Westpac's Warning Signals Trouble for Australian Banks

Australia's stock market took a hit after Westpac, one of the country's biggest banks, dropped by more than 5% following a cautious update. This had a ripple effect on other lenders, with Commonwealth Bank of Australia, ANZ, and National Australia Bank also falling.

The issue lies in mortgage demand, which has cooled significantly: applications have dropped by 20%. Westpac expects investor housing credit growth to halve next year, posing a problem for bank profits. With fewer people borrowing, banks are forced to compete more aggressively for customers, cutting rates and offering perks that can squeeze their net interest margin.

The Reserve Bank of Australia's rate decision on Tuesday will still be closely watched, but it may not have the same impact as usual. Policymakers' tone will give a clearer indication of whether they are comfortable keeping rates restrictive for longer, which could mean continued softness in housing credit and bank earnings.