Banks have materially loosened their lending standards in a bid to win customers amid heavy competition for borrowers as record low interest rates fire up the property market.
A new survey of the chief financial officers of Australia’s banks found they were applying easier criteria, including discounted interest rates and lower fees, for both home buyers and business borrowers as the market heats up.
The findings of the UBS survey conducted in December and January will be food for thought for the country’s financial regulators, which have warned banks against lowering their standards to gain customers while interest rates are low.
“Over the last 12 months we believe that we have seen a material move in underwriting standards for the banks in consumer credit,” UBS analyst Jonathan Mott said in a report on the survey’s findings.
“While 12 months ago the outlook for the housing market was subdued, following a number of interest rate cuts and monetary easing globally the outlook has improved significantly.
“While this has resulted in an increase in demand, the banks have also indicated that underwriting standards have been loosened, especially in mortgage lending.”
With property prices growing strongly, buoyed by record low interest rates, improved “housing market prospects” were cited as the main reason behind looser lending standards.
Competition from rival banks was also a key factor.
According to the survey, which included the CFOs of the big four banks and smaller regional rivals, credit underwriting standards for home loans have been “eased somewhat” over the past six months.
In the same survey six months earlier, credit criteria were “unchanged” for home buyers, while they were being “tightened somewhat” 12-months ago.
The Reserve Bank of Australia and the Australian Prudential Regulation Authority have issued warnings to the banks against loosening lending standards over recent months.
“Loan Officers indicated lending standards have been loosened materially in both mortgages and large corporate lending over the last six months,” Mr Mott said in the report.
“In housing, improved market prospects and competition were cited as the factors driving a loosening in standards. This has led to a material reduction in both price and fees in mortgage lending.”
In a positive for the property market, the RBA kept official interest rates on hold at a record low 2.5 per cent this week.
As low interest rates fuel the market, house prices across Australia rose by an average of 9.8 per cent in 2013, leading some commentators to issue warnings about a potential bubble.
The market was strongest in Sydney, where property values rose 14.5 per cent last year.
“Housing market prospects is now seen as the biggest driver of the loosening of underwriting standards for consumer credit, with the average response now in the ‘eased somewhat’ category,” Mr Mott said.
“Competition from other banks was also seen as a factor leading to a loosening of consumer underwriting standards.
“Over the last six months the banks have indicated that pricing has eased materially, with a mix of responses in the ‘eased somewhat’ and ‘eased considerably’ category. “While the banks have not cut their standard variable rates out of cycle, we believe that discounts to the SVR have been cut substantially. The banks have also indicated that non-interest fees have been cut over the last six months.”
In business lending, the survey found borrowing criteria for large companies were being loosened, especially in the residential development sector.
However, lending standards for mining companies where being tightened, reflecting concerns by the banks as the resources boom fades.
Credit criteria for small businesses remained “unchanged”
“Competition was viewed as the main driver behind this loosening in standards, and has been reflected in price reductions and loan maturity,” Mr Mott said.
“This was partly offset by tightening in underwriting standard to the mining and mining services sectors, a trend which has now been in place for the past 12 months.
“Loan officers indicated that they expect these trends in mortgages and large corporate lending to continue going forward.”
Despite dropping their standards, banks believe bad debts will fall over the next year as low interest rates make repayments easier.
According to the survey, the ratio of non-performing loans is expected to fall by 2 basis points over the 12-months.
Demand for all loans, including mortgages, corporate and personal credit, is expected to grow by 3 per cent in the next year, according to those surveyed.
“Loan officers unanimously agreed that loans for home purchases had increased somewhat over the last six months, the first time such a positive response has been recorded since our first survey in the first half of 2010. Demand for credit cards and personal loans, however, is unchanged,” Mr Mott said.