- UBS says tightening of mortgage underwriting standards is a key risk to the banks.
- And the financial services royal commission interim report means further tightening of underwriting standards if the banks are to fully comply with Responsible Lending laws.
- Commissioner Kenneth Hayne was clearly unsatisfied with the banks’ compliance with Responsible Lending laws, UBS says.
A home loan is about to become even harder to get as the banks face an increased risk of a credit crunch and several years of pressure on earnings.
The interim report of the financial services royal commission points to further tightening of underwriting standards if the banks are to fully comply with Responsible Lending laws, says UBS.
The banking industry itself called the release of the report, which showed the banks were driven by greed, a day of shame for banking. Treasurer Josh Frydenberg called it a “scathing assessment” of the culture, conduct and compliance of our financial system.
“We remain very cautious on the banks,” says UBS.
“The risk of the current credit squeeze turning into a credit crunch is real and is rising, in our view.”
UBS, in a note to clients, says tightening of mortgage underwriting standards is a key risk to the banks, the housing market and the broader economy.
“We believe that the current credit squeeze is likely to worsen as the banks move to comply with a more rigorous definition of Responsible Lending,” writes UBS analysts Jonathan Mott, Rachel Finn and Karyn Cao.
UBS says the commissioner focused on responsible lending given that a review by prudential regulator APRA found that in as many as three out of every four home loans the banks assumed that the borrower’s household spending was equal to the relevant HEM (Household Expenditure Measure).
“Although there are no formal recommendations (these will come with the Final Report in February 2019) it is clear that the RC believes that the banks have been over-earning, focusing on profits before people and not meeting community expectations,” says UBS.
UBS believes the implications of the royal commission are likely to be:
- Credit for consumer lending is likely to be tightened further.
- Further substantial provisions for fee-for-no-service and inadequate advice.
- Higher costs likely for several years as the banks invest in cultural change, compliance, systems, processes and possible litigation provisions.
- Staff pay across is likely to need to move away from sales and profit measures.
“Given the comments by the Treasurer and calls by the Labor Party to further extend the RC, hopes that the final recommendations may be watered down or not adopted by the current or future governments appears highly optimistic,” says UBS.
“We believe the Australian banking sector is facing a period of substantial and sustained earnings pressure which is likely to last several years.”
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