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Loans to foreigners with foreign-sourced income comprised about 3 per cent of loans.Westpac has pulled back from lending to foreign property investors because new regulations will crimp returns and not because regulators are concerned about the risks associated with these borrowers.

Loans to foreigners with foreign-sourced income comprised about 3 per cent of loans. Photo: Paul Jeffers

"We are conscious of customers that were some way down the path of borrowing or commercial property developments where they are concerned that it might undermine the demand for that property, " he said.

Loans to foreigners with foreign-sourced income comprised about 3 per cent of loans, and had performed better than the broader portfolio of loans, Mr Coffey said.

However, pending regulations that would force banks to hold more capital against these loans meant it would become less attractive to lend to foreign borrowers.

"In the future, the capital weighting for foreign-sourced loans is going to go up materially under Basel IV and unless there is a significant repricing of these loans, the returns won't be anywhere near where they are today, " he said.

"That customer is only ever going to be a mortgage. And as you look at building out a service-based business you want a deeper relationship."

The bank was also mindful of being the last remaining bank to write loans to foreign borrowers.

Phil Coffey says new capital regulations are behind Westpac's change in lending rules. Photo: Ryan Stuart

"Two of the other banks had retreated from that market so you don't want to be the last bank who is actually getting a disproportionate share of this [business], " he said.

Phil Coffey says new capital regulations are behind Westpac's change in lending rules.Mr Coffey also explained that Westpac could not include these mortgages in residential mortgage-backed bonds, which can either be used to access funding from the Reserve Bank of Australia or sold to other investors as part of its funding.

The differential between rates charged to commercial property developers compared to investors had also become "material" given increased concerns.

"What the market is saying [is that it is] comfortable lending for commercial property investment but they are much more wary lending to development."

Mr Coffey said the bank, which prides itself on its conservative lending policies, was assessing property loans on the micro levels.

"In aggregate, you can get comfortable by looking at population growth versus commencements and come to the conclusion that while there has been some catch up ... there is still a very strong undersupply of residential accommodation compared to population growth that we have had over the last five years.

"The danger of that is it might work in aggregate but it doesn't work in individual cities, suburbs and buildings, " he said.

"We will look right into the micro. There are buildings where we will not lend to because we are not comfortable with the characteristics of the building itself."

Meanwhile, margins on loans written by the institutional bank are being adversely impacted by global banks "that have access to incredibly cheap funding" as a result of central bank policies that have pushed interest rates to zero or below.

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