Australian bank regulator warns Aussie parents of the big NZ banks over home loan lending standards

Australia's banking regulator has warned the Aussie parents of New Zealand's major banks about mortgage lending standards at a time when record low credit growth is leading to increasingly risky home loan practices, The Australian Financial Review reports.

The AFR says the Australian Prudential Regulation Authority (APRA) has written to bank chairmen reiterating the need for appropriate pricing, adequate loan-to-valuation ratios, loan serviceability and other risk criteria.

"In effect, APRA is asking boards are they satisfied with the credit standards in their bank," a bank source told the AFR. "It has certainly got a few risk officers going with board reviews."

The AFR said APRA would neither confirm nor deny the letter but it understood recipients included banks, building societies and credit unions. Australia's big four banks - Commonwealth Bank of Australia, National Australia Bank, ANZ and Westpac - own New Zealand's ASB, BNZ, ANZ, National Bank and Westpac.

APRA's warning comes at a time when official figures show Australian housing credit grew at just 0.32% in June, its weakest level since statistics began in 1977. Housing arrears in the Australian banking industry, loans more than 90 days overdue, reached 0.70% recently, which is up from just 0.20% in 2002.

APRA's letter follows a warning from the New Zealand Institute of Economic Research in June that the biggest risk to the New Zealand economy was if a faltering Australian housing market caused economic growth to slow in Australia.

Here Reserve Bank Governor Alan Bollard said in June that the central bank was keeping in close contact with the banks over their lending policies, with some banks again offering 95% home loans as they sought to reignite lending growth while households were cautious about taking on more debt.

“Net growth in lending into the household sector is very, very low. So we don’t have broad concerns from a financial stability point of view, or from the point of view of households overloading their own balance sheets with debt," Bollard said then.

He said the Reserve Bank would not be slow in telling the banks about its concerns if it thought households had resumed overloading their balance sheets with debt. The latest Reserve Bank sector credit data shows housing debt rose NZ$181 million from May to June to NZ$172.367 billion. Year-on-year, the June figure is up NZ$2.1 billion, or 0.7%, from NZ$170.254 billion in June 2010. The year-on-year growth was above 15% from October 2003 until May 2006.

Asked whether the central bank had anything to add, in the wake of APRA's letter and following on from Bollard's June comments, a Reserve Bank spokesman told interest.co.nz that New Zealand bank housing lending policies weren't currently raising issues of concern.

'Pig in python'

A recent research report from Sydney-based banking analysts at UBS entitled Mortgage arrears - 2009 pig in the python noted a spike in mortgage arrears (90 days delinquent) to 60 basis points was the highest level in 15 years, at more than twice the 27 basis point median during the period. UBS's analysts also said personal loans 90 days past due were also their highest since 1996 (134bp versus median of 95bp), and Australian SME impaired assets were also high at 239bp against a 95bp median.

UBS said that given the fiscal and monetary policy stimulus during the global financial crisis, 2009 was a boom year for the big Aussie banks in terms of mortgage originations.

"We estimate that 2009 vintage currently accounts for almost a quarter of the major banks' mortgage books. At this large 2009 vintage pool 'seasons' we estimate total mortgage arrears may rise further towards 85bp, even if 2009 vintage turns out to be no worse than 2008 vintage (it is likely to be worse in our view)," the UBS analysts said. "If the RBA continues to hike rates we estimate that total mortgage arrears of 100bp (or A$13 billion across the industry) are possible by 2012."

The Reserve Bank of Australia will reveal its latest cash rate decision this afternoon and is expected to leave official interest rates unchanged at 4.75%.

The AFR reported that APRA's view was that it was a different world now to 2007 and a new normal in home loan lending was therefore expected.  Some of the "old normal" practices APRA has flagged include loan-to-value ratios rising to 95% meaning borrowers have to stump up only a 5% deposit, and a rise in the cut in point when borrowers are asked to pay for mortgage insurance, making it possible for riskier borrowers to get a loan, the newspaper said.

(Updated with comment from a Reserve Bank spokesman).