Banking sector outlook worsens
The recent flow of banking industry data suggests that things will get worse before they get better, and investors may want to hit pause on any plans they have to increase their bank shareholdings.
The latest Australian Bureau of Statistics data shows that demand for consumer and business loans is falling, and in remarks this week the governor of the Reserve Bank of Australia, Philip Lowe, says this could be a long-term trend.
Weak demand is spurring on even greater competition for new borrowers. Home loan rates are coming down to around 2 per cent, squeezing lenders’ margins in the process.
Another pressure point for the banking sector is that its fee income is falling. Last year was the second successive year it has fallen, after steady growth in the past.
And banks’ costs are going through the roof, as bad debt write-offs increase and post-Hayne IT spending remains high.
Reduced demand from borrowers and tighter lending criteria saw new lending fall sharply in April. According to ABS lending data, the value of new loan commitments for owner-occupier mortgages fell 5 per cent in April, compared with the previous month, and new mortgage lending to investors fell 4.2 per cent.
The ABS said the fall in new housing finance would have been greater, except for a backlog of housing loan applications in March that were processed in April.
The value of new personal loans crashed by 24.8 per cent, month on month. The ABS said it was the biggest monthly fall in the history of the series. Business lending was also hit hard. New business loans for construction fell 39.2 per cent in April and new loans for the purchase of property fell 7 per cent.
Weak demand for credit could be a long-term problem, as businesses and households adopt more risk-averse positions in response to COVID-19, RBA governor Philip Lowe has warned.
Speaking at the ANU Crawford Leadership Forum this week, Lowe said: “When we get to the other side, we face a world where there will be a shadow for a number of years – a slower growth world with lower borrowing and weaker population dynamics.
“There may be a protracted period where people will be risk-averse and where there will be less investment and less spending.”
In the home loan market, Reduce Home Loans has cut the standard variable rate on its Super Saver Variable to 2.19 per cent, which comparison site Canstar says is a new benchmark for the mortgage market.
The previous lowest rate was 2.25 per cent, which Reduce Home Loans was offering on loans with loan-to-valuation of 60 per cent or less. The new rate is available on loans with LVRs of 80 per cent or less.
Canstar says that for loans with LVRs of 80 per cent or more, the best rate is Tic:Toc’s offer of 2.39 per cent.
The lowest fixed mortgage rate is 2.09 per cent, which HSBC is offering for two years on loans with LVRs up to 80 per cent and ING Bank is offering for two years on loans with LVRs up to 95 per cent.
As lending rates continue to fall, banks have less scope to cut deposit rates to maintain their margins.
Another income stream under pressure is fees. According to the Reserve Bank’s latest Bank Fees in Australia report, total bank fee income in 2019 was $12.3 billion – down 0.7 per cent from the previous year. Lower fee income from households was driven by lower fees on deposit accounts, while fee income from businesses grew at a slower pace, as a result of changes to merchant service fees.
Banks earned fees worth $3.9 billion from households – down 6.8 per cent from the previous year. The biggest fall was in deposit account fees, which fell 18.4 per cent.
The biggest household item is credit card account fees, which were worth $1.7 billion – 43 per cent of the total. Credit card fees were down 0.2 per cent from the previous year.
The RBA said some banks reported reductions in late fees due to the use of SMS alerts to remind customers of payment due dates.
The 18.4 per cent fall in deposit account fees, which were worth $744 million, reflected falls in account servicing fees, transaction fees and ATM fees.
Bank fee income from business was worth $8.3 billion – an increase of 2.3 per cent from the previous year.
The RBA said growth in business fees was largely a reflection of increases in business loan fees, which accounted for 40 per cent of the total, and merchant services fees from processing card transactions (38 per cent of the total).
The increase in fee income from business loans was consistent with a higher volume of loans last year.
Merchant service fee income rose 2.2 per cent, which is below the average annual increase of the preceding five years. The RBA said this reflected the ongoing shift from credit to debit cards for payments.
Finally, banks’ cost of doing business is going through the roof. Their cost-to-income (CTI) ratios exploded in the March quarter, as big increases in bad debt charges and higher regulatory and IT spend weighed on modest income growth.
According to the latest Australian Prudential Regulation Authority (APRA) quarterly authorised deposit-taking institution (ADI) performance statistics, the average cost-to-income ratio for the 147 banks and other ADIs in the survey rose to 63.4 per cent in the March quarter – the highest ever recorded in the data set (which goes back to 2004).
Over the year to March, the average CTI was 55 per cent – up from 51.6 per cent in the year to March 2019.
Net interest income for the industry grew just 2.4 per cent to $79.2 billion in the year to March, while total operating income was flat at $107 billion. Operating expenses rose 6.1 per cent to $59.1 billion.
The overall charge for bad and doubtful debts in the December quarter was $5.4 billion, which was the worst result since the December quarter in 2008 when the financial crisis caused a spike in bad debts to $6.1 billion.
“Factors such as abrupt changes to capital markets, negative sentiment due to altered economic conditions and pressure to maintain dividend rates despite declining profitability will continue to place capital strain on ADIs,” APRA says.