Nassim Khadem* says the ‘Big four’ banks made huge profits as Australians took out bigger mortgages for pricier housing.
Australia’s big four banks — ANZ, CBA, NAB and Westpac — now hold a whopping $1.87 trillion in home loans.
Throughout 2021, as Australian house prices skyrocketed, Australians kept on taking bigger mortgages — many worth more than six times their income — pushing up the profits of the big four banks.
EY analysis of big four bank 2022 half-year results, has found that they had a combined cash profit after tax of $14.4 billion.
That’s up $700 million from the 2021 half-year results, or an increase of 5.1 per cent.
The big four’s $1.87 trillion share of home loans makes up the bulk of the nation’s total housing loans, which is worth almost $2 trillion all up.
“That’s where they [the big four banks] maximise their profits – through home loan lending,” according to EY Oceania region banking and capital markets leader Tim Dring.
EY found that of a $2.9 trillion loan book held by the big four (including home loans, personal loans and business loans), about $1.87 trillion is made up of home loans.
In the year to March 2022, EY says that home loans written by the big four grew 2.4 per cent, or by $43.9 billion.
The report notes that many Australians also took out high debt-to-income ratios, with many big four customers among almost 300,000 Australians who borrowed more than six times their income.
“Borrowers in this category are at higher risk of mortgage default,” the report noted.
It said the share of big four customers in this category increased significantly since March 2020, representing around one-quarter of new loans by authorised deposit-taking institutions in the December 2021 quarter.
“However, with collections capabilities strengthened during the pandemic, banks are better placed to work with borrowers on customised payment strategies and solutions,” the report said.
Margins on home loans temporarily tighten, but will lift as interest rates rise
The report found that margins on home loans have been declining due to intense competition from other lenders, but that these margins will shoot up again due to rising interest rates.
Average net interest margins decreased 14 basis points from the 2021 half-year, to 1.75 per cent.
“Fixed rate loans have enticed people to move lenders,” Mr Dring said.
“We have seen through the pandemic, a number of customers refinancing — going to another big four lender or another lender that’s not part of the big four.”
But tight margins won’t be the case for long as interest payments start to increase.
The Reserve Bank last week increased the cash rate to 0.35 per cent, and big four bank economists expect more rate hikes to come.
CBA expects the cash rate to lift to 1.60 per cent by February 2023, Westpac expects it will reach 2.25 per cent by May 2023, NAB thinks it will hit 2.60 per cent by August 2024, and ANZ predicts it will reach 2.25 per cent by May 2023.
Analysis from RateCity shows that if the cash rate hits 2.60 per cent by August 2024, someone with a $500,000 mortgage could see their monthly repayments rise by $675 compared to what they’re paying currently.
For someone with a $1 million mortgage, repayments could rise by $1,350.
RateCity research director, Sally Tindall, said economists were predicting the rate hikes would likely push house prices down by about 15 per cent over two years.
“Anyone planning to take out a new home loan in the coming months needs to carefully consider how much debt they take on,” she said.
More loans to business during the pandemic also helped deliver big profits
The rest of the big four’s record profits came from business loans, which grew during pandemic lockdowns.
EY says loans to business now sit a $974 billion, which is up 5.68 per cent, or by $52.4 billion.
Mr Dring said personal loans to customers were down slightly due to increased competition from Buy Now Pay Later services like Afterpay and Zip.
EY says the big four’s share of personal loans (credit cards, car loans etc) was worth $44 billion, which is down 0.91 per cent on the previous year.
KPMG’s banking strategy lead Hessel Verbeek said the big four profit results were back to the rates seen pre-COVID, but that competition, especially for home loans will intensify.
He said in this environment the big four banks need to “become more digital, automate more and reduce their overheads” in order to stay profitable.
He said margins on business lending are higher than they are on mortgage lending because it’s a riskier loan, but that all the major banks were looking to business lending for their future performance.
“There’s questions about how the economy will continue to grow given the impact of rate rises on the housing market,” Mr Verbeek said.
“With higher interest rates we would expect people to stop borrowing – in terms of mortgages — as much as they have been.”
The analysis is for the banks’ 2022 half-year results.
ANZ, NAB and Westpac’s half-year reporting periods ended on March 31, 2022, while CBA’s half-year reporting period ended on December 31, 2021.
*Nassim Khadem is an award-winning journalist, reporting on business news across online, radio and TV for the ABC.
This article first appeared at abc.net.au
