NZ policies to hit big four margins

Although the chances of ‘macro-prudential measures’ being introduced in Australia look to have decreased, the margins of Australia’s big four banks are still at risk with New Zealand’s restrictions beginning today.

The restrictions being imposed in New Zealand will effectively put a “speed limit” on bank lending, which will restrict banks’ high loan-to-value ratio home lending to 15% of overall volume – down from current levels of around 30%, according to The Australian.

Whilst high LVR loans offer higher margins to the banks, due to the absence of lender mortgage insurance in the country, the new restrictions will have a relatively minor effect on the banks’ margins, reducing their return on equity from NZ by 2% and their overall group earnings by between 0.2% and 0.4%.

In regards to Australia’s banks, ANZ (ASX: ANZ) will be the most affected, with Commonwealth Bank (ASX: CBA), Westpac (ASX: WBC) and NAB (ASX: NAB) are also exposed to the changes.

Are macro-prudential measures necessary in Australia?

Whilst it has been feared that Australia’s low interest rate environment could lead to a property price bubble, figures released by the Reserve Bank of Australia (RBA) and the Australian Prudential Regulation Authority (APRA) suggest that the threat may not be quite as imminent as first thought.

The figures revealed that instead of rushing towards borrowing money to buy houses (which would push property prices upward), borrowers are actually trying to pay off their current debts more quickly. Based on this, Goldman Sachs economist Tim Toohey stated that “it is hard to envisage a surge in housing credit any time soon.”

The reduced threat of a housing bubble could give the RBA more scope to cut the official cash rate further if inflation levels suggest such an action may be necessary later in the year.

Foolish takeaway

With ANZ, Westpac and NAB having each closed off their accounts for the year yesterday, investors will eagerly await annual reports to review the lending outlook of each of the banks, as well as hints at capital returns.

For investors who think that they have missed the boat on the banks, there are still plenty of opportunities available (many of which are a lot smaller than the banks)! For instance, two of Australia’s most promising small companies are still flying under the radar. Discover these two exciting ASX investments in our brand-new special FREE report, “2 Small Cap Superstars”. Click here now, it’s free!

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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