Scott Murdoch | The Australian | April 19, 2011
The major banks have been accused of lending too much to Australian consumers and underestimating the cost of living, which could lead to tighter lending standards to avoid an increase in bad loans.
A Bank of America-Merrill Lynch report says the banks are too keen to lend and have relaxed their customer criteria in efforts to boost market share.
BAML analysts tested each of the big four banks’ online application systems with case studies based on varying household budget scenarios.
They found that the Commonwealth Bank, Australia’s largest bank and home lender, was the most conservative, ahead of Westpac and NAB, while ANZ was the most aggressive based on how much it would lend.
The analysis shows the Australian banks’ estimates of cost of living expenses were up to 7 per cent below mainstream forecasts.
It shows the banks’ projected monthly living expenses, excluding housing, was $1208 for a single person and $1708 for a couple.
However, the internationally recognised Poverty Index projects a couple’s expenditure at $1814.
BAML’s modelling estimates $2018 for a couple on a “barebones” budget and $2504 for a “normal” budget.
BAML’s banking analyst, Matthew Davison, said rising food, power, transport and healthcare costs were crimping consumers’ budgets, but that had not been recognised by the banks in the mortgage approval process.
“We think banks lend too aggressively against living costs,” Mr Davison said.
“The strain on the household budget is too big to ignore and banks don’t accurately measure household costs.
“These (cost) pressures could possibly prompt the banks to update their household budget models and tighten mortgage lending standards.”
Mr Davison said tightening lending criteria could cut the average mortgage size and weaken demand for credit.
“We believe the banks do not investigate a borrower’s credit cards or saving history to gain an accurate reflection of their current spending habits,” he said.
The National Consumer Credit Protection legislation is expected to increase the amount of research banks carry out before approving a mortgage.
Meanwhile, a separate report from equities research firm Morningstar published yesterday shows the major banks will have to begin adjusting to the low-credit-growth environment as consumers save the most in two decades.
It says the banks will rely on a pick-up in business lending to cover the decline in household credit demand.