Banks easing standards on competition

Cross-posted from Martin North’s Digital Finance Analytics Blog.

Within APRA’s voluminous quarterly ADI data is information of the flow of new loans written by value, separated into LVR bands. With the caveat of course that this does not include non-bank lending, which is rising; it paints an interesting picture of the state of play. As I have said previously, higher LVR loans may not always be a problem, but we also know of a wider range of higher LVR deals, 120% of LVR is still the record. So its interesting to dig into the data. The trends are clear.

The first chart shows the value of new loans written above 80% and 90% LVR, by lender type. As you would expect, the major banks, other banks and overseas subsidiaries have the largest footprint, with a small amount coming from credit unions and building societies. Overall, higher LVR lending is growing.

ResLoansLVR2

But if you look at the trend in terms of the proportion of over 90% LVR loans approved as a share of all loans approved, you can see clearly that the majors have increased their share of high LVR loans, in substitution for the smaller banks and the overseas subsidies recently.

ResLoansLVR1

Another way to look at this picture is variation from the average. Here I look at the trend proportion, against the average for all banks. Major banks were below trend, but that is changing now.

ResLoansDelta

Finally, here is a view of just the majors (important because they have such a large market share). It shows a significant rise in higher LVR lending in the past few months.

ResLoansMajBanks1

So, what to make of all this. Well, for me it illustrates the momentum in the market thanks to demand for higher LVR deals, being translated into the majors willing to lend at higher LVR in the right circumstances. Its also suggests that regional banks and overseas subsidiaries may have had a slight advantage for a period, but this is now being wiped away, thanks to recent changes by the majors. What we cannot tell is whether this reflects just a change in mix from the market, or a change in underwriting standards, or both. Which ever, we will watch the LVR mix closely, as higher LVR loans ultimately may be equated with higher portfolio risk if house prices were to experience a correction. Whilst that in the short term is unlikely, there could be escalated risks later.

My read on this is that the majors have relaxed their criteria in response to competitive pressure.

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Comments

  1. My take is that the big four have decided that they are too big to fail, and if there’s a problem they will get bailed out no matter what.

    So they have put some extra champagne on ice to cool (that’s called long-term planning) and have dived headlong into more and more risk.

  2. Thanks
    This is all kind of mind-blowing stuff. You have already deduced, seemingly correctly, that the FHBs are priced out. So is this investors with higher and higher leverage? Surely not? Any ideas?

    • innocent bystander

      just wondering…
      if investors with high LVRs (why not, get that neg gearing while you can) they probably have other equity to backstop the loan? Just wondering how this is reflected in the stats? Say I borrowed 90% on an investment property but had 75% equity in my PPOR, so the bank is comfortable… but is that reflected in those stats as a high LVR? or is my PPOR held as collateral reflected, giving a lower overall LVR?

      • Thanks IB That’s the question I was trying to ask butyou put it with some clarity! Anyone got an answer as it is fairly critical?

    • Yesterday there was mention that only 2.8% of new loans was for FHB in NSW.
      Investors are buying up about 40% of homes for sale.
      The rest must be upgraders or foreign students or recently arrived residents.
      Cashed up foreign students & recent residents don’t seem to need much debt.
      Upgraders are unlikely to dive into 90% LVR for debt.
      So it must be investors gambling with high LVR.
      Insane that APRA does nothing, either about high LVR or Interest-only loans for existing property.
      Rationale of banks: stamp out FHBs.

  3. A bit more on the APRA data:

    Theoretically of the total portfolio 43% of the loans o/s were issued with LVR’s over 80% in the current loan book. Weighted avg. LVR of the of this o/s works to 84%

  4. Is there anything to stop foreign lenders offering non-recourse mortgages in Australia?

    Maybe that is the next wave of qe to hit ?