[SYDNEY] Australian banks are reining in their most profitable business after increasingly stern warnings from regulators that tighter mortgage lending standards may be needed to prevent a housing bubble in Sydney from destabilising the financial system.
The country's four major lenders, Commonwealth Bank of Australia (CBA), Westpac Banking Corp, ANZ Banking Group Ltd and National Australia Bank have all begun to tighten lending to investors in recent weeks.
The measures include stricter criteria to approve investor loans, pulling down interest rate discounts and raising deposits on investor loans to up to 20 per cent, from as little as 5 per cent just a month ago.
This is a big shift for Australia's banks, which emerged from the global financial crisis to post record profits in recent years on the back of mortgage lending. Home loans account for 40 per cent to 60 per cent of the major banks' total loans. "If the regulators force the banks to slow investor lending growth and it isn't offset by any significant pick-up in owner-occupied housing or business credit, this will no doubt hurt revenue growth," said Omkar Joshi, an investment analyst who helps oversee about A$1 billion at Watermark Funds Management.
Policy makers and the Australian Prudential Regulatory Authority (APRA), the banking watchdog, are sounding alarm bells over the rising risks to the financial system from the red hot Sydney property market.
Home prices in Australia's biggest city have soared 40 per cent in three years, fuelled by interest rate cuts to historic lows. On Monday, Treasury Secretary John Fraser told a senate hearing that Sydney was "unequivocally" in a housing bubble.
Compounding the regulator's concerns, the major banks'reserves against potential losses in their mortgage books have fallen since 2008 even as profits reached record highs, thanks to the use of in-house risk-management models.
Regulators have flagged the need for the major banks to set aside more capital against their mortgage book, a move that could further hit earnings and investor returns. Analysts expect risk weights on mortgages to rise to 25-30 per cent from 14-19 per cent now.
The "Big Four" banks are together expected to raise between A$22 billion and A$41 billion to boost their capital reserves in what will be the their biggest fund raising in history, analysts estimate.
Bankers complain that APRA officials are "camped" in their mortgage departments, ensuring they keep growth in investment loans below a 10 per cent annual speed limit and tighten standards on products such as interest-only loans.
Home loans to investors have outpaced growth in owner-occupied loans in recent months, and now account for a third of the A$1.5 trillion (US$1.15 trillion) home loan market, regulatory filings show.
That, coupled with subdued income growth, rising household debt and unemployment, has APRA warning openly about "heightened risk" to the financial system.