- Home loan growth lowest in 35 years
- Business growth nevertheless continues to improve
- Bank shareholders should remain cautious however

By Greg Peel

Friday's release from APRA of Australian monthly private credit statistics showed home loan growth continued to slow in May to 0.34%, the second weakest figure on record, while year-on-year growth has fallen to 5.1%, the lowest figure since records began to be kept in 1976. The numbers are consistent with the recent easing in house prices.

They should also signal bad news for expected Australian bank earnings, given home loans (both owner-occupier and investment) represent around 59% of all bank loans. However it does appear business loan growth, which represents around 34% of loans, is providing an encouraging offset after spending the post-GFC years in decline. Business loans grew by 0.8% in May to 3.3% year-on-year, well above April's 2.3% reading. Business loans have grown ten out of the past eleven months and the growth rate is now at a three-year high.

This implies that eight months into the banks' FY12 fiscal year (eleven for CBA), business credit growth continues to hold up, notes Credit Suisse. While home loans are providing a drag, both business credit and total credit are growing modestly and have reached levels of year-on-year growth not seen since April 2009. Credit Suisse is looking for business credit growth to modestly strengthen further from here and for declining mortgage rates to ultimately provide some support for consumer credit.

RBS Australia also expects the “modest” cyclical recovery in business lending growth to continue in FY12, peaking at around 8% in FY13. RBS further expects housing credit growth to post a small recovery, growing by 5.4% in FY12 and 6.4% in FY13. 

Some faith is therefore being placed in the 75 basis points of cash rate cuts the RBA has delivered in the past two months. However, Citi notes that the 50 basis points in cuts the central bank delivered in November-December last year, of which a net 38bps was passed on by the banks, do not appear to have made any difference to home loan demand. At best so far, the recent 75bps cuts have served to increase consumer sentiment towards real estate.

BA-Merrill Lynch is also not enthused by the data. Housing credit is subdued, personal credit (only around 7% of lending) is negative, and business credit remains low by historical standards. We remain in a period of weak growth, notes Merrills, and earlier this year the unfolding European crisis ushered in another period of high offshore funding costs which is being passed on to customers.

[It is again worth noting at this point that ANZ remains resolute in trying to drag Australians kicking and screaming towards the reality that a bank's costs are dependent on five-year offshore funding rates far more so than the RBA overnight cash rate, and hence SVRs should be priced accordingly. ANZ has risked the ranting of politicians and the ire of borrowers by sticking to its once-monthly price resets, irrespective of the RBA cycle.]

Despite positive signs in business lending, Merrills retains the view the risk to consensus lending volumes remains skewed to the downside.

UBS actually sees the slowdown in housing loan growth as “healthy”, suggesting borrowers have used recent rate cuts to accelerate principal payments (rather than reducing net monthly payments on a lower rate) and consumers have looked to deleverage. Nor is the home loan demand slowdown any great surprise in the current environment. What is a surprise, however, is the ongoing strength in business loan growth.

Such growth is inconsistent with Australian business capex intentions (ex-mining, albeit miners do not typically fund capex from bank loans) having slowed, with weak business confidence measures and with general feedback from the banks themselves. Perhaps, UBS ponders, the general economic slowdown (again, ex-mining) is reducing business cashflows to the point businesses are drawing down on bank facilities in order to stay afloat. This would give a false impression of any positive assumptions surrounding loan growth.

It's a bit early to be sure, but thus it's also too early to call a recovery in business loan growth as far as UBS is concerned.

The good news is that since the GFC, deleveraging has been underway across the broader economy, Macquarie notes. Listed companies have recapitalised and are now considered to have strong balance sheets. It's a bit more difficult to ascertain gearing levels in the non-listed, small and medium enterprise segment (SME), however having matched up information from the tax office, the central bank and APRA, Macquarie believes SME gearing is low by historical standards. We can thus assume Australian businesses are better placed to cope with further economic weakness.

Yet, warns Macquarie, we remain in uncertain times. The “new normal” of deleveraging, declining asset values and the paring back of excess capacity means that SMEs are unlikely to gain any confidence to re-gear (and thus boost credit growth) at any time this side of the next election. And whatever that result might be, SME challenges still remain in the form of slow demand from household deleveraging, more restricted access to credit, and even ownership transition as many owners see the slowdown as a good enough cause to retire.

The upshot, therefore, is that bank shareholders should not become overly excited about the apparent recovery in business lending. Mind you, they should not necessarily be lamenting record low housing growth in the current global environment either. At 5.1% annual growth, Australia is sitting fourth on the developed market home loan growth table, behind Canada (7.2%), Scandinavia (6.3%) and France (5.8%), but ahead of the the UK (1.2%), Germany (1.1%) and the US (-2.5%), UBS notes. Last week the UK announced net mortgage lending had turned negative for the first time ever in May. In terms of business lending, growth is again strong in Scandinavia, up 4.7% in the US, but very weak across Europe and the UK.

The other positive, as UBS points out, is that Australian deposit growth remains strong, up 11.3% over the year as households continue the strong savings trend. System deposits grew $17.8bn in May, easily funding a $12.9bn increase in credit. The more deposits grow, the less Australian banks need to borrow in costly offshore funds, and the same is true if credit growth remains soft. 

In other words, while banks elsewhere in the world worry about simply staying solvent, Australian banks have lackustre earnings growth as their prime concern and balance sheet strength is of little concern. This, at least, is comforting to know in such an environment, particularly when dividend payments to investors remain robust.

In terms of variations between the Big Four, National Bank ((NAB)) is leading the charge in loan growth, increasing mortgages by 0.9% against system growth of 0.5%. ANZ Bank ((ANZ)) also performed well with 0.7% growth, while Westpac (0.4%) fell short and the still premium-to-peer Commonwealth Bank ((CBA)) came in behind at only 0.3%.

In the year 2012 up to last week, Macquarie notes the ASX 200 has fallen 10.8% and the Big Four have outperformed by a net 8.5%. In absolute terms, CBA has risen 2.3% and ANZ 0.4% while Westpac has fallen 4.1% and NAB 7.6%.

Since the last publication of the table below -- following the banks' interim result season -- not a lot has changed other than NAB was in last place below Westpac previously (suggesting, across the four, that broker ratings were pretty accurate on a net basis) and now those positions have been reversed. The promotion of NAB is consistent with its loan growth outperformance pitched against price underperformance. Meanwhile, CBA's loan growth weakness highlights CBA as the only bank trading above target, and would tend to suggest target prices will not rise in the near term to meet the market. Whenever banks get ahead of their targets there is a good chance of a relative pullback.

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