The first bank to cut its mortgage rate is Australia and New Zealand Banking Group (ASX: ANZ) but the bank has drawn the ire of the government for not passing the full 25 basis point rate cut on to customers.
ANZ Bank is only lowering its rate by 18 basis points and the federal Treasurer Josh Frydenberg blasted the lender for letting down its customers and for putting profits before people.
Interestingly, its rivals Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank Ltd. (ASX: NAB) have opted to pass on the full RBA rate cut onto their customers, and I suspect Westpac Banking Corp (ASX: WBC) would as well.
While Frydenberg may be displeased with ANZ, its shareholders aren't as the stock jumped 0.8% to $27.76 on Tuesday – making it the best performer of the big four and putting it well ahead of the 0.2% gain by the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index.
Mortgage growth on the rebound
But the key question investors should be asking is whether this lower rate environment will do anything to help the banks grow their loan book.
You might think conditions are ripe for mortgage growth given the multiple tailwinds. On top of falling interest rates, demand for mortgages will be bolstered by the anticipated turnaround in the housing market, the continuation of negative gearing benefits and APRA's lowering of stress testing requirements on loan repayments.
These tailwinds could more than triple mortgage growth at the big four after the group only managed to achieve an annualised growth rate of 1.2% in the past three months, according to Morgan Stanley.
Don't forget growing headwinds
But before you get too excited, Morgan Stanley believes investors shouldn't hope for much more than 4% growth. While that's a sharp improvement over current growth rates, it's modest compared to the circa 8% growth by smaller banks and circa 16% for non-bank lenders.
Mortgage growth at the big banks are held back by a number of factors. One of this is the level of debt by households with APRA putting pressure on the banks to restrict lending to customers where debt-to-lending ratio is above 6 times.
Morgan Stanley thinks this means borrowers wanting to borrow more will not be able to do so and a recent survey it conducted found that 23% of mortgagees had a total debt-to-income ratio above 6 times while 11% were over 8 times.
"Borrowing capacity is down >30% since 2015 according to ANZ, with 6/10th of this due to living costs,3/10th from higher interest rate buffers and 1/10th from income haircuts," said the broker.
"A lower interest rate buffer returns ~6.5% of capacity, but the benefit is skewed to owner occupiers (+9.5%) vs. investors (+1%)."
More headwinds are building too. These include ASIC's new responsible lending requirements, loan-to-value (LVR) constrains with falling house prices (the market hasn't turned yet!), comprehensive credit reporting and the change over from interest-only to principal plus interest loans, which will lift repayments by 40% to 50%.
