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Mortgage lending: global credit crisis puts pressure on Australian banks

21st September 2007
By Petter Ingemarsson

The US sub-prime mortgage crisis has resulted in a global tightening of credit conditions, which continues to wreak havoc among Australian lenders. While the market turmoil is expected to cause further suffering in the short-term for lenders, it is anticipated that the credit crunch will ease as investor confidence returns, stabilizing the market.

The credit crisis continues to cause turbulence in the Australian mortgage market. In recent months, non-bank lenders have been forced to raise mortgage rates, while their share prices have plummeted. RAMS Home Loans was floated at A$2.50 at the end of July, but now trades at around A$0.80. Other non-bank lenders such as Bluestone Group have raised their rates by up to 30 basis points. Since non-bank lenders fund their loans mainly through securitization and short-term debt, they are more vulnerable to changing money market conditions than banks that have a deposit base.

However, the current market turmoil has started to involve banks as well. Recent rumors about funding problems at Adelaide Bank (ADB) sparked investor panic, sending its share price plunging by 7% in a day. The Reserve Bank was forced to categorically deny rumors that ADB had sought financial support. Investor jitters may have been aggravated by the troubles of British mortgage lender Northern Rock, which sources funds from the US money market, and the share price of which has halved recently.

ANZ has also been a focus of concern. The bank recently admitted that developments in the money market had raised funding costs and would erode revenues by at least A$15 million per month. The bank admitted that it was reviewing its fees and pricing. However, ANZ has denied reports that it is one of the Australian banks most vulnerable to money market conditions, instead claiming to have one of the more robust deposit bases.

It is expected that the credit crisis will continue to create Australian casualties in the short term, and that mortgage costs are bound to increase across the board. However, since fundamentals in the market are still strong, the credit crunch should ease as investor confidence returns, and the market will land softly.

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