Banks' could pull back on home loans

By Gareth Hutchens

Framework shaky: Banks are making losses from new home mortgages, according to a report. Photo: Erin Jonasson

BANKS could become more cautious on lending to new home owners after making losses on mortgages written over the past four months, according to the latest banking industry research.
As the Reserve Bank considers whether to cut rates today, a report from UBS Securities said higher wholesale funding costs and intense competition to write new home loans had left Australia's banks facing a ''dangerous situation'', with little incentive to offer new mortgages.
This followed a warning from Moody's rating agency that Australia's banking system was ''most vulnerable'' to financial and economic shocks from the euro-area crisis.

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Economists widely tip the RBA to cut rates by a quarter percentage point today after retail sales figures yesterday showed trade grew at its slowest pace in 50 years in December, despite interest rate cuts in November and December.
Jonathan Mott, a banking analyst from UBS and author of the report, said banks would be left with a difficult choice if the RBA did cut rates today: they could pass on the full RBA cut in the hope of wholesale funding markets improving; they could reprice the interest rate on new mortgages above the official cash rate; or they could stop writing new mortgages.
''We estimate the banks are currently losing money on new mortgages written in the current funding environment,'' the report said. ''Unless the banks reprice mortgages or funding markets improve significantly, there is no direct economic incentive for the banks to continue to write new housing loans … We see this as a dangerous situation for both the banks and the broader Australian economy.''
The report suggested that as long as wholesale funding markets remained in disarray, in the event of an RBA rate cut banks were likely to reprice their mortgage books, decreasing rates by 10-15 basis points - less than the predicted 25 basis point cut.
Whether to remain tied to the RBA's cash rate cycle has become an issue in recent months, with ANZ announcing plans in December to make its interest rate decisions independently of the RBA, on the second Friday of each month.
That means ANZ's customers and competitors will be keenly watching to see what it does this Friday.
Meanwhile, the ratings agency Moody's has warned that banking systems in Australia, New Zealand, Korea and Vietnam are most vulnerable to contagion from a crisis in the euro area.
Citing five ''key risk'' factors - dependency on external funding, the amount of credit sourced from European banks, export reliance, banking system strength, and a government's capacity to provide support - Moody's warned that, though this was not the ''central scenario'' for its 2012 outlook, a sharp deterioration in the euro-area crisis could hit Australia's banking system hardest.