Commonwealth Bank chief executive Matt Comyn said the banks’ data showed younger generations had lifted their spending and saving.Credit: AFR
“Bad debts have stayed extremely low,” said Morningstar analyst Nathan Zaia, though he noted NAB bucked the trend with slightly higher bad debts in the June quarter. This could be a quarterly blip, or it might show small businesses (NAB’s key customer base) are feeling the pain more than households.
Australian Prudential Regulation Authority (APRA) chair John Lonsdale also said this week the broad trend in credit quality had been “probably as good as we could have hoped”, given rises in interest rates between 2022 and 2023.
“The arrears figures, the delinquencies, and ultimately the non-performing loans have held up incredibly well over a rising and now falling interest rate environment,” Lonsdale said.
Rate cuts fuel mortgage growth
Interest rate cuts are not only giving indebted customers more breathing space – they are also boosting the housing market. And as house prices rise, it tends to lift credit growth.
CBA said in its result that it expected housing credit growth of between 5 per cent and 7 per cent this financial year, and its presentation also noted customers’ borrowing capacity had risen thanks to tax changes that came into effect in July last year.
Loading
ANZ economists, separately from any results, have noted that the latest June quarter was the strongest quarter for housing credit growth since 2022, and they expect housing credit will accelerate and overtake business credit growth in the year ahead. ANZ forecasts housing credit growth will hit 8.2 per cent by the end of 2026, compared with 5.9 per cent now.
Markets expect the Reserve Bank will make two more rate cuts over the next year, and Morningstar’s Zaia says that could help to encourage growth in lending to property investors. “If you’ve got some more cash rate cuts, that should be a positive for investor sentiment.”
APRA this week said further rate cuts could add to the risk in banks’ mortgage portfolios, as in the past lower interest rates had fuelled higher leverage, house price growth, and often, riskier lending by banks. It will keep a close eye on these risks.
The contest with mortgage brokers continues
Mortgage brokers have had a phenomenal rise since the 1990s and now write about three-quarters of all new home loans in Australia. Banks are openly trying to fight back, and many are employing more bankers to arrange loans. But given the key role of brokers in the market, it is a delicate balancing act.
CBA, which is much less reliant on brokers than rivals, repeatedly highlighted that it wants to do more lending in-house, and it kept the share of loans that were written in-house steady at 54 per cent.
Westpac’s trading update showed 46 per cent of loans were written by its own staff, down from 48.7 per cent a year ago, and from 46.6 per cent in March. The bank is hiring 180 new bankers and this area is a key priority for chief executive Anthony Miller.
The major banks have about $1.8 trillion in mortgages – their biggest asset.Credit: Peter Rae
NAB’s Andrew Irvine said it had made “good progress” in its in-house lending – one of the top priorities he outlined for the bank in May.
It’s not clear what ANZ’s new chief, Nuno Matos, may be planning for the bank’s use of mortgage brokers, who accounted for two-thirds of its new lending in the latest half.
Market observers are watching the issue closely, but many, such as Jarden’s Matt Wilson, believe it will be difficult to reverse the long-term move by customers towards mortgage brokers.
“Whilst we applaud the efforts by the CBA and NAB, in particular, to win back the third-party distribution margin in search of better shareholder returns, we think it’s akin to trying to put toothpaste back in the tube,” Wilson said.
Is the CBA ‘bubble’ deflating?
The big question for many investors – including the people managing our superannuation – is what all this means for share prices.
Loading
CBA is the biggest company on the ASX, worth $290 billion after a rally of more than 25 per cent over the past year. The big four combined are worth almost a quarter of the entire ASX 200, and there’s long been a debate about whether Australian bank shares (especially CBA) are overvalued.
The violent market reaction to CBA’s largely as-expected result helped reignite this discussion, as analysts questioned if there could be more falls to come for the country’s biggest bank.
Barrenjoey’s Jonathan Mott said CBA’s price-to-earnings multiple (a measure of valuation) had swelled to a record 30 times at its peak, and it was “impossible” to justify the bank’s valuation when it makes “low single-digit” growth in earnings per share. “Has the CBA bubble finally popped?” Mott asked.
Other analysts are also convinced the banking titan is over-valued. Even after the fall in CBA’s share price following its results, none of the major investment banks has a “buy” recommendation on CBA shares.
The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.
