National loan growth to slow: Fitch Ratings

Statistical rating agency Fitch Ratings (Fitch) has revised its outlook for the banking sector in Australia, saying that it now considers the outlook to be 'deteriorating' (previously neutral).

The assessment was arrived at given that Fitch expects loan growth in Australia to slow, particularly in mortgages, as interest rates continue to rise and deter new borrowers and arrears from “still-low” levels expected to pick up.

According to Fitch, higher rates will result in asset quality weakening in both the commercial and mortgage books, albeit from strong levels and “not to a degree that would pressure bank ratings under our baseline assumptions”.

Additionally, Fitch has said that it believes net interest margins (NIMs) peaked late last year and that the interest rate hike cycle is drawing to a close.

“NIMs benefited from a strong uplift in the current cycle, as high inflation led to a relatively fast and steep rise in rates, while savings buffers built up during the COVID-19 pandemic initially dampened deposit pricing,” it said.

Slowdown in loan growth

The outlook downgrade comes after more data sets show that new mortgage lending has slowed.

For example, quarterly statistics from the Australian Prudential Regulation Authority (APRA) for the three months to 31 March 2023, indicate that Australia’s banks funded $132.7 billion in new residential mortgages that quarter, a drop of 8.5 per cent when compared to the same period last year.

This affirmed the Lending Indicators data trends released by the Australian Bureau of Statistics (ABS), which revealed that the value of new loan commitments has declined over the past few months.

The data revealed that new housing loans fell 2.9 per cent to $23.3 billion in April 2023, 25.8 per cent lower compared to the same month in 2022.

Arrears monitored by RBA

Give the changing environment, the governor of the Reserve Bank of Australia (RBA), Philip Lowe, has stated that the RBA will be monitoring the strength of household spending, with mortgage arrears being one of the indicators being examined.

Real incomes in households have declined, with higher shares of disposable income being required for mortgage repayments that will reach record levels later on in 2023, according to Mr Lowe.

Furthermore, the latest data from credit ratings agency S&P Global Ratings has indicated that mortgage arrears in Australia are ticking up as borrowers face mounting financial pressures.

S&P’s quarterly market overview for March 2023 revealed a rise in both prime and non-conforming mortgage arrears during the first quarter of the year, with prime mortgage arrears reaching 0.95 per cent during this period, approaching the long-term average above 1 per cent.

[RELATED: Bank mortgages down $12bn in March quarter]