Jul 18

Housing heats Westpac but cool change coming

Westpac chief executive Gail Kelly is upbeat that the growth the bank is experiencing in the mortgage market will continue into 2015, thanks to low interest rate demand and an upswing in new home building.

The company released an 8 per cent improvement in cash earnings for the 2014 financial year – reflecting improvements across most divisions of the bank, a fall in the charge for bad and doubtful debts and a tax tailwind.

But it was a result that investors had already pencilled in, given Kelly’s previously well heralded focus on boosting the bank’s share of lending and deposits.

The four major banks regularly tweak their growth initiatives – at times opting to take their foot off the market share accelerator.

In 2013, Kelly presided over what would be thought of as a more conservative year and one in which the bank put more emphasis on its balance sheet strength, allowing market share in mortgages to slip.

This year it took a more aggressive approach – one that saw it front up in a competitive sense in the home, personal and business lending segments. But it came at a cost to its interest rate margin which fell during the year.

Kelly said she expected to continue growing market share and manage this interest-rate margin in 2015.

The bank received a bit of help from accessing cheaper wholesale funding and will be hoping this remains. Its other source of funding – customer deposits and where this ends up is difficult to predict given its a factor that will be determined by the competitive decisions made by the large players in the market.

But the real potential headwinds for the banking industry are regulatory – hence both outside its control and at this stage unquantifiable.

The first is the potential changes that may be imposed as a result of the Financial Services Inquiry which could require banks to hold more capital.

The FSI has not yet delivered its conclusions to Treasurer Joe Hockey but the market is almost uniformly factoring in that it will recommend higher capital buffers. This will come at a cost to banks’ financial returns.

Kelly joined the industry chorus warning that those regulators had to be mindful of the trade off between stability of the system and growth – in profits and lending and the economy.

And she was clear that dividend trajectory could be sustained regardless of any changes in capital requirements.

But she was also pretty clear that someone had to pay the price for increasing capital buffers. “Either we price for that cost or pass it on (to customers),” she said.

ANZ’s Mike Smith was more direct last week saying the cost would be borne by the borrowers.

Kelly also weighed in on the potential for the Australian Prudential Regulation  Authority (APRA) to use so-called macro-prudential measures to curb the booming lending market for property investors, which is creating huge property price growth in hot spots for Sydney and Melbourne homes.

Additional restraints on how banks lend to the housing market would be felt acutely by Westpac which has a large share of the home loan investment market.

And there is speculation there could be movement by the regulator as early as next month to target investors seeking to buy in particular postcodes for additional prudential attention.

Kelly, who is generally quite careful in her public comments around regulators or legislators, said the bank WAS adopting a wait and see position on macro-prudential chances. Notably she said she believed the Reserve Bank of Australia and APRA would be sensible and moderate in their approach.

She said the regulators already employed macro-prudential tools such as stress testing and ‘they would probably like to stop at that set of tools’.

The bank, however, is comfortable with the investment (housing) portfolio which is skewed towards older affluent borrowers and that it has a better delinquency profile than Westpac’s overall portfolio.

But RBA board members over the past month have made threats about the possibility that new tools could be used in the arsenal if the property market got any further out of hand.

Referring more generally to the banking environment, Kelly said ‘we can tackle anything that gets thrown at us’.

Any signs of a regulatory crimping of the growth in lending for housing could also potentially modify the outlook for the bank’s fastest growing segment.

Westpac said while businesses remain cautious, there are signs of improving prospects for non-mining, investment and a continued moderate pick-up in business credit growth is expected.

Credit growth has already picked up over the past year from 1 per cent to 3 per cent but Kelly is not as optimistic as her in-house economist who sees it improving to 5 per cent this year.

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