ANZ maintains strong lending standards

With interest rates at only 2.5%, many investors will be looking to take advantage of cheap credit to buy property. People who couldn’t qualify for loans when interest rates were higher could now potentially be approved for finance because lower buffers could be applied to stress-test loan applications.

However when interest rates eventually rise (and they will) those applicants may find themselves unable to service their repayments, which could ultimately lead to default. That’s when the banks will take control and sell off any secured assets. These are known as bad or doubtful debts and are extremely costly for banks to manage.

Despite a strong push for increased market share of mortgages and lending growth, ANZ (ASX: ANZ) boss Mike Smith says his bank has not relaxed lending rules. “We haven’t lowered our standards,” Mr Smith told ABC TV. “Over the last few years we’ve maintained credit standards very well… in fact our impaired assets were 20 per cent down year on year.”

ANZ has maintained strong stress test “buffers” to assess the ability of mortgagees to service its loans when rates rise. Currently ANZ adds on an extra 2.5% to interest rates when assessing mortgages.

Mr Smith went on to say that increased house prices, particularly around capital cities, was healthy and that after a long period of gradual stability, “it’s just edging up a little bit.” He played down fears of a housing bubble and said people would always say there’s an impending bubble or recession but, “most of the time everything is between.”

Despite a strong push to grow their share of the mortgage market here in Australia, ANZ, Commonwealth Bank (ASX: CBA), Westpac (ASX: WBC) and NAB (ASX: NAB) know that relaxing lending standards is a short-sighted goal that could have long-term repercussions.

Foolish takeaway

The GFC has forced banks to be more responsible with lending because growth is only good for earnings if it is sustainable. In the next 12 months low interest rates will slowly return confidence to businesses and consumers around Australia and will encourage them to borrow. However, despite the likelihood of further revenue growth, bank stocks remain expensive and investors should wait for a better entry point.

Don't want to wait for a great dividend?

You don't have to! Discover The Motley Fool's favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of "The Motley Fool's Top Dividend Stock for 2013-2014."

Motley Fool contributor Owen Raskiewicz does not have a financial interest in any of the mentioned companies.  

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.