“The housing market has only just started to enter this downturn and this one will be as big as the biggest we’ve seen over the last 40 years. In the previous 10 periods of declining house prices, the banks have underperformed in nine of them.”
Higher interest rates have crimped the maximum that homeowners can borrow from the banks, with Rate City director Sally Tindall calculating May and June’s interest rate increases wiped about $66,000 off the amount a couple earning $150,000 can borrow.
“However, by April next year, if the cash rate rises to 2.35 per cent as forecast by Westpac, the maximum the same family would be able to borrow from the bank would be approximately $163,500 less than a year ago, before the hikes began, ” she said.
Atlas Funds Management chief investment officer Hugh Dive said the sell-off was overdone, with the banks fundamentally still in good shape and net interest margins set to improve, particularly given how much less reliance they are on wholesale funding markets compared with previous downturns.
“I think it’s a bit of a knee-jerk negative reaction to say that everything is going to be terrible for the banks,” he said.
“It seems a bit too aggressive. The banks will probably have higher profitability than everyone is thinking, it’s a bit premature to chuck them all out this week.”
Mr Tevfik said the Reserve Bank’s aggressive move on Tuesday to increase the cash rate by 50 basis points, which would ordinarily boost the banks by lifting the margin they earn on loans, had spooked investors.
“What’s made it clear for a lot of investors this week is the RBA is not going to waste any time in trying to normalize policy,” he said.
New lending down
“We’ve had a short position in the banks and I’m not tempted to cover it any time soon. You’ve still got earnings to roll over and the current price decline reflects weakness in future earnings.”
He said Westpac had the biggest mortgage book relative to its size and while many investors hoped to expand net interest margins would support bank earnings, “history suggests it is declining volumes which tends to dominate at this stage of the cycle”.
ABS data released last Friday showed that the value of new home loans fell by a much deeper than expected $2.13 billion in April, with new lending to owner-occupiers dropping by $1.57 billion, or 7.3 per cent compared with March and $2.92 billion or 12.8 per hundred from a year ago.
Meanwhile, investor lending dropped by $557 million or 4.8 per cent from the previous month, but was up $3 billion, or 37 per cent, compared to April last year.
“Anyone could see it coming down the pipe, when you had this huge bring forward of housing demand during the pandemic,” Mr Tevfik said.
The market is now trending lower given tighter lending criteria introduced last November when APRA said that serviceability buffers would need to increase by 50 basis points to 3 per cent. He also asked NAB and ANZ to reduce the debt-to-income ratios on new lending from nine times in early June, while higher interest rates have also crimped the maximum homeowners can borrow.
Mr Tevfik said the analysts’ focus on non-performing loans or fears about a broader recession were overblown, but it was difficult to see volumes growing in the current property market, especially with tighter lending restrictions.
“We do not expect a material increase in NPLs. The banks have provided a lot of mortgages in the last couple of years, but they haven’t been stupid with relatively low LVRs compared with previous cycles,” he said.
Mr Dive agreed the banks’ bottom lines are in good shape, with household balance sheets healthy after people spent the pandemic getting ahead on repayments.
“A move from bad debt charges of 10 basis points to 15 or 20 basis points is more normalised. We’ve gone through a very weird period of history when it comes to almost zero bad debts,” Mr Dive said.
He said while the RBA had been more aggressive than expected, with a “bigger move early rather than lots of little moves”, this was “probably a good thing”.
“Historically in a rising interest rate environment they’ve done quite well and their books are a lot cleaner than in 2001 or 1990,” Mr Dive said.
“The RBA going a bit hard early was the right move, banks historically have been very profitable in that rising rate environment.”