Big banks push credit to maintain market share

Despite a "hot property market", it might not be time to buy bank shares.

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Australia's property market, although patchy in some areas, is regaining favour with both investors and first home owners. Record low interest rates are breathing air back into the once-bulletproof investment but, like any worthwhile venture, it isn't guaranteed.

Despite watching the rest of the developed world fall into financial chaos, Australians are now regaining confidence and looking to invest in their favourite market, property. Thanks to a 2.5% cash rate and banks that are loosening their belts to maintain market share, both investors and first home buyers are competing fiercely — lending more and pushing prices and auction rates higher.

A common measure of the size of a loan to the value of a house is known as an LVR, or loan-to-value ratio. LVRs for both investors and first home owners are up year-on-year. For example, in the September quarter for 2012, the average LVR for new home loans to first home buyers was 74.8% but in 2013 it was 80.8%.

According to The Sydney Morning Herald, "The boom-time conditions in parts of the property market recently prompted regulators to keep a close eye on loan-to-valuation ratios."

In New Zealand, 'macro-prudential' policies are being used to control the amount of loans issued with high LVR's because "there has been considerable international focus on reducing risks to the financial system" – according to the Reserve Bank of New Zealand. Since October 1, 2013, banks have been forced to restrict new residential mortgage lending at LVRs over 80% to no more than 10% of the dollar value of their total residential mortgage lending.

ANZ (ASX: ANZ) and Westpac (ASX: WBC) have both increased their average LVRs whilst NAB (ASX: NAB) and Commonwealth Bank (ASX: CBA) haven't revealed their numbers. Digital Financial Analytic's founder, Martin North, believes the big banks are trying to capture more of the market despite having good lending standards. "My read is that the banks are being a little bit more aggressive. They want to grab a larger share, but they are relatively conservative overall."

Foolish takeaway

The big banks are facing increased competition from regional institutions who are offering lower rates of interest and, sometimes, much higher LVRs. However, if we experience a rise in unemployment it will increase the number of bad loans which cannot be serviced by their mortgagees and impact on the banks' profit margins.

Investors would be wise to limit their exposure to the big banks at current prices because, up until now, they've continued to increase dividends, have accrued a very little amount of bad debts and unemployment has remained low. However with tougher capital requirements, modest rises in unemployed predicted in coming years and low returns on equity, they are expensive and the market could witness significant profit taking in the next year.

Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies. 

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »