The Reserve Bank says more risky home loans could end up on the books of less regulated non-bank lenders, as some of these challengers to the banks try to overcome a tough environment by targeting higher-risk customers.
In last Friday’s Financial Stability Review, the RBA said Australia’s banks were well positioned to deal with the risk of rising bad debts, as non-performing loans remained near decade lows and the banks were well provisioned.
But it said non-bank lenders – challenger lenders that raise money from wholesale markets, rather than through deposits – could end up holding more of the risk in the financial system.
While the RBA said the wider “systemic risks” from non-bank lenders remained low, the fast-growing industry has been attracting significant attention from regulators.
Non-bank mortgage lenders include listed players such as Liberty Financial Group, Pepper Money, and Resimac. The sector has grown rapidly since 2015 though it is less than 5 per cent of the overall home loan market.
But as interest rates took off last year, non-banks have faced a sharp increase in wholesale funding costs, making it harder to compete with traditional banks, which mainly use cheaper deposit funding.
The RBA on Friday said loan quality in the industry may come under pressure, as some non-banks responded to the challenges they faced by targeting higher-risk borrowers. It did not name which non-banks had cut loan standards.
“In an effort to rebuild margins and lending volumes, liaison discussions indicate that some non-bank lenders are relaxing serviceability requirements and targeting higher risk borrower segments, such as those with less documentation about their finances,” the RBA said.
“At the same time, some non-banks have found it difficult to retain credit-worthy borrowers who have sought to refinance their loans on highly competitive terms with banks.”
“A weakening in lending standards and overall loan quality could lead to more risk concentrating in a part of the financial system where regulators have less oversight,” the central bank said.
Globally, regulators have been keeping a close eye on the potential for risks to build up in the non-bank sector, which is not subject to the strict regulation imposed on traditional banks.
The RBA said the fact some non-banks had loosened lending standards and were chasing higher-risk customers warranted “careful monitoring.” But it also said non-bank lenders were “unlikely to pose systemic risks” because non-banks were still relatively small in Australia.
The RBA also on Friday published its latest analysis on the so-called fixed-rate cliff, which refers to a bulge of fixed-rate loans that were written at ultra-low interest rates during the COVID-19 pandemic. It said about half the borrowers who took out a cheap fixed-rate loan had already made the transition to higher rates, and most remaining fixed-rate borrowers appeared well positioned to also handle the change.
“Fixed-rate loans yet to roll off do not appear materially riskier than those that have rolled off already,” the RBA said.
Bank of Queensland will this week report its full-year profits, after flagging last month that its bottom line would take a $79 million hit from restructuring costs and integration costs relating to its acquisition of ME Bank.
Commonwealth Bank chair Paul O’Malley and chief executive Matt Comyn will face shareholders when the banking giant holds its annual meeting in Sydney on Wednesday.
