Commonwealth Bank Imposes Stricter Borrowing Requirements

According to The Australian, the Commonwealth Bank implemented stricter rules on its borrowing requirements. The tightening applies to the bank’s more than $400 million home loan book. Because of this, the bank will no longer acknowledge negative gearing benefits for Bankwest issued mortgages. CBA purchased Bankwest during the global financial crisis. The latter confirmed that its “serviceability calculators” have been upgraded. The update would remove gearing tax benefits and it is already in effect. Bankwest also stressed the importance of adhering to “regulatory guidance” amid the continued crackdown of the banking regulator on banks to determine if they are following the 10% growth limit on property investor loans.

A Bankwest spokesperson said the related tax benefit will not be included in Bankswest’s calculation of the loan’s serviceability will no longer be included for those whose investment properties are operating at a loss and if the income of their investment properties are lower the costs. The spokesperson added that this applies to all new applications involving an investment lending facility and any existing deals that need a new serviceability calculation after February 10.

The CBA’s recent imposition of stricter lending standards triggered the move, which will also affect existing borrowers. The main reason behind all of this the banking regulator’s demand that banks must not exceed the 10% annual growth cap or risk having to face higher capital requirements. In addition to that, CBA also revealed that it cut off lending to a few new property investors due to “regulatory commitments.” Based on the data provided by APRA for the month of December, CBA’s investor lending rate was well beyond the cap at 10.3%. Wayne Byres, the Chairman of the Australian Prudential Regulation Authority, reminded banks that they would face higher capital requirements if they go beyond the cap. This comment came after the Reserve Bank warned that there would be higher risks of settlement failures because of the increase in inner-city apartment developments over the past years, particularly in Melbourne and Brisbane.

Other financial institutions have boosted their investor lending over the past few months as demand grew. According to the RBA, this pickup could be due to buyers who are sealing their purchases of off-the-plan apartments. Byres warned once more that the benchmarks that they have set including the 10% restriction for annual investor lending growth rate still stands. Lenders that prefer to operate and surpass this cap are “under no illusions” would be a possible consequence and that may mean higher capital requirements. Byres added that it may be good for the system in its entirety if this trend is encouraging banks to bring their competitive instincts to another place.

Bankwest is owned by Commonwealth Bank and that makes it the most exposed lender in Western Australia. This is one thing that concerned many analysts especially with the notable slowdown in the activities within the mining sector. Meanwhile, CLSA analyst Brian Johnson noted that the end of the construction phase has led to higher unemployment rate and lower house prices.