Warning for bank on mortgage credit rules

The big Australian banks have been warned not to relax their mortgage credit standards to offset the flat lending growth that has emerged across the industry.

A new report by Credit Suisse found the banks could be starting to increase their loan-to-valuation ratios to win market share.

Housing lending growth is increasing at below 5 per cent a year, one of the slowest rates seen in the sector in recent years.

Credit Suisse analyst Jarrod Martin said the big domestic banks could absorb a fall in Australian house prices. But he said there was a chance of creating a mortgage arrears increase if lending standards were relaxed.

“The risk 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,” Mr Martin said. “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.

“Banks (are) selectively retaining mortgage credit risk that previously would have been transferred to the lender’s mortgage industry.”

Mr Martin said before the downturn most of the lower underwriting standards and high loan-to-valuation ratios were offered by smaller players and non-bank lenders.

Regulators and the government warned the banking industry that prudent lending standards had to remain in place.

The two largest banks, Commonwealth and Westpac, are most exposed to the mortgage market with up to 60 per cent of their total lending focused on home loans.

“The post-crisis risk standards (are) being degraded from within the major banks, driven by challenges of achieving mortgage balance growth and revenue growth in a subdued macro environment,” Mr Martin said.

A National Australia Bank spokesman said the bank had maintained strict lending criteria in light of its market share gains in the past few years. The bank has rapidly increased its residential mortgage book by offering the cheapest standard variable rate among the big banks for the past 34 months. It has vowed to maintain the cheapest rate for the rest of this year.

“We have seen our asset quality improve over the past two years. We are happy to continue to implement the measures that are delivering this good asset quality,” he said.

Meanwhile, Westpac revealed yesterday it had sharply increased the number of customers using mobile banking. The bank said it had one million personal and business customers using its smartphone applications, up 90 per cent in the past year.

Westpac estimated mobile activity accounted for 30 per cent of all online banking sessions, 150 per cent higher than the same time last year.

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