Industry Trend Analysis - Banking Outlook Still Poor Amid Cooling Housing Market - MAY 2018

BMI View: We continue to hold a negative outlook for Australian banks as they are likely to be undermined by slower mortgage lending as the housing market continues to cool over the coming quarters. Tighter lending standards, poor housing affordability, and stretched household balance sheets are likely to curb lending for house purchases, which will likely weigh on the earnings of banks at a time when interest rates are still at record-lows. Banking equity performance is therefore likely to lag that of the broader stock market.

Australia's housing market is already cooling, with price growth slowing to 4.2% in 2017, from 5.8% in 2016 and 9.2% in 2015, according to Corelogic, and our core view is for the slowdown to continue over the coming quarters. Given that residential mortgages account for slightly more than 60% of the overall loan portfolio of Australian banks, we expect a cooling housing market to weigh on banking profitability as credit expansion slows. Notably, the series of tightening macro-prudential measures by domestic regulators since 2014 in an effort to curb speculation will likely act as a drag on credit growth. At the same time, stretched household balance sheets (at a time when wage growth is still subdued), poor housing affordability, and an increase in housing supply will also likely weigh on house price gains.

Macro-Prudential Measures And Stretched Households To Limit Credit Expansion

Investor Housing Credit Facing Headwinds
Australia - Interest-Only Loans Approved, % Of Total New Residential Term Loans To Households Approved And Investor Housing Credit, % chg y-o-y
Source: BMI, APRA

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