After blasting higher yesterday on the back of the unexpected federal election win for the Coalition government big bank shares are rising again today, but this time for an entirely different reason.
The further good news is that the banks’ prudential regulator, APRA, has announced it intends to scrap rules for regulated authorised depository institutions (ADIs or banks) to “assess whether (hone loan) borrowers can afford their repayment obligations using a minimum interest rate of at least 7 per cent. Instead, ADIs would be permitted to review and set their own minimum interest rate floor for use in serviceability assessments.”
The canning of the onerous 7% rule means credit growth could now return to the home loan markets and on a fundamental level the more banks can lend on a risk-adjusted basis, the more profit they can make.
In response to the news the Commonwealth Bank of Australia (ASX: CBA) share price is up 1.3% to $78.44, with National Australia Bank Ltd (ASX: NAB), Australia & New Zealand Banking Group (ASX: ANZ) and Westpac Banking Corp (ASX: WBC) shares up 0.8%, 1.3% and 1.7% respectively.
Specifically APRA claimed the reason it was loosening the restriction now is that in some cases home loan rates are becoming so low that the gap between the rate offered to a low LVR borrower and 7% is so wide as to be an unreasonable obligation on the banks.
Moreover, benchmark lending rates are heading lower as soon as June if currency markets and forecasters are on the money in their rate cut calls to mean the gap could widen even further unless APRA acts now.
More broadly APRA is loosening the restrictions as house prices in Melbourne and Sydney have been in reverse for over a year now and it’s aware that an Ireland-style ‘house price crash’ scenario where bad debts explode and panicked sellers emerge could send the Australian economy into a potentially deep recession.
While the federal election result and loosening of credit restrictions are big wins for bank investors over the short term that’s all now reflected in their surging share prices.
Over the medium term I still expect that ultra-low-interest rates will hurt banks’ earnings and there’s plenty of evidence to back up this assumption. Including the fact that both the NAB and Westpac CEOs have already come out publicly to warn that falling benchmark rates will hurt their operations.
As such I’m not a buyer of big bank shares, although I could understand the appeal to an SMSF investor in the retirement stage for example.
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The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.