Non-major raises serviceability fears as rate hikes loom

A regional bank chairman has expressed concerns about the potential impact of rate hikes on the housing market and the ability of highly leveraged households to service debt.

Addressing shareholders at the group’s AGM yesterday, Bank of Queensland (BOQ) chairman Roger Davis said 2016 has not been without its challenges and the list of industry specific headwinds the non-major faces “is indeed lengthy”.

“Interest rates at all-time lows, increased public scrutiny, slowing credit growth, continued market volatility, greater regulatory uncertainty and increased attention to stable funding and capital ratios,” Mr Davis explained. “Meanwhile cost pressures are increasing as all banks fight to better manage rapid changes in technology and changing customer preferences”

“Competition for loans and deposits is also intensifying, adversely impacting net interest margins. The combination of all of these factors has made it a difficult year for all banks, with one analyst noting that revenue growth across the sector in the second half of 2016 was at the lowest level in 25 years.”

Mr Davis said that BOQ remains “cautious” about “increasing household debt, housing affordability and serviceability, growing under-employment and declining participation in the labour market, and the potential impact of rate rises and housing market weakness”.

Addressing the real estate market directly, the regional bank chairman admitted that the group is “cautious about the domestic housing market”, particularly on the east coast.

“As a national bank operating across the country, we see first-hand many of these market conditions and therefore are well positioned to opine,” Mr Davis said.

“Indeed pricing in some markets is still struggling to beat previous market highs, and prices in Perth actually falling, so to unequivocally state that Australia is facing a housing bubble is clearly not accurate.

“Having said that however, there are indeed areas and regions across the nation and especially on the east coast, where prices continue to set new highs on the back of supply constraints and lower interest rates and thus are arguably fully priced with average prices across the combined capital cities up 7 per cent in the 12 months to September 2016.

“Given these environmental conditions, we naturally remain cautious about the domestic housing market but take comfort from several mitigating factors in managing our exposure, especially our strong risk culture and conservative risk settings.”

Commenting on bank capital levels, Mr Davis said BOQ strongly believes that regional banks continue to be disadvantaged in their “bread and butter” business of writing residential mortgages and would welcome a further narrowing in risk weights between the majors and regional lenders to level the playing field.

[Related: OECD flags housing risks, tips rates to rise in 2017]

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