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A report has shown that loan momentum among the major banks slowed in the six months to March.
The report Major Australian banks’ 2023 half-year results: Walking the tightrope released by Ernst & Young (EY) indicated that both mortgage and business lending growth for the four major banks slowed over the six months to March as financial conditions tighten.
EY Oceania banking and capital markets leader Doug Nixon stated that retail credit growth compression created “highly competitive prices practices” for mortgage business as some lenders were “appearing to price loans at or below the cost of capital”.
According to the report, the majors have been “competing intensely” for mortgage business via offering cashback incentives and discounted rates.
Mr Nixon said: “Banks have been offering significant cashback incentives and discounted rates in the battle to attract new, and retain existing, borrowers.
“However, competitive pressures are showing early signs of easing, as the banks respond to rising funding costs and expectations that the current monetary tightening cycle may soon end.”
Additionally, while business confidence “remains around pre-COVID-19 levels” and business conditions are strong, confidence and conditions are likely to take a hit as consumption growth slows, according to the report.
Furthermore, the major banks are not anticipating “a sudden wave of home loan defaults” despite concerns of the looming “mortgage cliff” and arrears slowly ticking up.
“However, they remain cautious in their outlook, especially given the current market uncertainty. All have increased their collective provisioning levels compared with 2H22,” the report stated.
Average net interest margin (NIM) improved over this period, reinforced by rising interest rates and careful management of mortgage versus deposit rate increases.
“But, as ongoing competition erodes the margin benefits of higher rates, we may see margins tighten as early as the second half of 2023,” Mr Nixon said.
There are some signs of mortgage stress developing across the sector as arrears tick up on the heels of the RBA’s 11 cash rate hikes, however, non-performing loan levels remained low overall.
The report further stated that the major banks are not anticipating a “sudden wave of home loan defaults” despite concerns and market speculation of a looming “fixed-rate mortgage cliff”.
The banks are remaining cautious in their outlook, particularly given the current uncertainty in the market, with all the majors increasing their collective provisioning levels compared to 2H22.
[RELATED: FHBs coming back into market as mortgage activity rises]
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