% on a TWI basis.

10

Good Asia/China influences on Australia - Education 3rd largest export industry

Foreign Student Enrolment Numbers

Rank Year Total 2015 2016Change in Year

1 China 114,180 135,206 21,0262 India 46,020 52,404 6,3843 Vietnam 19,653 20,105 4524 Malaysia 17,594 19,567 1,9735 South Korea 17,129 18,422 1,2936 Thailand 14,350 16,245 1,8957 Nepal 13,249 14,805 1,5568 Brazil 12,472 14,269 1,7979 Indonesia 12,442 13,004 56210 Hong Kong 11,238 12,547 1,30911 Pakistan 10,593 11,513 92012 Taiwan 6,977 8,829 1,85213 Colombia 6,886 8,292 1,40614 Japan 7,054 7,809 75515 Philippines 7,229 7,457 22816 US 6,431 6,956 52517 Singapore 6,960 6,887 ‐7318 Saudi Arabia 7,268 6,137 ‐1,13119 Sri Lanka 4,844 5,692 84820 Italy 4,720 5,569 849

Total 410,596 459,621 49,025

Source: Department of Education and Training

• In 2015 645k full fee-paying students came to Australia, contributing A$ 19bn to the economy

11

Demographics a longer term support for Australia (and NZ) growth

• Growth in working population is a key ingredient for economic growth – Australia placed well vs peers.

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The RBA has had to reduce its unemployment rate forecast

• Resilience of non-mining economy is showing up in the labour market.

• To the RBA’s surprise, an upturn in employment has meant new lower unemployment forecasts.

• Australia now creating 18-19k jobs per month – more than the 14-15k needed to keep the unemployment rate steady.

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The RBA normally hikes when unemployment falling. Why are they cutting?

14

Why did the RBA cut ? Because inflation is uncomfortably low

The RBA is a medium-term inflation-targeting central bank.

Headline CPI in Q1 -0.2% q/q; +1.3% y/y.Core CPI +0.2% q/q; +1.5% y/y.Core lowest ever, y/y below RBA 2%-3% target.

Fuel prices -10% q/q subtracting 0.3% pts off CPI.Fruit prices -11.1 q/q subtracting 0.1% pts off CPI.

But there was weakness elsewhere.

No pass-through from the weaker exchange rate (as anticipated by the RBA) from clothing, footwear, furnishings, household equipment, communications, recreation and culture.

15

Myriad factors pressing down on inflation, prompting big-picture questions

No pass-through from weaker AUD on many tradeable goods.On the non-tradeable side housing inflation was subdued due to:- lower rents- lower new dwelling prices

Housing is 22% of the CPI basket. Extra capacity in housing sector and regulatory measures are impacting.

Downward pressure on inflation from:- Commodity supply increases/higher USD =

commodity price falls (esp. oil)- Substantial increases in housing capacity

restraining rental growth- Little evidence (yet) of pass-through from

lower AUD (likely reflecting global excess capacity/comp from global retail

- Supermarket price wars- Low global inflation – now showing up in

Australia?- Unusually low wages.

16

Weakest wage growth in decades driving low inflation outcomes

• Wage growth continues to decline – necessary to restore competitiveness with rest of world?

• Likely also reflects labour market spare capacity (ie Jobless rate call fall further before inflationary).

• Unit labour costs may be being pushed lower temporarily as exports surge, boosting productivity.

17

Lower commodity prices mostly a function of increased supply - global oil consumption has held up but supply has soared... Inflation expectations sliding – need watching

18

Having asked itself: ‘are monetary settings appropriate for an inflation return to the 2-3% target in the medium term?’ the May policy outcome suggests the RBA thinks yes.

RBA’s new inflation forecast• The RBA’s Feb 2016 and

May 2016 forecast differ mostly in their starting points. If we extend the trends from their Feb and May forecasts another year, the central tendency looks the same 2½%.

Other considerations:• Factors depressing inflation

are part cyclical or one-off. Others look globally-driven. If not a signal of deficient demand in Australia, is inflation-targeting appropriate?

• RBA revealed no explicit easing bias in June –suggesting current policy mix is consistent with sustainable growth and CPI back to target.

19

GDP Outlook – Good for now but caution on net exports and dwelling investment

• RBA: “Recent data suggest overall growth is continuing, despite a very large decline in business investment….Other areas of domestic demand, as well as exports, have been expanding at a pace at or above trend.”

• Australia LNG capacity rises to 85mta in 2017 (around one third of global output) and set to surpass Qatar as world’s largest LNG exporter by 2020. Four projects come on line in 2016/17. But GDP boost will fade 2018/19.

20

Government Budget – return to surplus delayed and based on improving economy

• Australia’s fiscal revenues were hit by lower commodity prices and higher spending.

• Budget pushes out return to surplus timing again (now 2020/21). Heavy lifting to be done by receipts, which rise from 24% of GDP in 2015/16 to 25.9% in 2019/20, while expenses fall from 26.1% to 25.7%.

• Moody’s commended the commitment to fiscal consolidation, but warned, “the budget projects somewhat wider deficits than expected last year continuing a succession of revisions in the last 5 years.”

• Lower commodity prices as a result of global factors remain a potential threat to revenues.

21

Delivery of the Budget forecasts required for AAA

Australia net debt is expected to peak at 19.2% of GDP in 2017/18 vs 18.5%. This is low by international standards (OECD ave. 70%) but near mid-pack for AAA nations.

Moody’s – Reaffirms AAA but warns, “the “slower pace of fiscal consolidation will leave public finances vulnerable to negative shocks.

Fitch – “Australia Budget consistent with the AAA rating”.

Standard and Poor’s – “We will look through the details of the budget over the coming weeks. As we’ve previously highlighted, improving budget balances remain important to the rating to offset Australia’s high vulnerability to shifts in offshore financial market sentiment.” We note on S&P methodology net debt is closing in on the 30% threshold S&P considers a concern for AAA.

22

Record dwelling approvals have caught up with slowing population growth.House prices rolling over - absent the rate cut blip?

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Adelaide Houses

Hobart Houses

• Supply shortage price rise arrested somewhat as population growth slows on mining drop-off and on extra dwelling capacity and pipeline (especially apartments). APRA measures continue to add to moderation.

• May rate cut adds to housing activity, but is that sustainable as RBA signals no explicit easing bias? Employment growth may help, but low wage growth counteracts as does price to earnings ratios.

• RBA signals has faith in foreign buyers’ long-term motivations/less price swing sensitivity.

• We note dwelling approvals turning down after rise; less construction down the track?

23

2 July election looms – looking like a close run affair

TWO PARTY PREFERRED POLLING

• Labor needs to wrest 19 seats from the Coalition to win control of lower house.

• Labor requires a 4.1% swing to secure 50.1% of the vote on a two-party preferred basis.

• Current polls running very close to 50:50; PM Turnbull’s popularity has been imploding.

• Haven’t had a one-term (Federal) government since the Depression (though Gillard, Howard and Hawke all came close to not being re-elected).

• Voters (globally) seem much more willing to turn an incumbent government out.

Source: crikey.com.au

24

Economy travelling well amid inflation, housing, ratings risk and election uncertainty

Non-mining economy travelling well and labour market still solid.

NAB surveys shows business conditions above long term average.

RBA policy shift entirely driven by sub-optimal inflation concerns.

Weak wages growth keeps domestic inflation pressures subdued; limited pass-through from AUD drop to tradeable inflation.

Medium term growth question as LNG production and dwelling construction both peak.

Australian housing supply/demand coming into balance.

AAA ratings at low level risk – watching out for S&P.

2 July Australian election outcome highly uncertain.

25

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26

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27

Building approvals peaked in mid-2015. Construction to peak early-2017.

28

Foreign investor demand waning

0

2

4

6

8

10

12

14

16

18

Q2'

10

Q3'

10

Q4'

10

Q1'

11

Q2'

11

Q3'

11

Q4'

11

Q1'

12

Q2'

12

Q3'

12

Q4'

12

Q1'

13

Q2'

13

Q3'

13

Q4'

13

Q1'

14

Q2'

14

Q3'

14

Q4'

14

Q1'

15

Q2'

15

Q3'

15

Q4'

15

Q1'

16

Share of Demand for New & Existing Properties from Overseas Buyers

New Properties Established Properties

%

Source: NAB residential property Survey, Q1 2016

29

There remains considerable uncertainty about how fast the Chinese economy is growing. Like Australia (and the US), there is considerable variability by sector…

29

Tertiary includes: Transport, Wholesale & Retail, Accommodation, Financial, Real Estate, Services (Govt, Health, Education, Other Services)Secondary includes: Mining, Manufacturing, Electricity, Gas & Water, Construction

30

China – consumer-related activities holding up and housing has recovered.

Page 30

Consumer in good shape Housing has recovered

-6

-3

0

3

6

9

12

-40

-20

0

20

40

60

80

100

2006 2008 2010 2012 2014 2016

% yoy (3mma)

Existing home prices (based on former 70 city

series) (RHS)

Residential construction starts (LHS)

Source: CEIC, Datastream, NAB Economics

% yoy

31

Growth recovery supported by credit growth. China’s debt load now matches most developed countries.

Page 31

32

RBA cash rate and mortgage rates

33

Dwelling and population increase

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