Does the outlook for the banks hinge on whether tightening measures will be instigated to cool home buyer lending?
-Measures to rein in the housing market could be on the way by year end
-Initial action likely to be modest and probably involve limits to DTI and LTV lending
-Main upside for banks will be measures allowing for a re-pricing of mortgages
As soaring house prices in
Any macro prudential measures are likely to put a damper on housing and Macquarie expects credit growth and, potentially, property prices will moderate as a result. If these measures are effective it would limit the potential upside risk to bank earnings from credit growth.
A statement from the
Still, brokers agree regulators do not appear to be in a rush, and while
Commonwealth Treasurer
While surprised by the Treasurer's comments, as he had been keen to ease lending standards after banks tightened previously, Jarden now believes this is a clear signal of the tightening risk on the horizon. The broker expects 2022 could arrive before regulators make a move, after assessing the impact of lockdowns and the uncertain economic recovery.
As a result of the acceleration in housing credit growth,
Housing credit, over the 12 months to August, was up 6.2%. Credit Suisse also points to an all-time high of
The broker notes, of the major banks,
What Sort Of Tightening, And When?
The broker believes at least two of these tools could be used to meaningfully narrow the gap between household credit growth and income growth. The measures are expected to reduce housing loan growth to 5% during 2022.
Nevertheless, the broker concedes, given the 2014-17 experience, initial action could be modest. The broker calculates every 50 basis points increase in bank interest rate floors reduces borrowing capacity by -5%. If this was applied to all new loan approvals this could reduce housing loan growth by -1.5%.
That said, bank disclosures on high DTI lending are very limited and, as
Jarden expects a cap on high DTI lending would have the greatest impact on investors with multiple loans, while an increase in serviceability buffers would likely affect all borrowers.
Nevertheless, Jarden calculates that increasing the serviceability buffer by 0.5% would reduce borrowing capacity by -5% and directly slow credit growth by -0.5-1% over a 12-month period.
In the end, given a federal election is expected in early 2022, any tightening is likely to be modest as a housing market correction in the lead up to an election would be construed as "unwelcome".
Hence, Jarden agrees a modest but visible measure to take some heat out of the housing market is the most probable scenario. The broker remains positive about the outlook for house prices and credit growth because of continued low interest rates and the improving economic outlook post lockdowns.
Bank Valuations
The main upside for the banks, therefore, is likely to be coming from any macro prudential measures being used to re-price mortgages. In ranking the banks Macquarie notes mortgage fortunes at
Even though the bank has argued that it will not use a price lever to chase market share for its own sake, as growth lags peers by -4.5% Macquarie suspects this could turn out to be a costly mistake, unless margins can compensate. Banks have outperformed the broader market by 4% in September but the broker assesses, in the longer term, there is limited appeal in the sector.
On face value banks are expensive, although when reflecting the current cost of equity in the market the sector becomes only slightly overvalued, in Citi's view. The market appears to be pricing in an improvement in underlying returns in FY22 and beyond, likely because of higher interest rates and improving deposit margins.
While the sector may be priced broadly appropriately, there is a divergence amongst banks. Citi believes
While there has been some moderation in bank share gains since May most of the major banks have been re-testing 1-2-year highs. The banks have endured a protracted period of falling returns on equity, complicated by the pandemic ,and Citi concludes the lack of recovery in underlying returns, normalised for bad debts and buybacks, has meant outperformance has stalled.
The broker notes Commonwealth Bank has been the only one to record a modest improvement in underlying returns, to 13.1%, but this has been offset by a sharp recovery in the share price. If a economic downturn does eventuate, the valuation of the sector may make it more susceptible to underperformance compared with the broader market, the broker adds.
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