* Discussion paper on review of structured finance due this month
* First A$ credit card securitisation seen possible in 2014
* Australian major banks likely first issuers
By Cecile Lefort
SYDNEY, Sept 4 (Reuters) - Australia’s financial regulator may liberalise the country’s structured finance market, making changes that could open the way for banks to securitise credit card debt for the first time.
The move, which could happen as early as next year, would create new funding sources for Australian banks and bring diversity to a market dominated by mortgage-backed securities.
Worth A$110 billion ($99 billion), Australia’s structured finance market is among the five largest in the world, but unlike Europe and the United States, Australia has yet to see securitisation of credit card debt.
That could soon change as the Australian Prudential Regulation Authority (APRA), one of the world’s toughest regulators, is considering allowing the use of master trust structures.
“Depending on APRA’s review, we may get a master trust structure which will then allow the securitisation of credit card portfolios,” said Sofie Sullivan, head of the securitised product group at JPMorgan in Sydney.
Common in Europe, master trust structures allow borrowers to securitise a revolving pool of assets, meaning they can substitute loans that are prepaid with new ones. This provides investors with greater income certainty.
Australian securitisation is currently confined to closed pool structures in which pre-paid loans cannot be replaced.
That works well for assets such as mortgages with predictable repayment schedules, but less so for credit card debt.
A standard draft or discussion paper is expected this month and industry sources said the review could pave the way for Australia’s first securitised credit card offer next year.
Once permitted, securitisation of credit card portfolios is expected to start slowly with initial deal sizes of between A$750 million and A$1 billion. Eventually, the market size could reach A$10 billion to A$15 billion, with demand from U.S. and European investors underpinning it, according to JPMorgan.
Presently, residental mortgage-backed securities account for about 90 percent of the Australian structured finance market with commercial mortgaged-backed debt and car loan receivables making up the rest, according to data from ThomsonReuters and the Reserve Bank of Australia.
Investors and borrowers will both welcome the introduction of master trust structures.
Fund managers will like the greater income security they provide and the choice of new asset classes to invest in.
“Any development for new opportunities to put money to work is very constructive,” said John Manning, a senior investment manager at Aberdeen Asset Management, which has around A$13 billion in fixed income under management.
For their part, banks will like a more efficient, and therefore cheaper, form of funding provided by master trusts, that will make it more attractive securitise the credit card debt.
Data from the Reserve Bank of Australia shows that lenders were holding about A$50 billion of credit credit loans as of June.
“Banks would consider securitising assets that they don’t do today such as short-dated credit cards because it would add different investors into the mix, while creating diversification and better matched liabilities to assets,” said Satish Chand, an executive director at debt advisory firm Magma Capital.
Credit card securitisations could even appeal to individual investors, predominantly high net worth investors, because there are not enough high-yielding debt products in Australia to meet demand.
“Clearly, demand for appropriately priced and higher yielding debt is there,” said Chris Selby, head of private wealth management at Deutsche Bank. “The question is whom we can rely on in terms of pool quality?”
Selby said his clients would feel more comfortable with assets that the nation’s largest banks originated. Those banks, according to J.P. Morgan’s Sullivan, were the most likely candidates to securitise credit card receivables.
So far, Australia and New Zealand Banking Group, Commonwealth Bank of Australia, National Australia Bank and Westpac Banking Corp, which are among the world’s largest and safest banks, have kept credit card loans on their balance sheets.
Australia’s banks are extremely profitable, but with rising costs of capital stemming from a stricter global regulatory framework under Basel III, banks are more than ever taking a closer look at their funding alternatives. ($1 = 1.1036 Australian dollars) (Editing by Simon Cameron-Moore)