Housing downturn pushes Australian banks' credit growth down to 5.1% in March

Residential credit accounts for more than 60% of the banking system’s overall credit.

Australia’s headline credit growth has been on a steady decline after slowing to 5.1% YoY in March from a 6.6% peak in April 2016, according to BMI Research, as the housing market loses steam. 

National home prices dropped from 4.2% YoY in December 2017 to 0.2% YoY in April as the Sydney’s residential market contracted even further. 

Although credit rating agency Fitch notes that major banks have sufficient buffers to shield them from significant downturn in the mortgage market, housing credit accounts for more than 60% of overall credit in Australia’s banking system, pushing up downside risks should the downturn extend further. 

“Poor housing affordability, coupled with tight lending standards due to macro-prudential measures by the Australian Prudential Regulatory Authority and stretched household balance sheets , are factors that will weigh on house price gains,” BMI added.

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Moreover, the historically low interest rate environment brought about by the weakening housing market and a slowdown in China’s industrial sector is likely to weigh in on the net interest income of banks. This comes after data from the Australian Prudential Regulatory Authority showed that net interest income grew by a measly 4% in December versus the 10-year average of 7.1% YoY.

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Intensified scrutiny from the country’s Royal Commission on the alleged misconduct of the sector may prompt additional capital requirements by regulators.

“For example, whilst not directly linked to the government’s inquiry, the APRA releas ed the Final Report of the Prudential Inquiry into the Commonwealth Bank of Australia on May 1, and also imposed an extra A$1b onto the bank’s minimum capital requirement to addres s concerns found during the inquiry,” BMI noted.