Retail investors own around half of the big four banks – Westpac, ANZ, CBA and NAB – for that reason alone, they had better start noticing the start of the crackdown on home lending from the country’s two main bank regulators – the Reserve Bank and APRA.
The tougher approach from the regulators will impact bank revenue and profit growth and margins, with the big four in particular facing growing pressure to start reversing the recent fall in bad debt provisions (which has driven profit growth for the past year and more) and start putting more money aside in case the home price surge, rising unemployment and a sluggish economy trigger a rise in dud loans.
The RBA singled out the fastest growing area of investment in housing – and much of the stockmarket, including the banks, by revealing that the investment policies of self managed super funds are going to come under increased scrutiny in coming months.
The Reserve Bank yesterday showed how concerned it is about the picture emerging from the property boom that it joined APRA in publicly telling the country’s banks and other lending institutions to watch what they are doing with lending for home purchases and some other things including self-managed superannuation funds.
And it’s not just home lending in Australia that is worrying the RBA and APRA. Both are also looking closely at attempts by the Reserve Bank of NZ to cool that country’s property boom which has been mostly funded by our big four banks which dominate that economy (and NZ is our banks’ largest area of offshore lending, which elevates the level of interest for our regulators).
Regulators fear the banks could be hit by problems in the housing markets on both sides of the Tasman if the current booms get out of control, providing a double whammy on revenues, profits and bad debt provisioning.
The Big 4 YTD – Bank profits to be pressured as regulators warn about property lending
The RBA’s warnings appeared in yesterday’s minutes of the September RBA board meeting and came a week after APRA revealed that it had told the banks to be careful about lending too much money for loans with high loan to valuation ratios (80% or more).
Both warnings are a sign the country’s key banking regulators have suddenly become very worried about the rapid growth in house prices in the past three months, especially in markets such as Sydney.
The RBA warnings were given in the context of discussion of the impending release of the second financial stability report for the Australian economy (out Friday week), which tells us there will be more detailed discussion of the bank’s concerns next week.
These are not the first time that APRA and the RBA have warned the banks not to try and chase revenue and profits by engaging in imprudent lending time when demand for new loans is sluggish. Lower key warnings were issued in 2011 and 2012.
Now property lending has emerged as the only area of growth for the banks (and it’s not just the big four) and the regulators are making sure the banks understand that there’s to be no repeat of previous lending splurges that ended in tears, such as in the past decade (in 2001-1003 for housing and apartments, and then in the lead up to the GFC where billions of dud loans were made on commercial property and corporate loans with huge losses taken).
The messages come after APRA released quarterly data which showed that the banks are in robust financial health, with high levels of capital, profits and low bad debt provisions – which now appears to be a concern for the regulators, given the worsening in unemployment.
For shareholders it’s not good news and those expecting another year of solid profit rises in 2013-14 can think again. The RBA and APRA will be wanting banks to start putting more money away for a rainy day. The regular profit and dividend increases of the past three years or so could come to a halt.
The warnings from the RBA and APRA pre-date the warning issued on Monday by the IMF to major economies around the world which are seeing rapid house price rises. Countries such as the UK (especially London), Singapore, Denmark, New Zealand and Canada have seen or are seeing the emergence of house price booms that are starting to worry regulators.
In Australia it’s a concern because the surge is occurring in the prices of established houses, which add very little to economic growth and carry a lot of danger for stability and inflation. The RBA wants to see a rebound in new residential construction – not just the prices of existing houses.
New home and apartment building adds to growth and generates jobs. The RBA is concerned that a surge in the prices of existing houses could choke off the recovery in new residential construction, thereby placing growth in the wider economy in danger as it searches for growth to replace the fading resource investment boom.
In yesterday’s minutes, the bank referred directly to NZ economy, the RBA is clearly worried.
"Given the importance of the New Zealand business to the operations of the major Australian banks, the Board was briefed on developments in the New Zealand housing market and the macroprudential policy framework recently introduced by the Reserve Bank of New Zealand.
"The Australian banking system remained in a relatively sound position…. In the current environment of low interest rates and slow credit growth, members agreed that it was especially important that banks maintained prudent lending standards.
"Property gearing in self-managed superannuation funds was one area identified where households could be starting to take some risk with their finances; members noted that this development would be closely monitored by Bank staff in the period ahead," the bank warned.
Anecdotal reports suggest that investor housing purchases by self-managed super funds has been one of the big drivers of house prices in recent months as more and more retirees search for high returns.
The falling level of bank bad debt provisions actually indicate a higher level of confidence in the economic outlook than consumers and some of the forecasts from banks (such as Westpac and NAB).
Now the question is how long can that situation continue? The latest quarterly reports from APRA add weight to that query. The reports show that bad debt provisions fell $3 billion in the year to June by the 172 ADIs to just over $25.6 billion at the end of June, down from $28.66 billion a year earlier. Much of that fall went straight into the rise in profits of $2.1 billion over the same period. That means aggregated profits are now greater than bad debt provisions, when for a number of years the reverse has been the case.
That will make APRA and the RBA scrutinise even more closely the quality of bank housing loans and their bad debt provisions.
Unemployment is forecast to go on rising and reach an average of 6.25% next year, which means the number of people unemployed could top 750,000 next year (it’s currently 714,000 seasonally adjusted in August). Rising unemployment and rising house prices will make regulators increasingly nervous about the banks and the health of their home loan portfolios, especially the four big banks – Westpac, NAB, Commonwealth and ANZ.
Lending at high loan to valuation ratios when house prices are starting to rise quickly and when unemployment is starting to rise, is a trifecta of alarm bells for bank regulators.
They will not allow this situation to continue, given that unemployment is rising, and even though consumer and house prices are rising. Will the big four in particular start putting more money away and respond positively to regulator concerns? If they do, it will put pressure on bank profit margins, dividends and costs. Listen to the moans and groans from some shareholders, brokers, analysts and bankers. No one likes the sugar bowl being taken away.
The RBA and APRA will be making sure the banks don’t stuff things up by engaging in a bout of ill-timed or speculative lending to drive revenue and profit growth, and in turn threaten the health of the sluggish economy and choke off the recovery in demand for new housing.
