Falling home prices to drag Australian banks' 2019 credit growth to 3.5%

Mortgages account for roughly 60% of their loan portfolio.

The credit growth of Australian banks is expected to slow from 5.1% in March to 4% in 2018 and 3.5% in 2019 as the strain brought about by the ongoing housing downturn is starting to weigh down on growth prospects, according to Fitch Solutions.

Also read: Australian banks rank lowest in Q3 earnings outlook: UBS 

After a steep price uptrend that has granted several Australian cities with the recognition as the world’s most expensive housing markets, residential property prices have recorded a cumulative 1.9% drop in value since September 2017 thanks to falling prices in Sydney and Melbourne.

There is also room for further decline as overall home prices are still 31% higher than they were five years ago, Fitch Solutions added.

“We expect credit growth to be negatively impacted given that mortgages account for approximately 60% of the total loan portfolio of the banking sector,” said Fitch Solutions. 

In fact, Australia’s Big 4 banks have already booked slight increase to their problem loan ratios, according to an earlier report by credit rating agency Moody’s.

“The growth in mortgage arrears suggests tail risks in the housing market remain, despite the Australian Prudential Regulatory Authority's measures to rein in riskier types of housing lending including investor loans, and moderating housing prices in the key states of New South Wales and Victoria,” Moody’s noted.

Regulators have also been clamping down on the availability of credit for speculative housing investment to keep household debt within manageable levels or around 120% of GDP.

As such, tightening policies are likely to remain in place over the next few quarters in an effort to limit housing credit growth which has been trending lower from 7.2% in September to 5.6% in June. 

“Banks will also be negatively impacted by the low interest rate environment and heightened regulatory oversight as the authorities seek to improve the conduct of the sector.”

Here’s more from Fitch Solutions: 

Other than weakening mortgage loan growth, we expect Australian interest rates will remain low over the coming quarters as the RBA is likely to remain on hold amid an uncertain global economic environment and still muted inflation, which will weigh on net interest income and return on equity.

Moreover, given the competitive banking environment, banks are likely to continue competing by offering low mortgage rates in an effort to attract borrowers. Indeed, Reuters reported on August 2 that the country’s largest banks, Australia and New Zealand Banking Group and Commonwealth Bank of Australia, reduced their variable mortgage rate and fixed mortgage rate on August 2 and July 30, respectively.

The underperformance of banking equities of Australian banks (S&P/ASX Banks Index) relative to the broader stock market (S&P/ASX 200 index) has gathered steam since late-2017, and we continue to hold a bearish view on Australian banks.

Banks are likely to remain under pressure as their equity prices increasingly reflect the profitability challenges that the financial institutions face from cooling credit growth, the low interest rate environment, and increased scrutiny from regulators. The dividend payout of Australian banks is also lower compared to the peak of 102.3% in Q316 at around 79% in Q218 as they seek to preserve cash to boost their capital position in light of downside pressure on profitability.