As LTVs rise, major banks may deem some customers too risky
Falling house prices could be a boon to non-bank lenders, according to Liberty Group. The lender said that as loan-to-value ratios rise, major banks will deem some customers too risky as they focus on the safest borrowers.
Liberty, which reported that its loan originations rose 36% to hit $5.6 billion in the year ended June 30, predicted that the big banks would compete fiercely for “mainstream customers with low LVRs, strong earnings and who are a great credit.” Liberty CEO James Boyle predicted “heightened competition – if that is possible – for that cohort” among the majors.
However, Liberty is forecasting a 65% change of property prices dropping another 10% in 2023 and a further 15% in 2024, according to a report by The Australian Financial Review. As prices fall, Liberty thinks big banks may become hesitant to refinance borrowers whose loan-to-value ratios rise above 80% or 90%. And as many of these borrowers roll off fixed rates, the non-bank sees an opportunity, AFR reported.
“We expect there will be more customers outside the mainstream than we have seen for some time as we move through this economic cycle change,” Boyle said. “Major banks won’t want to grow their book in a way that layers risk for them, and APRA won’t let them. We expect house prices will continue to reduce in line with interest rate increases, so it is quite possible they find themselves with customers they lent to with loan-to-value (LVR) ratios in the high 70s who are now in the 80s or 90s, and who they don’t view as long-term customers. There may be a lack of engagement with those customers repricing rates.”
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Boyle said Liberty expected “a small uptick in LVR” as prices came down – and that might go up further if there is less competition for customers with high LVRs and challenging financial circumstances. That could mean more business for Liberty, which Boyle said was “more active in that market against the banks.”
S&P Global Ratings also expected that tighter standards at big banks would benefit Liberty.
“We expect rising inflation and interest rates will result in tighter standards for banks,” the agency said Monday. “THis will allow Liberty to continue to grow in its niche business of catering to borrowers that banks typically do not service.”
While some analysts worry about rising funding costs, “we are of the view that Liberty will balance increasing funding costs with risk-adjusted product pricing,” S&P Global Ratings said.
