Moody’s endorses credit card lending reform

On 4 July, the Australian Securities and Investments Commission (ASIC) released a consultation paper, off the back of findings released in its review of credit card lending in Australia.

REP 580 Credit card lending in Australia looked at 21.4 million credit card accounts open between July 2012 and June 2017.

The regulator found that there were over 14 million open credit card accounts as at June 2017, with outstanding balances totalling almost $45 billion.

As a result, ASIC has proposed new measures that would help improve credit card lending standards, in line with responsible lending obligations outlined in the National Credit Act.

Under the proposal, which is open for consultation, ASIC proposes that:

• assessments would be based on the consumer’s ability to repay the credit limit within three years, and
• this period would apply to all classes of credit card contracts.

According to ASIC, the three-year period would “strike an appropriate balance between preventing consumers from being in unsuitable credit card contracts and ensuring that consumers continue to have reasonable access to credit through credit card contracts”.

The new reforms would apply to credit licensees providing credit or credit assistance in relation to both new and existing credit card contracts from 1 January 2019.

Moody’s Investor Service has noted that ASIC’s proposed reforms are a “credit positive” and would help reduce asset quality risk at Australian banks.

“We expect banks will review their credit card lending practices, with a particular focus on improving debt serviceability and reducing the number of borrowers with persistent loan balances on high interest rate products,” Moody’s associate analyst Si Chen said.

“These measures will benefit both banks and consumers by preventing a build-up of risky credit card debt at a time of record high levels of household leverage.”

Moody’s has said that it does not expect the regulator’s proposed measures to have a significant impact on the profitability of the big four banks due to their limited exposure to credit card lending, which it noted accounts for 1.7 per cent of their gross loans as of 30 May 2018.

However, Moody’s claimed that the credit card lending measures would place “incremental pressure” on the big four amid slowing credit growth, higher funding costs, competition from non-bank lenders and “political noise around reprising” against the backdrop of the financial services royal commission.

The ratings agency added that smaller lenders, with relatively larger exposures to credit card lending, would be most affected by the reforms, and made particular reference to Citigroup and HSBC Bank Australia’s exposure to such loans, which it noted make up 36.2 per cent and 4.8 per cent of their loan books, respectively.

[Related: ASIC seeks to bring in new lending criteria for credit cards]