Business lending ‘back on the agenda’ as mortgage demand slows: EY
The major banks are turning their attention back to business lending with tougher market conditions driving a slowdown in mortgage profitability, according to an EY report.
Banks are searching for sources of growth beyond the traditional mortgage market with mortgage profitability continuing to tighten, according to recent EY analysis of the major banks’ full-year results.
The analysis report said that housing credit grew just 4.2 per cent in the 12 months to September, a considerable drop from the peak of 7.9 per cent during the first half of 2022.
Refinancing, which has been a key driver of mortgage growth, appears to be slowing as well, the report said.
EY Oceania banking and capital markets leader Doug Nixon said the major banks are now hunting for growth in areas such as business lending and are also looking to optimise funding and operational costs.
"Tighter financial conditions and serviceability requirements have seen residential mortgage demand slow significantly over the twelve months to September 2023,” said Mr Nixon.
“So, while mortgages have long been the traditional Australian banking sector growth engine, the current environment has put business lending firmly back on the banks’ agendas.”
Business credit growth has also slowed off the back of tighter financial conditions but remains robust at 6.8 per cent, the report said.
NAB saw its business lending balances increase eight per cent in the 2022–23 financial year, according to its full-year financial results. This includes a 24 per cent increase in small business lending over the year.
The Commonwealth Bank of Australia (CBA) similarly saw an increase in the volume of its business loans, with business lending increasing by $14.5 billion or 11.4 per cent.
The was more than double the growth rate for its home loans which rose 5 per cent over the financial year.
CBA reported a similar growth rate of 11.2 per cent for business lending in its September quarter trading update today.
ANZ increased its business loans by 6.5 per cent to $289.2 billion during 2022–23, with SME and specialist business lending primarily driving the increase in volumes.
Australian Business lending by Westpac also grew, increasing 7 per cent or $181.5 billion. The bank attributed the growth to its deepening relationships with existing customers across targeted industries including property, health and non-bank financial institutions.
Asset quality sees slight deterioration
The EY report stated mortgage stress among major bank borrowers had only risen modestly.
However, the report noted that the full impact of rate increases on credit quality is still to play out.
“According to central bank data, the proportion of borrowers rolling off fixed-rate mortgages has peaked at around 5.5 per cent of outstanding housing credit and is expected to decline in 2024,” the report said.
Mr Nixon said the number of borrowers behind in their loan repayments remains at low levels, but the full impact of rate increases on credit quality is still to play out.
“With cost-of-living pressures mounting, the banks will need to carefully monitor any increase in arrears and defaults over the next year, making full use of their front line and collections capabilities and stepping up their support for customers facing financial hardship where needed,” he said.
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