Banks: The Squeeze Is On

Australia | Jul 01 2019

Margins continue to be squeezed, as banks compete to retain deposits and borrowers struggle to afford loans. Traditional banks are also being confronted by new digital entrants.

-Improving outlook for the housing market, although households still struggling
-Business credit holding up because of lending to larger institutions
-Changes have allowed new banking entrants to make better-informed decisions


By Eva Brocklehurst

Banks are facing a challenging operating environment as their retail margins are being squeezed, yet while housing loan growth is at record lows it appears to be stabilising. Morgan Stanley sees indications a rebound is on the way, although notes ongoing headwinds for mortgage growth. Annualised growth in the major banks' housing loans in the past three months was 1.5%.

Housing sentiment has improved since the federal election but as to whether this will translate into an increase in system growth, Morgan Stanley is looking for a sustained rebound in auction clearance rates, an increase in house prices on a month-on-month basis and an increase in auction volumes. Reductions in official interest rates should also support sentiment.

Credit Suisse believes it is too early for a post-election recovery in credit. The broker encapsulates a modest slowdown in housing credit growth into its figuring, while continuing to believe business lending will accelerate. JPMorgan considers the early signs of stabilisation in the housing market and removal of the interest rate floor point to a modest pick up in housing loan growth over the next 12-18 months.

Housing credit increased by 0.2% over May, according to Reserve Bank of Australia data. Business credit increased by 0.1% and personal credit decreased by -0.6%. Data from APRA (Australian Prudential Regulatory Authority) also showed stable conditions in the property market over the March quarter. Growth in commercial real estate was modestly stronger.

JPMorgan found the latest financial aggregates disappointing, particularly business credit. Major banks appear to be still ceding share to smaller banks and non-banks in housing, while gaining slightly in the business segment. Macquarie agrees system mortgage credit growth appears to be stabilising, at around 3%, and with an improved outlook for the housing market,the downside risk to credit growth has moderated.


Meanwhile, owner occupied housing credit grew slightly in May while it was another flat outcome for investor credit. The latter has borne the brunt of falling house prices and tighter lending criteria, with reduced access to refinancing. The factors that continue to weigh on loan growth include high household leverage, restrictions on lending and very high debt-to-income levels. There is also reduced borrowing capacity, given loan-to valuation-ratio constraints and lower house prices.

The Reserve Bank has highlighted that while housing arrears are high, they are still below the levels of the 1990s recession. Credit Suisse calculates the increase in arrears has been generated by nominal income growth for the past five years, around half the long-term average. This has not compensated for other factors that have caused households to struggle to make mortgage repayments.

Properties are also taking longer to sell, making it more difficult for borrowers to avert arrears by selling their property and repaying the loan. While tighter lending standards should lead to lower arrears, measures being taken may temporarily increase arrears as some borrowers face difficulties refinancing loans. Nevertheless, the RBA believes that, with strong lending standards, so long as unemployment remains low, arrears should not rise to levels that pose a risk to the financial system or cause harm to the housing sector.

Upon meeting mortgage brokers over the past month, Morgan Stanley notes client inquiry numbers are up, but not consistently, and maximum loan capacity is down substantially over recent years. Household expenses are limiting the capacity to borrow and checks on living expenses are expected to tighten. There is strong competition for new loans as well.

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