Investors should maintain their underweight position on the big Australian banks, Macquarie Securities has advised.
Macquarie is concerned that the banks’ re-pricing of mortgages will be counter-productive – putting pressure on highly indebted households.
On June 9, ANZ increased the rate on its interest-only home loans by 30 basis points, while reducing principal and interest loan rates by five bps.
“All other things being equal, we estimate that in aggregate the changes will result in an uplift of around two bps of margins and around two per cent to 2016/17 earnings,” Macquarie says,
“However, we suspect the actual benefit is likely to be small, as customers who can afford to will begin switching to lower margin principal and interest products.
“Moreover, these changes are likely to continue to put pressure on already highly indebted households, particularly owner-occupiers who do not have any offsetting tax benefits.”
Back in April, Macquarie issued an assessment of the big banks which said that mortgage re-pricing and robust mortgage volume growth had supported banks’ earnings in recent years but that may be coming to an end.
It said the banks’ ability to continue to re-price mortgage was diminishing and, increasingly, banks needed to identify other sources of earnings growth.
It downgraded its earnings forecasts for the big four banks in the 2017/18 and 2018/19 financial years.
Macquarie is concerned that mortgage re-pricing is turning into a zero sum game. Historically low interest rates should give households a buffer against debt stress and at an aggregate level household debt servicing capacity remains sound.
However, the growth in debt has been concentrated rather than evenly spread. Thirty per cent of households are responsible for 85 of household debt. Household debt reached 130 per cent of GDP last year – an all time high
And as a result of ongoing mortgage re-repricing Macquarie estimates that the average mortgage rate is close to the 10-year average of six per cent, which suggest the low-rate buffer is not as great as people assume.
The impact of higher rates on household incomes is likely to be reflected in reduced borrowing capacity. Macquarie sees mortgage volume growth falling to low single digits towards the end of the 2017/18 financial year.
Further, while a possible fall of five to 10 per cent in house prices is unlikely to lead to large losses in banks’ housing portfolios, it would impact consumer sentiment.