Credit growth is lower than GFC levels

The RBA credit aggregates released at the end of October shows that Total Credit in the Australian economy contracted by $3.8 billion in the 3 months to the 30^th September 2019. The lowest figure reached in the GFC was a contraction of $2.2 Billion in November 2009.

This fall in lending is reflected in the major banks’ home lending portfolios. ANZ’s home lending portfolio fell $1.65 Billion over the previous three months, NAB fell $0.76 Billion, and WBC fell $1.8 Billion. Against the trend, CBA’s home lending lifted by $3.8 Billion.

These negative growth figures run contrary to the recent rally in home prices and auction clearance rates. First time home buyers are being induced to purchase with stamp duty waivers, Government programmes covering the mortgage insurance up to 95% of valuation and the relatively low current mortgage rates. The top end of the market is where the largest price movements have occurred, with the wealthier individuals largely indifferent to the sluggish economy, taking full advantage of the cheaper mortgage rates.

But rising home prices without growth in Bank loan books don’t make them more profitable. Lower turnover means existing homeowners are consolidating their finances by saving the benefits of lower mortgage rates and having the time to drive a harder bargain with the banks who are not passing on rate cuts to existing borrowers. Banks are also suffering from the inability of paying depositors less than zero, as interest rates keep falling.

Credit growth is correlated to Gross Domestic Product (GDP) growth, so the credit growth contraction does not auger well for GDP growth, with a real possibility of negative GDP growth a possibility. Real GDP per capita has flatlined the past three years, with the last 12 months having slightly contracted.

A rising unemployment rate will be the canary in coal mine for the Australian economy and bank profitability, as the possibility of bad and doubtful increases. According to APRA, the bad and doubtful debts for the year to June 30th, 2019 for Banks was $4.3 Billion or 1.5% of paid up capital. In the GFC, the bad and doubtful debt charge was 11.7% of paid up capital. By historical standards, the current bad debt charge is quite low given the very large home price increases experienced over recent years. Even if home prices go sideways for a period, you would expect bad and doubtful debt expenses to rise.

The talk in the press is that home prices are rising (possibly 30% in this cycle – Chris Joye, AFR) and the private sector will recommence their debt binge as interest rates fall to zero. I probably would be more cautious on the economy and the banks.