Banks Struggle to Carry On as Housing Remains Soft

SYDNEY -- Slowing home loan growth spells bad news for the banks and other home loan lenders, an issue that we here at The Motley Fool have been concerned about for some time.

The Reserve Bank of Australia has released data showing that housing credit to the private sector by banks rose an anemic 0.3% in June after rising by a similar level in May. The annual growth rate was 5.1%.

Banks depend on credit growth to build their revenue, profit, and dividend payout, but analysts are forecasting the growth rate to slow even further in the near term.

Investors might want to think twice about increasing their investments in the banks most exposed to the slowdown, which of course are our big four: Australia and New Zealand Banking Group (ASX: ANZ.AX), Commonwealth Bank of Australia (ASX: CBA.AX), National Australia Bank (ASX: NAB.AX), and Westpac Banking Corporation (ASX: WBC.AX), which control around 90% of the home loan market.

But home loan levels are not the only issue for the banks. Personal credit is going backward as households pay off their debts and resist the temptation to take up new loans and credit. Business credit is also very low as companies follow households in deleveraging.

The banks are also facing higher funding costs, and with the pressure to maintain their profit margins, they've been cutting staff as they try to reduce expenses. Additionally, as economic growth slows, the banks are exposed to marginal businesses that can only survive during boom times, such as Hastie Group. The fall into administration and loss of an estimated 2,000 jobs would have hit employees hard, but the company's lenders are also likely to suffer.

Is there any good news?
Data from the Australian Bureau of Statistics shows that house prices in our capital cities are rising for the first time in 18 months. Average prices across eight capital cities rose 0.5%, with Darwin posting a 5.1% jump in the June quarter.

In more positive news, Australia's biggest mortgage broker, Australian Finance Group, processed more home loans in July 2012 than in any other July since 2007 -- and 20% more than in July 2011. According to AFG, low interest rates, soft property prices, and escalating rents are creating strong incentives for people to get into the property market.

The Foolish bottom line
Bank shareholders will likely hope that these are the first signs of a recovery in the housing market. But with economists predicting the RBA will maintain the official interest rate at the current level in the short term, hope may not be enough for the banks.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, while it's still available. This article contains general investment advice only (under AFSL 400691). Authorized by Bruce Jackson.


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