The move by the major banks to clamp down on investor lending is a good step, according to a leading ratings agency, however lenders will also need to implement additional changes to fully address the risks in the housing market.
According to Moody’s, the absence of any mitigating actions would have increased the proportion of investment and interest-only loans, which would lead to a weakening of the bank portfolios’ quality.
“In our view, these initiatives are credit positive since they reduce the banks' exposure to a higher-risk loan segment,” Ilya Serov, a vice president of Moody’s said.
However, the growing imbalances in the Australian housing market pose a longer-term challenge to the Australian banks' credit profiles, over and above the immediate concerns around investment lending, according to the ratings agency.
The Australian housing market is characterized by elevated and rising house prices, declining mortgage affordability, and record levels of household indebtedness. In this context, Moody’s says addressing the tail risks embedded in banks' housing portfolios is likely to entail further tightening in the banks' lending criteria and/or increases to their capital levels.
“Accordingly, we expect the banks to further curtail their exposure to high [LVR] loans and investment lending over the coming months. Moreover, we expect that over the next 18 months, the banks will gradually improve the quantity and quality of their capital – likely through a combination of upward revisions to mortgage risk weights and capital increases,” Serov said.
But expectations of more conservative loan originations and increasing capital will support Moody’s stable outlook for the future of Australia's four major banks.
“We expect the changes made by the banks will slow investment lending growth closer to regulatory benchmarks,” Serov said.
“These considerations, in conjunction with the banks’ actions to improve their underwriting standards, support our stable outlook on the major banks’ credit ratings.”