Economist ‘nervous’ about credit restrictions

Fitch expects Australia’s most profitable lenders to face revenue pressures, noting that banks could be tempted to increase interest rates to offset the slowdown in credit growth and the ramp-up in compliance costs.

“Fitch Ratings expects Australia’s four major banks’ earnings to come under pressure in the near term as credit growth, especially in the residential mortgage segment, is slowing and non-interest revenue is likely to remain stagnant or decrease,” the ratings agency noted.

Fitch also cited figures from the Commonwealth Bank, ANZ, Westpac and NAB’s latest financial results, noting that the big four generated an aggregated statutory net profit of $15 billion, up by 5.5 per cent from the previous year.

The ratings agency attributed the majors’ aggregate profit increase to lending growth, cost control, efficiency improvements and a “benign” operating environment that limited impairment expenses across the board.

However, a rise in cost pressures may prompt the big four to hike interest rates.

“The slower growth puts the pressure on the banks to increase lending margins to maintain profitability,” the agency said.

However, Fitch noted that the current political climate and banking royal commission could deter the majors from hiking rates.

Economic forecaster Stephen Koukoulas told Mortgage Business that the banks could be looking to “recoup their profits” through alternative means of revenue raising.

“We’ve already seen that in deposit rates falling, so it’s not necessarily mortgage rates going up, although some of them have,” the economic forecaster said.

“[The banks are] trying to build their net interest margin and their profitability by trying to lower their cost of funds.

“So, if you look at some of the special deals that are done on deposits, they’re actually significantly lower now than they were six months ago, and I think that trend is probably going to continue even if there’s no change in official rates.”

Further, Fitch made reference to a decline in loan impairments reported by all four major banks in HY18, but cited recent quarterly results from CBA which revealed a rise in mortgage delinquencies.

The ratings agency added that it expects loan impairments to rise in the short and medium term from current “historical lows”.

Federal government growth forecasts are “optimistic”

Moreover, when asked about the federal government’s budget announcement, Mr Koukoulas noted that its growth forecast is “optimistic”.

“The budget papers did factor in relatively cautious household spending. I think the growth number was around about 3 per cent growth in real terms,” Mr Kouloulas continued.

“It might be a little bit stronger than the consensus would be for consumer spending.

“I think they’re just a little bit optimistic, rather than being a completely ‘pie in the sky’ type forecast.”

Mr Koukoulas acknowledged that it may be too premature to discount the government’s forecasts, but noted his concern over the reduction in credit growth and the slowing housing market, suggesting that the government may have understated such risk to economic growth.

“I’m a bit more nervous [about] a restriction in credit growth,” the economist added.

“We do know from the various measures of house prices, they still seem to be weakening. The weekly auction clearance rates in Sydney and Melbourne are also very subdued, they’re actually declining.

“[Economic] indicators are showing that consumers have a lot of debt on their mortgages, house prices falling, the decline in credit growth seemingly continuing, and, of course, wages growth is still very low — I think the risks are to the downside.”

AMP also recently released a statement that was critical of the Reserve Bank’s economic growth forecast of 3 per cent.

“We think the RBA’s forecasts are too optimistic and we see GDP growth tracking around 2.7 per cent over the near term,” AMP said.

[Related: No rate hike until 2020: AMP]