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.
If you’re in the market for some high yielding ASX shares, look no further than our ”Secure Your Future with 3 Rock-Solid Dividend Stocks” report. In this free report, we’ve put together our best ideas for investors who are looking for solid companies with high dividends and good growth potential. Click here now to find out the names of our three favourite income ideas. But hurry – the report is free for only a limited time.
- 10-speed economy under stress?
- The online delivery war hots up
- Going for ASX gold
- Australian dollar flying high – Aussie tourists to benefit
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.
Where to invest $1,000 right now
When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*
Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.
*Returns as of June 30th
- Why PWR Holdings Ltd could see its share price rise from here – July 21, 2017 12:11pm
- Fortescue Metals Group Limited share price sinks on native title decision – July 20, 2017 4:23pm
- 5 overlooked finance shares to add to your watchlist – July 20, 2017 2:33pm