The ‘Big Four’ banks made huge profits as Australians took out bigger mortgages for more expensive housing
Australia’s big four banks – ANZ, CBA, NAB and Westpac – now hold a whopping $1.87 trillion in home loans.
Throughout 2021, as Australian house prices soared, Australians took on larger and larger mortgages – many worth more than six times their income – and sent profits at the Big Four banks soaring.
EY analysis of the big four banks’ half-year 2022 results showed they had a combined after-tax cash profit of $14.4 billion.
That’s $700 million more than the 2021 half-year results, or an increase of 5.1 percent.
The Big Four’s share of $1.87 trillion in home loans makes up the majority of the nation’s total home loans, which are worth nearly $2 trillion in total.
EY found that out of a $2.9 trillion loan book from the Big Four (including home loans, personal loans, and business loans), about $1.87 trillion is made up of home loans.
In the year ended March 2022, home loans originated by the Big Four increased 2.4 percent, or $43.9 billion, according to EY.
The report finds that many Australians have also taken on high debt-to-income ratios, with many Big Four clients borrowing more than six times their income among nearly 300,000 Australians.
The share of the big four customers in this category has increased significantly since March 2020 and accounted for around a quarter of new loans from eligible deposit-taking institutions in the December quarter of 2021.
“However, as collection capabilities have been strengthened during the pandemic, banks are better positioned to work with borrowers on tailored payment strategies and solutions,” the report said.
Home loan margins are temporarily falling but will rise as interest rates rise
The report found that home loan margins have declined due to intense competition from other lenders, but those margins are set to surge again due to rising interest rates.
Average net interest margins fell by 14 basis points to 1.75 percent compared to the first half of 2021.
“We’ve seen through the pandemic, a number of clients have refinanced – going to another Big Four lender or another non-Big Four lender.”
But tight margins won’t be the case as long as interest payments start to rise.
The Reserve Bank raised interest rates to 0.35 percent last week, and economists at the big four banks expect further rate hikes.
CBA expects the policy rate to rise to 1.60 percent by February 2023, Westpac expects it to reach 2.25 percent by May 2023, NAB expects it to reach 2.60 percent by August 2024, and ANZ forecasts that it will reach 2.25 percent by May 2023.
Analysis by RateCity shows that if cash interest hits 2.60 percent by August 2024, someone with a $500,000 mortgage would increase their monthly repayments by $675 compared to what they are currently paying could.
For someone with a $1 million mortgage, repayments could increase by $1,350.
RateCity research director Sally Tindall said economists were predicting rate hikes would likely push home prices down about 15 percent over two years.
More lending to businesses during the pandemic also helped generate big profits
The remainder of the Big Four’s record profits came from business loans, which grew during the pandemic lockdowns.
According to EY, loans to businesses are now $974 billion, up 5.68 percent or $52.4 billion.
Mr Dring said personal loans to customers have declined slightly due to increasing competition from buy-now-pay-later services like Afterpay and Zip.
According to EY, the Big Four’s share of personal loans (credit cards, auto loans, etc.) was $44 billion, down 0.91 percent year-on-year.
Hessel Verbeek, head of banking strategy at KPMG, said the four big earnings results have returned to pre-COVID rates but competition, particularly in home loans, will intensify.
He said that in this environment, the Big Four banks “need to become more digital, automate more and reduce their overheads” to stay profitable.
He said the margins on business loans are higher than mortgage loans because it’s a riskier loan, but that all the big banks are looking to business loans for their future performance.
“With higher interest rates, we would expect people to stop borrowing as much — in terms of mortgages — as they have been doing.”
The analysis refers to the half-year results for 2022 of the banks. ANZ, NAB and Westpac semi-annual reports ended March 31, 2022, while CBA semi-annual reports ended December 31, 2021.
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