Slowing credit growth ‘credit negative’ for banks

A recent update from Moody’s Investors Service has revealed that the RBA’s recent housing credit growth data for January shows that credit growth was at its “lowest level in more than three decades” at 0.2 per cent, while the annual growth rate was “close to a historical low” at 4.4 per cent.

In an update from Moody’s Investors Service analyst Tanya Tang and associate managing director for financial institutions group Patrick Winsbury, the credit rating business warned that slowing housing credit growth is likely to “weigh on banks’ earnings growth”, which essentially equates to “a credit negative”.   

Given that housing loans comprise 62 per cent of total banking system loans, the service added that declining loan growth has already spurred competition for new home loans, compressing margins, which will likely only be exacerbated by increasing net credit costs (which are currently at “very low levels”, spiking regulatory and compliance costs and heightened remediation costs following the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

Housing credit growth has reportedly been slowing for Australian banks since early 2018 after strong growth was seen during the “housing boom” between 2013 and 2017, the Moody’s authors said.

According to the authors, a number of factors have reduced demand for credit, including “lower demand for investor loans as a result of potential changes to negative gearing and capital gains taxes, reduced interest from foreign investors, and banks tightening their underwriting criteria in response to the royal commission”. 

“Specifically, banks tightened verification processes and lowered their reliance on the Household Expenditure Measure (HEM) as a proxy for a borrower’s reasonable living expenses, to address concerns that over-reliance on HEM may have overestimated some borrowers’ repayment capacity,” they said.

Consequently, these developments have seen housing prices in Sydney and Melbourne fall by 10.4 per cent and 9.1 per cent, respectively, in the past year, according to recent data released by CoreLogic, which has placed further downward pressure on credit growth.

As a result of slowing home loan growth, Australian banks may need “to look elsewhere for growth, such as expanding their corporate and institutional lending”, experts at Moody’s Investor Service suggested, but noted that these sectors “generally have worse risk-return profiles than home loans”.

[Related: Risks flagged over housing slump’s drag on consumption]