Some banks may be letting big profits go to their heads by dropping lending standards, according to the Reserve Bank of Australia.
The Reserve Bank’s most recent Financial Stability Review, released last week, initially praised lenders for maintaining consistent standards since late 2011.
High LVR loans have remained at about 13 per cent, while low-doc loans have remained at less than one per cent.
The ratio of non-performing loans has also dropped from 1.9 per cent in mid-2010 to 1.2 per cent in December 2013.
However, the Reserve Bank also warned that some banks were expanding their new housing lending into borrower, loan and geographic segments that harbour greater risk.
“There are also indications that some lenders are using less conservative serviceability assessments when determining the amount they will lend to selected borrowers,” the review said.
“In addition to the general risks associated with rapid loan growth, banks should be mindful that faster-growing loan segments may pose higher risks than average, especially if they are increasing their lending to marginal borrowers or building up concentrated exposures to borrowers posing correlated risks.”
The banks remain highly profitable, with aggregate bank profit in the latest half-yearly results increasing by 23 per cent on the previous year, according to the Reserve Bank.
“The major banks’ profitability was supported by a decline in their bad and doubtful debt charges,” it said.
“In addition, operating expenses declined slightly over the year to the latest half, compared with average annual growth of seven per cent over the previous decade, as the major banks undertook a range of cost-cutting initiatives.”