Australia | Apr 03 2013
– Bank share prices remain solid
– Oz credit loan growth hits past lows
– RBA cuts not yet spotted
– Prices diverging from fundamentals
By Greg Peel
“Another month, another soft credit report in Australia,” sigh the economists at JP Morgan.
It is fair to say stock brokers have underestimated the attraction of Australian bank shares to both local and foreign investors these past few months, being diverted by the realities of the business that is banking rather than looking at bank shares through investors’ eyes as relatively safe, high yield investments. Bank shares have run and run, to levels which are considered too expensive under normal circumstances, and then run again.
There are clearly few countries in the world in which bank shares would be considered a “safe” investment at present. You can write off Europe and the UK for starters. US bank shares have had a good run in Wall Street’s push beyond past all-time index highs, but US banks are still harbouring some degree of government investment and have yet to work their way through the GFC toxic debt fallout. And the US is not an AAA-rated economy.
Australia’s is an AAA-rated economy, even without a budget surplus, and Australia’s banking sector is among the most carefully regulated and thus respected. Australian banks are now much better capitalised than they were in 2007, yet even then they did not need direct government intervention post-GFC, aside from the assistance of deposit protection. And the bottom line is: Australian banks pay handsome dividends in a low interest rate world, and those distributions are fully franked for local investors.
With the cost of offshore credit now retreating, the bank deposit war is waning. Having not passed on the full amount of last year’s RBA rate cuts, bank net interest margins are, for the time being, looking very healthy. The risk of bad debt write-offs has eased since the heady days post GFC, and the global appetite for risk is returning. Cost cutting and IT upgrades are improving efficiency. Australian banks almost look like they’re in a sweet spot. Except for one thing.
Their actual business is not growing.
Bank analysts had warned even a year ago that credit growth through 2012 and into 2013 was likely to be subdued, and not really apparent again until perhaps 2013-14, which is why they’ve been caught out by strong share price gains. Under normal circumstances, if your business isn’t growing your share price won’t be either. The banks have managed to improve earnings on the back of the abovementioned list of positives, but upside from here needs businesses and households to come back into the market looking for loans. Of course, slow loan growth is not simply the fault of businesses and households – the banks are still shell-shocked and have not yet eased the lending restrictions they quickly tightened up after the GFC.
For a little while there it looked like credit loan growth might just be sneaking back, but the figures for February have shot down that hope. Overall private sector credit grew a mere 0.2% in February, and the six month (annualised) run rate now sits at 1.8%. JP Morgan points out the run rate has “only previously plumbed those depths” in the GFC fallout of 2009 and in the nineties recession.
BA-Merrill Lynch notes within the 0.2% net growth figure, housing credit grew 0.4% in February but the annual growth rate fell to 4.41%, “another 36-year low”. Business credit growth turned negative, to minus 0.2%, resulting in annual growth falling to 2.3%. Personal credit grew by only 0.1% for minus 0.3% growth annually. Notes Merrills:
“Having improved for much of 2012, credit growth has now dropped back to levels witnessed 12 months ago. Aggressive interest rate cuts by the RBA appear to have done little to stimulate a major turnaround yet”.
This is a point not lost on the central bank, yet not enough to encourage the RBA to provide another rate cut yesterday. As the policy statement noted:
“There are a number of indications that the substantial easing of monetary policy during late 2011 and 2012 is having an expansionary effect on the economy. Further such effects can be expected to emerge over time. On the other hand…The demand for credit has also remained low thus far, as some households and firms continue to seek lower debt levels.”
Weakness in the particular housing credit sentiment is exacerbated by the split between owner-occupier loan demand and property investment loan demand. Property is again becoming attractive to investors as Australia’s tight rental market offers solid, negatively geared yields against borrowing costs which have fallen with the RBA rate cuts. Investors are thus pushing houses prices up once more, as was evident in yesterday’s housing data. In the meantime, mortgage holders are using lower rates as an incentive to pay down debt more quickly, rather than up-scale. “Potential owner occupiers appear to be either priced out of the market,” suggests UBS, “or put off by the large amount of debt required to buy a home”.
Investment property loan growth suggests to JP Morgan that the RBA rate cuts are “getting some traction in the usual pockets,” but that so far the trend looks “far too subtle to have broader macro significance, and clearly is not sufficient to lift overall credit growth”.
Merrills is worried the market is “over-extrapolating” what for the moment is a “purple patch” for the Australian banks of aforementioned positives. There is little Merrills can see in the near term which might derail bank share popularity, saving some further global-political shock (even eurozone woes are being shrugged off at present), but over-extrapolation into perpetuity without considering the underlying risks of any bank “is concerning,” say the analysts.
“We are concerned prices are disconnecting from fundamentals.”
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