The big four have been warned that more reform is needed if they want to address the risks in their mortgage portfolios.
Moody’s Investors Service said in a new memo that recent moves by all four major banks to tighten their investor lending criteria were “credit-positive”.
However, the credit ratings agency said more changes are needed to fully address the risks in the housing market.
Growing housing imbalances pose a longer-term challenge to the big four’s credit profiles, over and above the immediate concerns around investment lending, according to Moody’s.
“The Australian housing market is characterised by elevated and rising house prices, declining mortgage affordability and record levels of household indebtedness,” it said.
“In this context, addressing the tail risks embedded in banks' housing portfolios is likely to entail further tightening in the banks' lending criteria and/or increases to their capital levels.”
Moody’s also warned that the big four banks need to remain vigilant about their “large and growing” investment portfolios.
“This is particularly the case for Westpac, whose investment lending portfolio accounts for over 46 per cent of its total housing book and has been growing at just over 10 per cent over the 12 months to March 2015,” it said.
“This also applies somewhat to NAB, whose portfolio has been growing faster at over 13 per cent, albeit from a lower starting base.”
Moody’s said that the increasing proportion of investment and interest-only loans would lead to a weakening of the bank portfolios’ quality.
Part of the explanation Moody’s gave is that the investment sector is partly being fuelled by speculation and that investment loans typically have higher LVRs than other types of loans.
Another concern is that investors build equity more slowly than other types of borrowers because they usually repay their loans more slowly.
Moody’s also noted that investment loans are more likely to be interest-only, and are therefore more sensitive to movements in interest rates than owner-occupied or principal-and-interest loans.
Vice-president Ilya Serov said the big four banks would probably further curtail their exposure to high-LVR loans and investment lending over the coming months.
“Moreover, we expect that over the next 18 months the banks will gradually improve the quantity and quality of their capital – likely through a combination of upward revisions to mortgage risk weights and capital increases,” he said.
“These considerations, in conjunction with the banks' actions to improve their underwriting standards, support our stable outlook on the major banks' credit ratings.”