Banks Turn To Life After Home Loans

One thing made abundantly clear when Westpac announced its 10 per cent improvement in underlying full-year profit yesterday was that the major banks have cushioned themselves from the dangerous rise in the level of consumer debt in Australia.

While Australians have become addicted to debt, the major lenders have become addicted to increased lending to fuel their need for corporate growth.

The whole emphasis on costs which has been the trademark of the banking system for five years has taken a back seat to the revenue growth they have experienced as the Australian property sector and lending for housing have boomed.

The industry knows that the massive growth in home lending can't last. Firstly, demand has been saturated, particularly in the inner city apartment market, and secondly, because a rise in interest rates will dampen affordability and demand.

Consumer loan growth at Westpac grew 19 per cent over the year to September 2003 and in housing this figure was 20 per cent.

There are twin issues for the major banks.

The first is that they must find a new growth lever for when the home lending market inevitably slows.

They must also manage the fallout from distressed and delinquent lenders.

In the case of Westpac, it grew volumes in home loans by 10 per cent to owner occupiers and 22 per cent to investment properties in 2003.

Also, there was a huge 82 per cent surge in loans using homes as security to fund renovations.

The reason that the banks seem so relaxed about this ballooning consumer debt is that the risk is very finely pitched.

All the banks still play in the riskier end of the home loan market, but they lay off that risk through mortgage insurers like GE.

In Westpac's case, you can get a loan for 88 per cent of the value of the home as long as the mortgage is insured.

The best part is that the bank doesn't even have to pay for the insurance the borrowers do this upfront when they take out the loan.

In terms of new loans, you can get a loan of up to 63 per cent (on average) of the value of the house.

There is still plenty of scope for borrowers to default on interest payments but the housing market would have to experience an enormous drop for the bank to lose any of its principal.

Westpac has an average of 17 per cent of its mortgages insured but in terms of new loans, this has moved to 20 per cent.

The Australian Prudential Regulation Authority has stress-tested the major lenders to measure the effects of a whole series of changes that would negatively affect the mortgage market.

The individual banks have done the same sort of calculations.

Westpac chief executive David Morgan is working on the theory that the housing market could fall up to 20 per cent but that the landing should still be fairly soft. He is also looking at interest rates moving up 100 basis points over the next year.

The bank has stress tested its worst-case scenario of a rise in interest rates to 10.6 per cent, a 25.5 per cent fall in house prices, and an 8.1 per cent unemployment rate.