Banks' home loan fears

BANKS could pull back from lending to new homeowners after making losses on mortgages written over the past four months, according to the latest banking research.

Because the Reserve Bank is considering whether to cut rates today, a report by UBS Securities said higher wholesale funding costs and fierce competition from new home loans require banks had left Australia facing a'' dangerous situation'', with little incentive to to offer new mortgages.

This followed a warning about the rating systems of Moody's agency that the Australian banking system was'' most vulnerable'' to the financial and economic shocks in the euro zone crisis.
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Economists widely tip of the RBA to cut rates by a quarter percentage point today after retail sales figures yesterday showed the trade grew the slowest pace in 50 years in December, despite interest rate cuts in november and december.

Jonathan Mott, a banking analyst at UBS and author of the report, said banks are left with a difficult choice when the RBA was reduced fare today: they could pass on the full RBA cut in the hope of wholesale funding markets, they can review the interest rates on new mortgages above the official cash rate, or they could stop writing new mortgages.

'' We estimate at this time the banks lose money on new mortgages written in the current funding environment,'' the report said. '' Unless the banks reprice mortgages or financing markets to improve significantly, there is no direct economic incentive for banks to continue to write new housing loans ... We see this as a dangerous situation for both the banks and the broader Australian economy.''

The report stated that as long as the wholesale funding markets remain in disarray, in the case of an RBA rate cut banks tend to their mortgage rates, falling prices repricing by 10-15 basis points - less than 25 basis points cut predicted.

Whether to remain bound to the RBA cash rate cycle has become an issue in recent months, with ANZ announcing the plans in December to its interest rate decisions independently of the RBA, on the second Friday of each month.

This means that ANZ customers and competitors will have a sharp eye to see what it does next Friday.

Meanwhile, the ratings agency Moody's has warned that the banking industry in Australia, New Zealand, Korea and Vietnam are the most vulnerable to contamination from a crisis in the euro area.

Citing five main risk factors'''' - the dependence on external financing, the amount of credit coming from European banks, export confidence, effective banking system, and a government is able to provide support - Moody's warned that, but this was not the'' central scenario'' for the 2012 outlook, a sharp deterioration in the eurozone banking crisis may hit Australia hardest.


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