Housing Credit Growth Should Slow Eventually

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Macro prudential measures appear to be the way forward in targeting housing credit, although brokers observe there are few signs as yet that housing loan growth has slowed.

-Housing credit still the major driver for the banks
-Bank margins likely to continue to contract despite re-pricing
-Recent regulatory changes expected to impact from Sept qtr
 

By Eva Brocklehurst

Banks have quickly re-priced their mortgage books in reaction to political and macro prudential pressure, causing brokers to review the impact of changes on the sector. UBS notes, rather than simply being a knee-jerk reaction to the Reserve Bank of Australia's cash rate changes as it was in the past, changes in bank mortgage lending rates have recently been instigated by macro prudential tightening. In the past the cash rate move was the strongest influence on borrowing rates.

As 85-90% of mortgages are variable, the transmission mechanism led to an almost immediate impact on the flow of new loan demand and the cash-flow effect for existing borrowers as banks re-priced their back books. Hence, the recent downtrend in the RBA cash rate to a record low of 1.5% provided a prolonged and cyclical boost to the economy, as average borrowing rates dropped to under 5%.

Now, as regulators became increasingly concerned about housing risks and implement macro prudential tightening – such as APRA's caps on investor housing credit and limits on new home loans on interest-only terms – it appears likely that policy will continue to target housing through macro prudential measures rather than via the RBA's already-low, and blunt, cash rate.

Hence, UBS assesses the structural widening of borrowing rates versus the cash rate, combined with record leverage, means the long-run neutral cash rate in Australia is likely now much lower than previously, at around 2.75%.

The broker also notes that mortgage re-pricing has not led to higher net interest margins or returns on equity for the banks. Net interest margins have continuously fallen since the early 1990s, UBS calculates, and a steady decline is expected despite further out-of-cycle rate moves ahead.

Housing Yet To Slow?

Morgan Stanley estimates that owner occupier loans grew at an annualised rate of around 7.2% in May and investment property loans at an annualised rate of around 7.0%. This may suggest that the measures implemented by APRA and the banks' out-of-cycle re-pricing of standard variable loans are not having an impact, but it also could simply reflect the volume of approvals that have been conducted prior to the APRA announcement.

The broker expects the impact of macro prudential measures and re-pricing will be in evidence from the September quarter. Household deposit growth for the year to May was around 7.8%, but Morgan Stanley points out it has slowed to an annualised rate of around 6.1% over the past three months. The broker is not prepared to consider this as a trend as yet, because it may just be flows of cash into superannuation funds prior to rule changes which come into effect on July 1.

Annualised housing loan growth at ANZ Bank ((ANZ)), National Australia Bank ((NAB)) and Westpac ((WBC)) is tracking ahead of the broker's forecasts, while Commonwealth Bank ((CBA)) is in line. At this point, Morgan Stanley envisages no reason to change forecasts and expects growth will ease in the September quarter.

The broker expects the major banks will continue to constrain institutional loan growth and remains unconvinced that above-average business conditions will translate into stronger credit growth for the small-medium enterprise segment.

Impact On Bank Margins

Macquarie points out that, despite political pressures and the risks associated with further strain on highly indebted households, the major banks have re-priced interest-only books by 30-35 basis points in recent weeks, only partially offset by reductions in principal & interest (P&I) owner occupier rates.

The broker estimates the net impact is a 2-6 basis points uplift to margins and a 2-4% boost to earnings. That said, in the longer term, the broker also suspects benefits from mortgage re-pricing will be eroded, as customers will switch to lower margin P&I products.

Moreover, reduced flow to interest-only products is likely to affect credit growth. Ultimately, the broker expects these trends to result in a -2-8 basis points margin contraction, while system housing credit growth will fall to around 2% in FY19-23.

Macquarie envisages value is starting to emerge in the major banks after the recent underperformance and there is near-term upside earnings risk. The main short-term risk for the sector is a potentially adverse APRA announcement on capital. Macquarie upgrades its recommendation on the sector to Neutral and upgrades ANZ  to Outperform and National Australia Bank to Neutral.

System loan growth improved slightly in May and APRA data shows annualised 5% growth for the month versus 4% in April. Deutsche Bank agrees housing credit growth remains a driving force at 7% for the majors, with business lending at 3%.

For the first time since August 2016, monthly growth in owner occupier lending in May exceeded investor mortgage growth. Deutsche Bank expects recent regulatory measures, as well as an expectation for apartment price declines over the next 12-18 months, will accentuate this trend.

The broker expects housing credit growth for the majors to slow to 4% in FY19. In the medium term, consumers are expected to de-gear modestly, although business lending will improve, given modest corporate gearing and strong business conditions.

Ultimately, Macquarie expects the impact on credit growth through a reduction in interest-only flow will reduce system housing credit growth to around 2% in FY19-23. The broker also expects banks will start to compete for deposits again, in order to alleviate pressure, and, as a result, envisages limited ability to re-coup the bank levy on the liability side.
 

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