APRA has written to Australia's larger domestic and foreign bank branches outlining its concerns that underwriting standards for commercial property lending are "under competitive pressure". The main theme of APRA's letter is that boards cannot avoid responsibility for any failure or watering down of underwriting standards.The letter, signed by Brandon Khoo, executive general manager of APRA's diversified institutions division, comes in the wake of a "thematic review" conducted last year to assess portfolio controls and underwriting standards at Australia's largest property lenders. Noting that commercial property has historically been a source of significant loss for banks, both in Australia and overseas, APRA has told boards they are expected to be "conscious of the settings for underwriting standards and portfolio controls, and in a position to challenge as appropriate". One area picked out by APRA was that board members satisfy themselves that expectations of growth in commercial property lending are achievable without compromising the quality of lending. "It is critical that ADIs maintain appropriate standards through the credit cycle, and are prepared to tighten those standards as circumstances dictate, [and] ... to exercise particular care to ensure that they are not unduly accepting greater risk as other lenders step back," APRA said. The regulator said its review showed inadequate data, poor monitoring and incomplete portfolio controls have "hampered" the ability of boards and senior management to fully understand and challenge their institution's lending risk profile. "This has been in part driven by an underinvestment in information systems, leading to inability to extract portfolio data," was APRA's conclusion. The regulator therefore expects to see improvements: "Ready availability of detailed and reliable transaction level data, appropriately aggregated, is a key component in obtaining a sound and complete understanding of the risk profile of the commercial property portfolio," APRA noted. These transaction characteristics include asset type, geographic location, construction contractor and developer concentrations and key underwriting metrics such as ICR, debt yield, loan-to-development costs, presales to debt cover and loan to value ratios. Other specific areas of concern set out in APRA's letter included poor understanding of refinancing risk and the failure to adjust minimum interest cover ratios, used for debt sizing investment loans, as interest rates have declined. "ADIs should similarly consider their policies in relation to loan to valuation ratios in light of recent strong asset price growth," APRA warned.