Revenue Pressures Cause Aussie Banks to Lower Lending Standards for Home Loans

Credit Suisse, in a new report released on Wednesday, warned Australian banks not to lower their lending standards for home loans to make up for the flat growth of lending across the banking industry,

The warning was made amid Credit Suisse's observation that the lenders have begun hiking their loan-to-valuation ratios to get a higher share of the lending market. Weak consumer confidence and high interest rates caused housing lending to grow less than 5 per cent annually which is one of the slowest growth rates in years.

The report said that 55 per cent of growth in owner-occupied housing credit for the 17-year period 1995 through 2011 reached $378 billion, caused by rising housing prices instead of a growth in number of loans and population hikes.

"The risks we see in the Australian mortgage credit market is that revenue pressures, especially in decelerating housing credit growth, lead to the commencement of the next cycle of degradation in underwriting standards.... Our industry liaison suggests that this process is starting to occur but it hasn't slackened to the extent seen in the pre-crisis era," The Australian quoted Credit Suisse analyst Jarrod Martin.

Mr Martin observed that prior to the downturn, it was smaller players and non-bank lenders that were engaged in lower underwriting standards and had high loan-to-valuation ratio. However, he pointed out that Aussie banks are now selectively retaining mortgage credit risks that used to be transferred to the lender's mortgage industry.

Mr Martin named Commonwealth Bank of Australia and Westpac as the most exposed to the mortgage market by up to 60 per cent of their total lending focused on home loans.

Data from the Australian Bureau of Statistics said that home prices have gone down 4.5 per cent in the year to March after it went up by up to 18.8 per cent in the year to March 2010. The decline in prices which slowed housing credit growth to a 35-year low, forced Aussie banks to reconsider their expansion strategies for the coming years.

"In the absence of a tail risk event, such as a severe credit crunch, our base case expectation is therefore for an orderly deleveraging of household balance sheets, coupled with relatively stable nominal (or) real house price erosion over the medium term," The Sydney Morning Herald quoted Mr Martin.