‘Credit quality is still awesome, and if anything, it will probably get better from here.’
Principal at fund manager Alphinity, Andrew Martin
Markets have pared back their expectations for rate cuts lately, but Strong said that based on previous housing cycles, housing credit growth could peak between six and 12 months after the last rate cut in a cycle.
“The psychological impact of lower rates on sentiment, coupled with the lead time of a house search, sentiment and funding, means that housing credit tends to continue to accelerate well beyond the point of the last cut,” Strong said.
“Overall, a combination of improved credit growth and stable interest rates is positive for banks’ revenue growth,” Strong said.
While housing credit growth is picking up, the big four banks are also facing competition from rivals, such as the fast-growing Macquarie Group.
Jarden analyst Matt Wilson noted Macquarie continued to expand rapidly in home loans, forcing other banks to respond with competitive prices, while noting banks were also fighting to win back share from mortgage brokers.
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“Whilst volumes are strong, competition remains intense. The pick-up in volumes might be offset by the compression in margins,” Wilson said.
All up, Wilson said he expected profit growth of about 2 to 4 per cent across the banking sector.
When interest rates fall, it also tends to cut into banks’ net interest margins, which compare funding costs with the pricing of loans, and are a key influence on profits.
Principal at fund manager Alphinity, Andrew Martin said analysts had expected “a bit more margin compression” this year, but banks had found a way to largely maintain their margins, including through deposit pricing. Martin said another highlight for banks has been the very low charges for bad and doubtful debts.
“Credit quality is still awesome, and if anything, it will probably get better from here,” he said.
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