ASX bank investors facing a new $19 billion headache

Those hoping for signs that things are starting to look up for beaten down bank stocks have a new wall of worry to climb – a $19 billion wall to be exact.

Data from the Australian Prudential Regulation Authority showed that the value of new loans issued that failed to meet tough new lending guidelines surged to $19 billion, an increase of 85%, for the year to June, reported the Australian Financial Review.

What’s more, major Aussie banks are responsible for most of the breaches and these institutions include Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd. (ASX: NAB).

Approval of loans that do not meet the serviceability criteria from these banks increased by 6% while the number of such loan approvals by building societies and credit unions have halved.

The serviceability requirement measures a borrower’s capacity to repay the loan and has been a hot-button issue at the Banking Royal Commission, which found that banks had been too lax with screening loan applicants.

What’s particularly alarming about the latest APRA data is that some banks, such as Westpac, have claimed that they have tightened lending requirements over the past year when faced with criticism on this issue.

The data contradicts this defence and won’t help the share prices of the big banks, which are lagging the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index by a wide margin.

Some investors have been wondering if this is the time to be buying these “discounted” shares ahead of the bank reporting season, which kicks off next week.

To be fair, banks can exercise discretion in approving loans based on exceptional circumstances and for complex financial products, although I am not sure if this argument can be used to justify all of the increase in non-compliant lending.

But given that there are still skeletons popping out of the bank closet, it’s clearly too early to turn bullish on the banks with the analogy of catching a falling knife coming to mind.

The bigger question for investors is whether the news will contribute to a potential credit crunch for the wider economy as banks face increasing pressure to tighten lending standards. That means less available credit to borrowers, which in turn will exacerbate falling property prices.

We are already seeing the effects of this with dire warnings from some experts, including AMP Limited (ASX: AMP) to brace for a 20% peak-to-trough fall in home prices for our two biggest property markets – Sydney and Melbourne.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, National Australia Bank Limited, and Westpac Banking. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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