A top international investment strategist believes that Australian banks need to start rationing credit to avoid further inflating a housing bubble and "extend the boom".
Paul Schulte of Schulte Research International, a Hong Kong-based independent research house focused on banks and corporate credit in emerging markets, claimed leverage levels in Australian banks were “getting very high’’.
The comments come as new figures released by the Australian Prudential Regulation Authority show big banks were lending to riskier segments of borrowers at a faster rate than the market’s overall growth.
Mr Schulte, formerly Bank of New York Mellon’s head of investment strategy for Asia Pacific and a former Lehman Brothers executive, said rationing credit “would be a very wise move right now’’ for the banks.
“The leverage levels in the Australian banks are getting very high, whereas in the crisis they were low and Australia was looking great. Now they are some of the highest in the world and the loan-to-deposit ratio is very much on the high side,’’ he told The Australian on the sidelines of the ADC Forum’s recent Australian Leadership Retreat.
“If there is any sort of disruption in the world it is important for the Australian system to be able to slow down the pace of credit growth and ration it. That will spread out the property price appreciation, it will extend the boom.’’
Mr Schulte’s comments come after the Murray Inquiry interim report found that housing debt represented a “potential source of systemic risk for the financial system and the economy”.
According to quarterly APRA data, the domestic home loan market expanded to $1.23 trillion by the end of June, up 2.5 per cent from March and 8.6 per cent on a year ago. But loans held by investors — considered riskier because they are more vulnerable in a downturn — rose to $413.5 billion, up 3.3 per cent from March and 10.9 per cent ahead of the previous year.
In addition, ANZ, Westpac, Commonwealth Bank and NAB grew their interest-only mortgages 12.8 per cent from the previous year to $369bn and have approved an additional $7bn in the past three months.
The big four, which are deemed “systemically important” by APRA, also increased approvals at loan-to-value ratios above 80 per cent by $2.2bn in the past quarter.
CBA this month said signs of a bubble, such as rapid credit growth, were not evident and interest from investors was a “rational response” to low interest rates.
But Financial System Inquiry chairman David Murray has expressed concern about the banks’ rise in exposure to housing since the last inquiry 17 years ago.
He has flagged requiring the major banks to hold more capital to protect taxpayers from them being “too big to fail” and better safeguard the economy
Home loans make up two-thirds of bank loans in Australia and ratings agency Moody’s said recently that Australian lenders had sold $3bn worth of non-conforming or sub-prime home loans over the last 18 months.
“If you just slow down credit, either by doing it directly through interest rates or do what many central banks are doing in terms of putting curbs on the banks to how they can allocate credit. That has happened in Hong Kong, China, Korea and Singapore, but not Australia,’’ Mr Schulte said.
“That would be a very wise move right now. To extend the boom by rationing credit rather than allowing credit to exhaust itself too quickly.
“That is when you get into real problems — when credit is extended too quickly and it tends to go into unproductive purposes like real estate.’’
Last month, Industry Super Australia released research showing the banks were lending less for commercial endeavours, and more for the purchase or refinancing of existing housing, over the past two decades.
It showed the volume of commercial lending per dollar of housing-related lending has fallen from $3.84 to $1.62 over the last 25 years.
But Commonwealth Bank chief executive Ian Narev questioned this month why there was a disproportionate focus on housing debt in isolation from other vulnerabilities in the system.
Mr Schulte, who was also the global head of financial strategy and Asia banks research at China Construction Bank, is known for his controversial calls on Australian banks.
Last year he said Australia should have much higher interest rates, a claim critics said ignored the stable nature of the banking system.