Credit quality at the big four banks has improved despite challenges brought on by regulatory pressure, housing market conditions, and a stagnating economy.
According to financial services firm KPMG, the majors managed to decrease their impaired assets by 15.2% to $11.1m during this year’s reporting season.
With the exception of regional pressures caused by the mining slowdown, the credit environment has remained relatively steady with banks experiencing a four basis point decrease in loan impairment expenses and a 22.5% decrease in impairment charges.
“The majors have demonstrated an ability to preserve credit quality in a challenging growth environment. As interest rates inevitably rise, they will need to balance their pursuit of future volume growth, with profitability and a strong focus on pricing discipline,” said Andrew Yates, national managing partner of audit, assurance & risk consulting at KPMG.
Inflating the loan book
Overall, growth in housing credit has been steady over the year with the banks balancing loan book expansion with the need to restrain investor and interest-only lending under APRA’s restrictions, professional services firm EY said.
“Maintaining this growth is likely to be challenging, with housing affordability issues in Sydney and Melbourne, intense political scrutiny on upwards repricing and customers potentially switching to lower margin products,” EY Oceania banking and capital markets leader, Tim Dring, said.
In order to keep the same levels of growth, the majors will have to overcome the following key challenges:
- Upwards repricing of loans will be heavily scrutinised with concerns that the majors will pass on the bank levy expenses to consumers
- With more borrowers switching to lower margin products, current benefits of repricing will be partially negated
- Differential pricing and stricter lending conditions will see a shift towards principal and interest lending which is lower cost and lower profit
Furthermore, the transition from interest-only to principal and interest may increase the likelihood of mortgage stress amongst consumers, EY said.
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