Slowing Credit Demand And Australian Bank Market Shares

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By Greg Peel

Yesterday's private sector credit data for April released by the Australian Prudential Regulation Authority showed “system” credit growth, being an aggregation of business, consumer (including housing) and institutional sector demand, grew by only 0.2%. This was a disappointment to economists who were looking for a 0.5% increase.

It was disappointing because economists have been hoping the Australian economy would now stand on its own two feet without the aid of monetary and fiscal stimulus. As a reaction to the GFC, the RBA lowered its cash rate aggressively and the government provided various fiscal stimulus measures, including substantial first home buyer grants. Those grants have now been watered down and the RBA has returned its cash rate to an “average” level. The honeymoon is over.

While the drop-off in demand for first-time mortgages is not at all surprising, economists had been hoping business credit demand, which has been trending down continuously since the pre-GFC peak, would now be picking up to provide the off-set and signal a return to “normal” economic activity. A rise in loan demand from secondary house buyers and investors has gone some way to dampening the effect of first mortgage demand weakness, and in their various recent earnings reports the Big Four banks noted that corporate lending pipelines had been filling up.

It is nevertheless the nature of banks that they will lend anyone with a heartbeat money at the top of the cycle, and no one without a massive balance sheet money at the bottom of the cycle. Evidence suggests small and medium enterprises (SME) are still finding lending windows shut, and worse still many have been forced to refinance exiting loans at much more onerous terms. The RBA has been cognisant of the still down-trending business loan numbers, but at the same time has noted a gradual slowing of the decline and has been assuming a turnaround is not too far off. Clearly it has not stopped the central bank raising its rate by 1.5% since the trough.

But with the European crisis threatening to push up bank funding rates again, and a slowing of the Chinese economy creating added nervousness, it is difficult to see an immediate rebound in business lending numbers. UBS analysts sum up the situation:

“While we see potential for business credit demand to increase to fund capex, we believe supply of credit could potentially remain constrained, leading to growth at or below nominal GDP.”

Within the weaker corporate lending environment, Commonwealth Bank ((CBA)) has nevertheless made significant market share gains, notes Credit Suisse. Over six months CBA has picked up 0.76% of the market, well ahead of commendable 0.18% gain from ANZ Bank ((ANZ)). CS notes ANZ has picked up market share mostly from regional commercial banking.

National Bank ((NAB)) has seen its share slip by 0.29% over the period, although the broker notes losses are mostly in the higher-end wholesale lending market and off-set by gains in SME lending. Westpac ((WBC)) has performed worse with a 0.32% loss of market share as it own business portfolio contracts and reduced gearing among companies has led to a reduction in short-term bill financing by St George.

All banks saw reduced demand in the institutional lending segment.

While NAB may have slipped in overall business lending, BA Merrill Lynch notes that despite the announcement of a management reshuffle in its troubled Retail division the bank is actually winning praise from customers.

A Roy Morgan Research survey for the six months to April shows customer satisfaction with NAB rose 2.8% to 71.1% the mark the biggest improvement across all banks. The bank's move back in October to significantly reduce fees has clearly paid dividends.

The satisfaction jump has taken NAB from stone motherless among the Big Four (5.1% below leader Westpac 12 months ago) to only 0.2% below Westpac, notes Merrills.

Merrills has this week reiterated its view that given earnings headwinds for the banking sector, including potential regulatory changes, the banks are at risk of becoming more like “low growth defensive” stocks in a portfolio. While lower multiples suggest valuation support, Merrills can't see the banks quickly returning to the previous giddy heights of elevated sentiment.

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