The Australian Prudential Regulatory Authority (APRA), Australia's banking regulator, could be looking to have banks tighten their lending standards again.
Following on from recently imposed limits on interest-only lending, which will limit all banks' interest-only loans to a maximum of 30%, APRA has begun focusing on the serviceability of loans.
Fairfax media reported a recent speech where APRA stated it would like to see companies like Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) focus on a 'blind spot' in their lending, where they may not necessarily have complete information around a customer's other financial liabilities.
APRA also worries that banks may not be accurately estimating borrower living expenses, and may be lending to customers with low net income surpluses (money left over after paying the loan + expenses) as a result.
APRA has shown itself one of the only regulators in Australia willing to put the brakes on the home loan industry so far, an area which many have feared is contributing to a bubble in Australian house prices. The concern for bank shareholders is that APRA may act again to restrict bank lending, which could reduce the overall amount of business the banks do.
When a bank is competing for customers, an easy way to grow loans and profits (at least for a little while) is to lend to riskier borrowers, which APRA is uncomfortable with, given current low interest rates and the number of interest-only loans.
Any limits placed on lending would likely be an additional headwind for a banking industry that is already running out of steam.
Bank investors could soon be looking at profits in decline, which is something we haven't seen for a very long time. If anything, stricter conditions make the banks a safer investment – but it is something to be aware of if you have a large shareholding in the banks.
