The big banks rely heavily on their mortgage businesses but there could be tough times ahead in that market. One analyst is forecasting a slowdown in housing credit growth, while another expects that large numbers of borrowers with high margin interest-only loans will switch to cheaper loans.
According to the latest Reserve Bank figures, lenders’ mortgage balances have been growing steadily at an annual rate of more than 6 per cent for most of this year.
The annual growth rate has plateaued, not having changed since May.
Owner-occupier balances grew by 6.3 per cent over the year to August and investor mortgage balances grew by 7.3 per cent over the 12 months.
Macquarie Securities says that while system growth remains stable, it believes there will be a slowdown in housing credit growth in the current financial year and in 2018/19.
“Growth will be impacted by increased amortisation of loans, as customers in high-cost interest-only loans switch to principal and interest,” Macquarie says.
On a bank by bank basis, Westpac is growing ahead of the market, at about 1.3 times system growth. The danger for Westpac is that it has a high proportion of borrowers on interest only mortgages and many of them can be expected to switch to lower margin P&I loans.
CBA lags the other majors with mortgage growth at about 0.6 times system. CBA is pulling back from the broker channel, which is having an impact on volume.
ANZ and NAB are growing at system.
Among the smaller banks, Bank of Queensland and Bendigo and Adelaide Bank are growing well below system.
While the growth rate in the mortgage market may slow, the majors have the benefit of lower funding costs (deposit rates have been pushed down), ongoing mortgage re-pricing benefits and benign credit conditions.
UBS says recent repricing of interest-only mortgages, which was designed to help reach regulatory targets and pass through the cost of the Bank Levy, has provided a substantial boost to net interest margins in the September quarter.
“However, some of the benefit is likely to be reversed over coming months as some customers switch to lower cost principal and interest loans,” UBS says.
It had assumed that about 10 to 12 per cent of customers will switch from interest-only to P&I over the next six to 12 months.
However, a recent survey it conducted indicates that 24 per cent of interest-only customers will switch to P&I. UBS says that is thee survey is accurate, most of the benefit from mortgage repricing could be unwound. This would result in earnings downgrades of around 2 per cent to our 2018/19 forecasts.
Given that there is some doubt about the survey result, we remain comfortable with our current forecasts. But we do believe that NIM headwinds could be greater than expected if this level of switching occurs.