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Speaking to investors at an environmental, social and governance (ESG) briefing on Thursday, ANZ chief executive Shayne Elliott reflected on the state of the current housing and lending market.
The Australian and New Zealand economies are holding up well through the pandemic, according to the bank’s presentation.
However, Mr Elliott expressed concern around operating pressures for small businesses and higher levels of household debt, particularly for first home buyers.
Similar to his counterparts at NAB and Westpac, Mr Elliott stated housing affordability has become “stretched” and there is an emerging disparity in housing, with an escalation in prices far outpacing the rate of income growth.
“That impacts first home buyers, the market and so there isn’t this emerging issue here, as a bank, and as a prudent lender… we need to be responsible and [ensure people] are not taking on too much debt,” Mr Elliott said in response to analyst questions.
APRA recently recorded a rise in high debt-to-income (DTI) lending, with its chair Wayne Byres expressing concern. However, the watchdog has said it will not yet commence any action, as other risk metrics have decreased.
In the current environment, Mr Elliott stated banks would be reconsidering their risk settings and leaning towards more conservative approaches. Factors up for consideration he listed included serviceability numbers and how banks think about borrowers’ expenses and incomes.
“I imagine that all banks are sitting there thinking about their risk settings at a time like this, with house prices and the general uncertainty about the future economic outlook in terms of people’s incomes,” the CEO said.
“I mean there’s [a] lot to be positive about for the economy, but there’s still some risk out there.”
While he acknowledged “ongoing pressure around market share”, Mr Elliott added the banks should not have to rely on the regulators to do what is right.
“We do have to have our own risk appetite and sit down and say, ‘What do we think the right DTI numbers are? Or how much are we willing to see in the high LVR [loan-to-valuation-ratio] or not, etc,” Mr Elliott said.
“My view is that there’s too much within our industry of outsourcing the problem to regulators and when they set the level, our job is to go as far, as close to that line as possible and I don’t think that’s right.
“And I think that we have to do a better job of working out what’s right for us.”
ANZ’s view is that now is the time to tighten lending standards, Mr Elliott asserted.
“It is a time to be asking more questions. It is a time to be doing more analysis on borrower capacity. It is a time to be really understanding a borrower’s expense profile and their income outlooks,” he said.
“And so, guess what, that may take a bit more time to do and may make the banks a bit uncompetitive in terms of things like turnaround times, but it’s still the right thing to do and I think in the long term, it’s actually in the shareholders’ interests to do so.”
ANZ recently saw its loan book total slip by 1 per cent in the month of July, to $261.8 billion. It was the only major bank to see falls across both its owner-occupier and investor portfolios.
The bank’s book also dipped by $300 million during the June quarter.
But Mr Elliott said the bank has a preference for owner-occupier customers, and for helping them pay down their loans and to use offset balances, which has come at a cost.
“We think it is the right thing to do for the borrower, it is the right thing to do in terms of financial wellbeing position. That comes at a significant cost to our business,” the CEO stated.
“…You know, if you’re trying to maximise the financial outcomes, you’re much better off in pushing interest only loans but we’ve made, I think, a purpose-driven decision to say there’s a place for interest only. I accept there’s absolutely a place for investors, but our focus is on people who pay principal.”
He also acknowledged that the bank had “self-confessed to some operational issues”.
Elliott reflects on regulators
Both APRA and the Reserve Bank of Australia (RBA) are monitoring the housing and mortgage markets, having discussed what tools they will use if they decide to intervene.
Such tools, as listed by RBA governor Philip Lowe, could include limits on loans with high loan-to-valuation ratios or high debt-to-income in lenders’ portfolios.
But Mr Elliott commented the Reserve Bank’s choice to maintain cash rates at its record low level of 0.1 per cent has also been a contributor to the issues around housing and mortgage lending.
“Yes, it makes it harder to save for a home and yes, it encourages increased levels of debt because… you can afford it, if you will, because of the lower servicing costs,” he said.
“And that’s why I think, and again, it is a think, that’s why the Council of Financial Regulators and the RBA made comments about perhaps the need for macro-prudential intervention to offset some of those issues. So it’s a complex issue.”
However, he rejected that housing affordability should be folded into the RBA’s remit, to mirror the mandate of the Reserve Bank of New Zealand.
The Kiwi central bank also regulates prudential standards, which is covered by APRA in Australia.
“I think the policy setting in New Zealand, yeah I’m not sure it’s appropriate to lift and shift that and say, therefore the same should be here,” Mr Elliott said.
“I think the Council of Financial Regulators [and] I think the regulatory system does have a perspective and a role to play in terms of housing affordability and I see the way they execute that as through the various arms of that regulatory structure.”
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