Why Banks are suddenly tightening lending policies

Why Banks are suddenly tightening lending policies

Why Banks are suddenly tightening lending policies
On the 8th of Oct 2014, we published an article titled “Are Property Developer’s Prepared” foreshadowing the macro prudential credit squeeze that’s now occuring in the Australian Property and Construction Finance Market and the likely resulting consequence’s.
The overheated Sydney and Melbourne property markets has been blamed as the primary causal factor. However, the trigger point was the volatility created by the recent Chinese Stock Market Crash, Greece’s game of russian roulette with the its creditors and the Eurozone, and the sudden collapse of commodity prices especially Iron Ore.
Up until the recent, well publicised deterioration of the global marcoeconomic fundamentals and the speculated potential for a deeper downside risk to be felt in the future, APRA (Australian Prudential Regulation Authority) did not act to bring the Banks back in off the leash in terms of lending.
Prior to this point APRA’s attempts to slow the speed of residentially secured credit growth to maximum of 10% per annum was hopelessly inadequate and not taken seriously.
All of the major Australian Banks were allowed to drift out well beyond the macro prudential regulators risk adjusted benchmark for capital adequacy ratio “CA” of 10%.  DFP foreshowed the actions currently being taken by the major Banks to repair their balance sheets to become “unquestionably strong” again.

The following is a summary of some of the actions that have been either voluntarily or involuntarily taken by the major Banks in an effort to reach the “unquestionably” strong benchmark of CA of 10%. Over the last three weeks the following actions been have taken by the Banks:

  1. December 14 – In effort to slow housing price growth in a historically low interest rate environment APRA announced a tightening in home lending standards particularly for property investors;
  2. May 15 – In response a perceived worsening in housing affordability and the ever accelerating growth in housing investor credit APRA announced further tightening to more conservatively test serviceability and reduce Loan to Value ratios;
  3. 7th of May 15 – NAB tapped shareholders on the shoulder for $5.5 Billion as part of a record rights issue;
  4. 13th of July 15 – After sustained pressure from APRA and market analysts have pressured the Banks to reduce their LVR’s down from 95% to 100% LVR’s to between 80% to 90% thereby at least doubling the equity requirement on escalated purchase prices. Westpac (Australia’s biggest lender to Landlords) announced to the market they now require a minimum deposit of 20% on all new investment property loans. From a pricing perspective the Banks have removed all discounted pricing to attract new property investors to the market.
  5. 14th of August 15 – CBA announces a $5 Billion Capital raise
  6. 16th of August 2015 Westpac is the first to lead the market with an announcement to Brokers requiring new interest only borrowers to be tested against their ability to make principle and interest payments.
  7. Today – As per usual all of the other major Banks have subsequently followed another Bank’s lead and reduced their loan to value to 80%

Credit Suisse analyst Jarrod Martin was recently quoted in the AFR as saying “the big banks were more than half way through the task of raising $28 billion, an amount he estimates they will need to satisfy the banking regulator’s recent rules on mortgage “risk weights,” and lift their ratio of capital to assets towards 10 per cent.
“They’ve raised $15 billion, so they have $13 billion to go,” Mr Martin said.
Capital call
On the 29th of July 15 DFP published an article summarising the key points of a presentations given by the Directors in early to mid June 15, the article was titled “What is causing the current credit squeeze in construction and development finance and what you can do about it”.
The article attracted the attention of the Property Council of Australia who published an interview with Matthew Royal DFP Director on the 28th July 2015, the article was titled “What’s causing the credit squeeze in construction”. Over the last week dozens of articles have been written some quoting DFP’s earlier articles and interviews about the of APRA’s credit tightening and the effect that this will have and is having directly on the construction finance and development industry.
If you are property developer or commercial property investor and you haven’t already done so I would encourage you to read the above mentioned articles especially our article “What is causing the current credit squeeze in construction and development finance and what you can do about it”. The article contains a valuable financial health checklist and practical financial strategies and measures you can take now to best position yourself for the current credit squeeze now in its early phase.

The two best ways you can stay up to date with the expert knowledge DFP shares with the construction finance market is to subscribe for free to our regular updates and connect with us via our LinkedIn company page https://www.linkedin.com/company/development-finance-partners.
Given the current state of volatility in the construction finance market we will be publishing even more regular updates, innovative credit strategies, case studies and interviews over the coming weeks and months….stay tuned and be prepared as the market is shifting quickly.
If you are concerned about how the current credit squeeze may affect your specific circumstances you should contact DFP as soon as possible. We will quickly be able to assess your situation and professionally advise you with a set of strategic recommendations.
If you are concerned we recommend you take action on this sooner rather than later.

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