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Bank struggles to continue as housing remains soft

Slowing home loan growth spells bad news for the banks and other home loan lenders, an issue that we here at the Motley Fool have been concerned about for some time.

The Reserve Bank of Australia (RBA) has released data showing housing credit to the private sector by banks rose an anaemic 0.3% in June 2012, after rising by a similar level in May. The annual growth rate was 5.1%.

Banks depend on credit growth to grow their revenues and profits, and for shareholders to receive growing dividends but analysts are forecasting the growth rate to slow even further in the near-term.

If banks aren’t growing, revenues and profits usually follow, which will affect their ability to grow earnings per share and dividends, which should be concerning for shareholders.

Investors might want to think twice about increasing their investments in the banks most exposed to the slowdown, which of course are our big four,  Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac  Banking Corporation (ASX: WBC) who control around 90% of the home loan market.

But its not just home loan levels that are an issue for the banks. Personal credit is going backwards as households pay off their debts and resist the temptation to take up new loans and credit. Business credit is also very low, as companies follow households in deleveraging.

The banks are also facing higher funding costs, and under pressure to maintain their profit margins, have been cutting staff as they try to reduce expenses. Additionally, as growth in our economy slows, the banks are exposed to marginal businesses that can only survive during boom times, such as Hastie Group Limited (ASX: HST). The fall into administration and loss of an estimated 2,000 jobs would have hit employees hard, but the company’s lenders are also likely to suffer.

Is there any good news?

Data from the Australian Bureau of Statistics shows that house prices in our capital cities are rising for the first time in 18 months. Average prices across 8 capital cities rose 0.5%, with Darwin posting a 5.1% jump in the June quarter.

In more positive news, Australia’s biggest mortgage broker, Australian Finance Group (or AFG), processed more home loans in July 2012 than any other July since 2007, and more than 20% higher than July 2011. According to AFG, low interest rates, soft property prices and escalating rents are creating strong incentives for people to get into the property market.

The Foolish bottom line

Bank shareholders will likely be hoping that these are the first signs of a recovery in the housing market. With economists predicting the RBA will maintain the official interest rate at the current level in the short-term, hope may not be enough for the banks.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned. The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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