Banks doling out loans as rate cuts and first home scheme fuel demand

1 week ago 5

Westpac, National Australia Bank and ANZ Bank are ruling off their financial year as rising house prices and falling interest rates fuel quicker growth in the $2.3 trillion mortgage market, which analysts say should help banking giants rake in more revenue.

The three banks will close their books on the financial year on Tuesday, after a year in which falling interest rates have had a significant impact on Australia’s banking market. Their larger rival Commonwealth Bank, which uses a June financial year, reported its full-year results last month.

Housing credit growth has picked up to its quickest pace in more than two years as interest rates have fallen.

The Reserve Bank has made three 0.25 percentage point cuts to interest rates this year, sparking stronger growth in mortgages and business loans, while lower rates have also eased the financial squeeze on households, which is further good news for banks’ loan portfolios.

At the same time, however, analysts say competition remains intense in business and home lending, which is eating into the sector’s profit margins. Cost-cutting is also a key theme and investors expect the banks to keep a tight rein on expenses, following recent job cuts announced at ANZ Bank, NAB, Westpac and Bendigo and Adelaide Bank.

As the Reserve Bank prepares to meet on Tuesday, with markets expecting no change in the cash rate, there has already been a pick-up in home loan growth this year.

Housing credit growth hit 6 per cent in the year August, its highest level since early 2023, while business credit growth hit 10 per cent in the year to August, latest RBA figures show.

A new report from Citi analyst Thomas Strong suggests home loan growth will accelerate further, helped by the effect of past rate cuts and stimulus including help for first home buyers that starts on October 1.

From Wednesday, the government will cover the cost of lenders’ mortgage insurance on deposits between 5 and 20 per cent for first home buyers. The scheme is open to all first home buyers, and Strong said it could be a “material tailwind” behind first home buyers.

‘Credit quality is still awesome, and if anything, it will probably get better from here.’

Principal at fund manager Alphinity, Andrew Martin

Markets have pared back their expectations for rate cuts lately, but Strong said that based on previous housing cycles, housing credit growth could peak between six and 12 months after the last rate cut in a cycle.

“The psychological impact of lower rates on sentiment, coupled with the lead time of a house search, sentiment and funding, means that housing credit tends to continue to accelerate well beyond the point of the last cut,” Strong said.

“Overall, a combination of improved credit growth and stable interest rates is positive for banks’ revenue growth,” Strong said.

While housing credit growth is picking up, the big four banks are also facing competition from rivals, such as the fast-growing Macquarie Group.

Jarden analyst Matt Wilson noted Macquarie continued to expand rapidly in home loans, forcing other banks to respond with competitive prices, while noting banks were also fighting to win back share from mortgage brokers.

“Whilst volumes are strong, competition remains intense. The pick-up in volumes might be offset by the compression in margins,” Wilson said.

All up, Wilson said he expected profit growth of about 2 to 4 per cent across the banking sector.

When interest rates fall, it also tends to cut into banks’ net interest margins, which compare funding costs with the pricing of loans, and are a key influence on profits.

Principal at fund manager Alphinity, Andrew Martin said analysts had expected “a bit more margin compression” this year, but banks had found a way to largely maintain their margins, including through deposit pricing. Martin said another highlight for banks has been the very low charges for bad and doubtful debts.

“Credit quality is still awesome, and if anything, it will probably get better from here,” he said.

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