With the Royal Commission playing havoc on the financial sector, lending laws have been under focus with rigorous interpretation, and hence there are expectations of a sharp slowdown in credit growth. With about a 40 percent drop in bank share prices, the credit growth would fall by 2-3 percent and there be a significant rise in the impairment changes that will put pressure on bank net interest margins.
There are tighter lending restrictions which are also known as macro prudential policies which were started by APRA in late 2014 that introduced a 10% annual cap on housing investor credit growth. Of the total new mortgage debt in March 2017 what followed the policies was the regulator limiting the interest only loans to 30%. Now APRA’s restriction removed the cap on annual investor credit growth for some lenders and for already heavily indebted borrowers announcing more stringent lending criteria.
The expectations from the lenders by APRA is that they develop policy limits on maximum debt to income levels for individual borrowers and internal portfolio limits on the proportion of new lending at very high debt to income levels. This will help the banks take into account the total borrowing of an applicant rather than just one or two specific loan applied for, which might be a more detailed and complex service calculation for individual borrowers.
On the other side the lenders remain positive about the outlook and remain optimistic about the domestic housing market but they did expect that the price growth could subtle down which would mean housing credit growth will ease down. The ASX Listed Banks, specially, the big four banks – Australia and New Zealand Banking Group Limited (ASX: ANZ), Westpac Banking Corporation (ASX: WBC), Commonwealth Bank of Australia (ASX: CBA) and the National Australia Bank (ASX: NAB) have lost around 4 percent of their value since the time the commission has been laid down upon the lenders.
Strict restrictions could trigger a far bigger and systematic crunch which can not just hit the profitability of the banks but also potentially the entire economy. As house prices are mainly determined by the availability of the credit, we could see a weaker house prices for few years. Many experts say and agree to the fact that the changes by APRA are, instead of loosening the lending standards, gradually tightening them.
As per estimates, the borrowing capacity has been on a downslide plunging by 20% over the past three years. This has led to predictions and forecasts that major ASX listed banks’ housing credit growth by 2019-2020 will fall to almost zero with more restrictions on credit to be seen soon. Borrowing capacity is also expected to shrink around 30 percent if the banks have to follow the strict regime of actually verifying the living expenses using applicant’s transaction records, and this is not just now that both investors and owner-occupiers on the maximum borrowing capacity have faced constraints. While the cash rate stays as it is, its widening gap with the bank bill swap rate can impact margins. Now, whether these concerns are inflated or not, will be tethered to regulations in the sector which are must to look into. Nonetheless, this makes the play around the ASX Listed Banks to be watched out for opportunities and risks.
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