“The housing market has only just started to enter this downturn and this one will be as big as the biggest we have seen in the last 40 years. Over the past 10 periods of falling house prices, banks have underperformed in nine of them.
Rising interest rates have reduced the maximum homeowners can borrow from banks, with Rate City Director Sally Tindall calculating that May and June’s interest rate increases wiped about $66,000 off the amount that couple earning $150,000 can borrow.
“However, by April of next year, if the cash rate increases to 2.35% as Westpac predicts, the maximum the same family could borrow from the bank would be about $163,500 less than a year ago, before the hikes started,” she said.
Atlas Funds Management chief investment officer Hugh Dive said the selloff was overdone, with banks fundamentally still in good shape and net interest margins expected to improve, particularly given their less reliance on foreign exchange. vis-à-vis wholesale funding markets relative to 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 thinks, it’s a little premature to fire them all this week.”
Tevfik said the Reserve Bank’s aggressive move on Tuesday to raise the cash rate by 50 basis points, which would normally boost banks by increasing the margin they earn on loans, spooked investors.
“What has been clear to many investors this week is that the RBA is not going to waste time trying to normalize its policy,” he said.
New loans down
“We had a short position in banks and I’m not tempted to cover it anytime soon. You still have profits to carry forward and the current decline in prices reflects weak future profits.
He said Westpac had the largest mortgage portfolio relative to its size and while many investors hoped expanding net interest margins would support bank earnings, “history suggests it’s the downside volumes which tends to dominate at this stage of the cycle”.
ABS data released last Friday showed the value of new home loans fell much more than expected by $2.13 billion in April, with new homeowner loans falling by $1.57 billion, or 7.3% from March and 2.92 billion or 12.8% percent from a year ago.
Meanwhile, loans to investors fell $557 million or 4.8% from the previous month, but rose $3 billion, or 37%, from April last year.
“Everyone could see it happening, when you had this huge increase in demand for housing during the pandemic,” Tevfik said.
The market is now trending lower given the tougher lending criteria introduced last November when APRA said service buffers should increase by 50 basis points to 3%. He also asked NAB and ANZ to cut leverage ratios on new loans by nine times in early June, while higher interest rates have also reduced the maximum homeowners can borrow.
Mr Tevfik said analysts’ focus on non-performing loans or fears of a wider recession were overblown, but it was hard to see volumes rising in the current property market, especially with restrictions more stringent lending.
“We don’t expect a significant increase in NPLs. Banks have provided plenty of mortgages over the past two years, but they haven’t been foolish with relatively low LVRs compared to previous cycles,” a- he declared.
Mr. Dive agreed that the financial results of the banks are in good shape, with healthy household balance sheets after people spent the pandemic moving forward on repayments.
“A move in bad debt charges from 10 basis points to 15 or 20 basis points is more normalized. We’ve been through a very strange time in history when it comes to almost zero bad debts,” Mr. Dive said.
He said that while the RBA had been more aggressive than expected, with a “bigger move early on rather than a lot of small moves”, it was “probably a good thing”.
“Historically, in a rising interest rate environment, they’ve done pretty well and their books are a lot cleaner than they were in 2001 or 1990,” Dive said.
“The RBA which was a bit tough at the beginning was the right decision, the banks have always been very profitable in this environment of rising rates.”
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