You are using an older browser version. Please use a supported version for the best MSN experience.

Will record low rates trigger a big jump in mortgage growth at the big four banks?

The Motley Fool logo The Motley Fool 6/4/2019 Brendon Lau
a graffiti covered wall: big four banks 16:9© Provided by The Motley Fool, Inc big four banks 16:9

The first bank to cut its mortgage rate is Australia and New Zealand Banking Group (ASX: ANZ) but the bank has drawn the ire of the government for not passing the full 25 basis point rate cut on to customers.

ANZ Bank is only lowering its rate by 18 basis points and the federal Treasurer Josh Frydenberg blasted the lender for letting down its customers and for putting profits before people.

Interestingly, its rivals Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank Ltd. (ASX: NAB) have opted to pass on the full RBA rate cut onto their customers, and I suspect Westpac Banking Corp (ASX: WBC) would as well.

While Frydenberg may be displeased with ANZ, its shareholders aren’t as the stock jumped 0.8% to $27.76 on Tuesday – making it the best performer of the big four and putting it well ahead of the 0.2% gain by the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index.

Mortgage growth on the rebound

But the key question investors should be asking is whether this lower rate environment will do anything to help the banks grow their loan book.

You might think conditions are ripe for mortgage growth given the multiple tailwinds. On top of falling interest rates, demand for mortgages will be bolstered by the anticipated turnaround in the housing market, the continuation of negative gearing benefits and APRA’s lowering of stress testing requirements on loan repayments.

These tailwinds could more than triple mortgage growth at the big four after the group only managed to achieve an annualised growth rate of 1.2% in the past three months, according to Morgan Stanley.

Don’t forget growing headwinds

But before you get too excited, Morgan Stanley believes investors shouldn’t hope for much more than 4% growth. While that’s a sharp improvement over current growth rates, it’s modest compared to the circa 8% growth by smaller banks and circa 16% for non-bank lenders.

Mortgage growth at the big banks are held back by a number of factors. One of this is the level of debt by households with APRA putting pressure on the banks to restrict lending to customers where debt-to-lending ratio is above 6 times.

Morgan Stanley thinks this means borrowers wanting to borrow more will not be able to do so and a recent survey it conducted found that 23% of mortgagees had a total debt-to-income ratio above 6 times while 11% were over 8 times.

“Borrowing capacity is down >30% since 2015 according to ANZ, with 6/10th of this due to living costs,3/10th from higher interest rate buffers and 1/10th from income haircuts,” said the broker.

“A lower interest rate buffer returns ~6.5% of capacity, but the benefit is skewed to owner occupiers (+9.5%) vs. investors (+1%).”

More headwinds are building too. These include ASIC’s new responsible lending requirements, loan-to-value (LVR) constrains with falling house prices (the market hasn’t turned yet!), comprehensive credit reporting and the change over from interest-only to principal plus interest loans, which will lift repayments by 40% to 50%.  

It’s hard to believe what these 2 ASX companies could mean to the digital payments revolution

The Motley Fool’s top tech analyst has spent years studying the huge global trend in which cash and traditional banks give way to new digital payments systems... And now he’s identified the two ASX companies he believes are poised to win this multi-trillion-dollar “war on cash.”

If he’s right, these two companies could power your portfolio for years to come. Heck, stock #1 is already up 204% in just the last two years...

While Stock #2 has climbed a stunning 954% just since 2015.

Yet we think the biggest returns look to be still ahead. In fact, our expert is convinced investors who act now could be in for 10X gains (or more). Which means you will want to get the details on these 2 ASX companies as soon as possible.

So click the link below right now! We’ll tell you how to pick up your free copy of this brand new report, “Leave Your Wallet at Home: 2 Stocks for the Digital Payments Revolution”…

CLICK HERE TO FIND OUT MORE!

More reading

Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, Commonwealth Bank of Australia, and Westpac Banking. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

AdChoices
AdChoices
AdChoices

More from The Motley Fool

The Motley Fool
The Motley Fool
image beaconimage beaconimage beacon