Morningstar equity analyst Nathan Zaia has created a new report that provides readers with insight on the Australian banking space including the challenges, opportunities and Morningstar’s expectations.

In this article we take a look at five charts from Zaia’s report to understand how the banks have performed over the last quarter.

The full report can be found here for premium subscribers.

Australian home loans remain the majority of leading in Australia, in fact since 2019, home loans have made up 62% of lending. Owner-occupied home loans have been on the rise since August last year and remain the bulk of lending. The number of investment-related home loans have also been increasing since 2021 yet remains proportionally smaller to the number of owner-occupied loans. Zaia also mentions that nonbank lenders have increased their market share within the home-loan space to 8%, up 2% in the last three years to August 2022. He believes the nonbanks access to cheap funding has improved their competitiveness as major banks have focused on managing industry exposures.

 

New loan commitments have remained relatively robust up until May this year when the RBA began hiking the cash rate. Since May, new loan commitments have started to drop off, falling from $32.4 billion down to $27.4 billion in August. Zaia attributes the dip in new loans to higher rates, weakening consumer confidence and borrowing capacity in combination with falling house prices, which brings caution and lessens the fear of missing out. New loan commitments fell 3.4% month-on-month in August 2022 yet remain 53% higher on a year-on-year basis. Zaia also expects further falls in new loan commitments in the future as the RBA continue with its rate-hiking cycle.

 

Over the last year CBA, NAB and BOQ had the largest growth in home loans, with CBA increasing its home loan book by $34.1 billion. Macquarie also grew its home loan book over the last 12 months despite it only growing by a considerably smaller amount than the largest lenders (excluding ANZ Bank). Zaia notes that this is a change from recent periods where Macquarie was keeping pace and outperforming the major banks. He forecasts that with funding and operating costs rising, smaller leaders like Macquarie will switch their focus from volume to margins and returns in the future.

 

Many economists are split on the magnitude of future rate rises. The ASX 30-day futures implies an RBA cash rate of 2.9% by December 2022 and 3.5% by December 2023. On the other hand, Commonwealth Bank is the only bank who is pricing in a cash rate cut for next year, with all other banks rates to rise or remain on hold. Morningstar forecasts the RBA will slow the pace of rate hikes to allow the previous increases to materialise and impact consumer spending.

 

The percentage of borrowers who are ahead on their mortgage payments by six months or greater has increased. Zaia believes this will provide borrowers more time to remedy their financial situation if they are unable to meet the higher mortgage rates. However, he notes that strong new lending activity, fixed rate and tax incentive investor loans are reasons why the majority of borrowers are not ahead on their mortgage payments.