Credit growth overpowers margin squeeze

Credit growth is at its strongest levels since early 2009, despite record-low rates and a highly competitive lending market putting downward pressure on margins.

Australia's four major banks delivered a 5.6 per cent rise in combined underlying cash earnings of $29 billion after tax for the full year. A further fall in bad debts combined with a growth in core earnings and a rebound in credit demand drove the record result, according to PwC's biannual Major Banks analysis.

PwC Australia's Financial Services leader Hugh Harley said the increase in lending volumes – most noticeably to business and for housing investment – overcame a margin squeeze.

Margins fell two basis points to 2.06 per cent in the second half amid strong competition for new lending –the lowest since the all-time low of 2.05 per cent in the first half of 2008.

Total growth in credit of 5.4 per cent over the year to September is the strongest since February 2009, Mr Harley said.

"The good news is that both housing construction and housing credit are up over the year," he said.

The PwC analysis found that total private residential construction is up 9.1 per cent for the year to June while housing credit is up 6.8 per cent to September.

“The pick-up in residential construction is particularly pleasing, with the number of dwelling starts to June 2014 up nearly 10 per cent on the previous year and the highest in more than a decade,” Mr Harley said.

“NSW has been a particular standout,” he said.

"The flip-side is that investment home loans continue to increase nearly twice as quickly as owner-occupied borrowings."

Investment property loans grew 9.5 per cent, well up on last year's 6.0 per cent. Owner-occupier housing loans were up 5.5 per cent compared with 4.3 per cent last year.

"Despite the improvement in housing construction, a good deal of the increased investment lending is being funnelled into existing housing stock and this has clearly fed through into further price increases in some markets," Mr Harley said.

"There is a risk that too much of this increased borrowing for investment purposes is being driven by an expectation that prices will continue rising indefinitely in a low-interest rate environment,” he said.

“Rent increases are not keeping up with increases in housing prices, and so investors need to make sure they maintain a buffer.”

PwC’s view continues to be that so long as the world economy holds up, the Australian housing market should also hold up.

“If for some reason the world economy should stall, then that's a tougher proposition,” Mr Harley said.

Meanwhile, a highly competitive lending market has led to increased discounting.

Mortgage discounts have risen from about 75 basis points a year ago to about 100 basis points and beyond, according to the PwC analysis.

In contrast to recent years, banks are no longer funding all new loan growth through deposits.

"In percentage terms, bank loans (7.0 per cent) and bank deposits (7.1 per cent) have grown at almost exactly the same rate over the past year, but because total bank loans substantially exceed bank deposits, the banks are no longer funding all new growth in loans out of deposits,” Mr Harley said.

"Benign market conditions in credit markets have assisted the banks' requirement for increased wholesale funding, with credit spreads paid by the markets approaching those prevailing before the GFC,” he said, adding that benign market conditions have also assisted non-bank lenders, helping to increase competition in the market.

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