John Kehoe Australian Financial Review 04 April 2012
Higher funding costs and concerns about unemployment have caused banks to tighten their lending standards for the first time in two years.
- Consumer underwriting standards have been tightened for the first time since 2010.
- But banks are no longer tightening their underwriting standards for business.
- Business credit is now rising about 1.2 per cent annually.
A survey of chief financial and risk officers at the major and regional banks has revealed banks have adjusted their lending criteria, especially for personal loans and credit cards.
Less mortgage discounting, stricter collateral requirements and higher non-interest fees are the ways banks are repricing risk in consumer lending, according to the report by UBS.
“Consistent with anecdotal evidence the banks indicated that consumer underwriting standards have been tightened for the first time since 2010,” UBS analysts Jonathan Mott and Chris Williams said in the report.
“Underwriting standards have stopped being loosened in mortgages and have been tightened somewhat in cards and personal lending.”
While banks are becoming more cautious about the consumer market, which accounts for about 65 per cent of their lending, they are no longer tightening their underwriting standards for business.
Business credit contracted by more than $100 billion from its peak of $778 billion in 2008 and is now growing at about 1.2 per cent annually, UBS calculated.
Since reducing their exposure to more risky commercial property after the global financial crisis, lenders have stopped tightening their credit standards for the sector over the past six months.
“We believe that the banks remain ready and willing to lend to businesses,” UBS said.
“This is reflected in banks no longer tightening their underwriting standards.
“This suggests that soft demand for credit rather than strict lending standards is the driver of this credit weakness.”
In a bid to stimulate lending, bank executives indicated that they expect business underwriting standards to “ease somewhat” over the next six months. But they have become less optimistic about a pick-up in business lending. They believe demand for lending from both small and medium enterprises and large companies will contract, with particular weakness in retail and wholesale trade, manufacturing and other industrial sectors.
Bank loan officers said demand for credit for investment needs and working capital had fallen since the previous survey six months ago.
Mixed with continued subdued loan demand from households, bank loan officers forecast credit growth to be about 4 per cent over the next year, well below the double-digit growth recorded before 2009.
Total credit growth has been weak over the past two years, as consumers and businesses deleverage their balance sheets.
Underlining the headwinds confronting banks, are rising funding costs that will cut into loan profits.
Banks forecast their net interest margins will decline 0.05 of a percentage point over the next six months.
This suggests banks will be able to recoup most of the higher funding costs caused by competition for deposits and wholesale market pressures, by adjusting rates outside of the Reserve Bank of Australia cycle.
In a sign banks are less worried about a crash in property prices, executives indicated a severe downturn in the market was now less likely than they thought last year.
“General economic conditions and housing market prospects are less of a concern for the banks than they were in mid 2011, at a time when the European crisis was at its worst and house prices were falling sharply,” UBS said.
UBS warned that weakness in the non-resources sectors of the economy including retail, tourism and manufacturing, meant banks loan exposures would remain under stress.
Unemployment levels and property prices would be the key indicators that determine whether impairments rise.
Bank shares have risen an average of 24 per cent since their September lows, meaning they may no longer offer value given the headwinds banks are facing.
“Following the rally, banks are not cheap,” UBS said.
The Australian Financial Review