NIM is likely to remain constrained over the medium-term, given RBA expectations that the official cash rate will not increase until 2024 at the earliest.
New housing loan commitments have continued to show very strong growth, reaching record high levels and increasing by more than 55% over the year to March . However, the major banks have grown below system amid a fiercely competitive market. Mortgage growth has been largely driven by lending to owner-occupiers, including first home buyers taking advantage of government incentives and low interest rates. Investor lending has also gained momentum in recent months to finish 54% higher over the year to March . However, the share of these higher risk investor home loans as a proportion of total housing credit remains low. The share of high LVR and high debt to income lending has also been increasing since mid-2020 , but both remain low by historical standards.
In an environment of very low interest rates and rising housing prices, regulators and policy makers are closely monitoring lending standards. There has been no notable evidence of a decline in housing lending standards. For example, the share of loans with an LVR ratio above 80% is just 21% of outstanding credit. And importantly, the current housing market has been driven by owner occupiers – currently more than 74% of new loan commitments – not investors. However, should credit underwriting standards deteriorate, the introduction of macroprudential controls by APRA is a likely outcome. These could include a cap on the share of loans with a high LVR or debt to income ratio. The challenge for APRA will be to ensure that controls do not unduly restrict the supply of credit to first home buyers.
While rates on shorter-term fixed loans offered by the major banks continue to fall – some advertised rates are now below 2% – a number of banks have recently increased rates on four-year fixed-rate loans. The move reflects anticipated increases in funding costs amid rising long-term bond yields and the end of the TFF in June, and the pricing in of a possible rate increase in 2024.
While there has been little change in small-to-medium enterprises (SME) lending at the system level over the past 12 months , there are signs that conditions are starting to improve. Business credit looks to be stabilising, following eight months of contraction. The latest EY Capital Confidence Barometer shows that Australian firms expect revenue and profitability to be back to pre-pandemic levels either this year or next. As the economy has started to recover, some of the banks have noted growth in business credit in recent months.
However, small businesses are reporting that access to finance remains challenging, particularly for new businesses. Banks are taking a cautious approach in deciding whether to finance small businesses, focusing on the more profitable customers and sectors likely to see good growth as the economy recovers. They are also pricing for risk and imposing more restrictive terms on loans.
Buy now, pay later options
The buy now pay later sector continues to grow rapidly as new providers enter the market. RBA research indicates the value of BNPL transactions increased by around 55% in 2019-2020 . However, this is off a low base, with the value of BNPL payments estimated to be equivalent to less than 2% the total value of Australian debit and credit card purchases in 2020 . Nonetheless, some of the major banks have invested in BNPL providers, and introduced new ‘no interest’ credit card and BNPL-type products to attract and retain customers who are seeking convenient and cost-effective ways to make purchases.
The pandemic has highlighted the need for more efficient and flexible lending models. Some banks have faced challenges with evaluating and processing large volumes of mortgage loan and refinancing applications as housing credit activity has soared.
In response to these challenges, the banks have focused on reducing the ‘time to yes’ and ‘time to cash’. They have invested heavily in their systems to streamline processes, including compliance with responsible lending requirements. This has led to improvements in home loan approval times over recent months. It has also enabled the banks that were losing ground to regain momentum.
Looking ahead, the banks have an opportunity to build on the initial changes already made to accelerate the transformation of their lending operations. Tech-enabled processes and data-driven decision-making will drive the development of smarter lending models. For example, data-driven insights that incorporate more forward-looking and behavioural data in retail and SME banking will enable more granular and customised loan pricing. Banks also need to integrate their products with customers’ unique life moments, to engage with them more personally. So, rather than confining their role to conventional mortgage servicing, banks can include themselves in other parts of a customer’s home-buying journey to better anticipate the customer’s evolving needs. This means banks can target customers with more personalised propositions to help retain and grow their customer base.