JP Morgan economist Henry St John said credit growth in Australia will continue to fall because of tougher home lending restrictions and the prospect of further caps.
Because this credit slowdown is predominantly policy-driven, this will have implications for banks’ funding mix, profitability and balance sheet growth over time, according to the economist.
His comments come just as central bank figures released on Tuesday show that private sector lending slowed in September – rising by just 0.3 per cent month-on-month.
This is down from 0.5 per cent growth in August.
The Reserve Bank of Australia data showed housing credit growth stayed at 0.5 per cent in September for a fourth consecutive month.
Business lending growth dropped to 0.1 per cent in September from 0.3 per cent in August.
Housing growth fades
According to St John, at the more microscopic level of second decimal places, monthly growth in housing credit has been slowing since February.
“The glacial pace of adjustment reflects the underlying tension between investor and owner-occupier credit growth," he added.
“Housing credit growth continues to fade, albeit very gradually, with both investor and owner-occupier monthly credit growth, a tenth lower than August levels, at 0.5 per cent and 0.4 per cent respectively.
“The tightening in macro-prudential policy, both by driving refinancing activity away from interest only loans, and more generally through slowing the pace of lending growth since early this year is likely to continue to weigh on housing credit over the medium term.”
In his view, the regulator appears to be moving away from target growth rates on lending for certain types of borrowers or products, and towards bringing credit in line with income growth.
“A direct way in which to achieve such an objective would be via some form of debt-to-income restriction on new loans.”
Wholesale funding shrinks
In a client note, St John examined what structurally slower housing credit growth would mean for fixed income markets.
Clearly, he argued, the wholesale funding needs of the banking system will substantially shrink.
This, in turn, would dampen the structural pay-side demand that has kept the 10-year Aussie dollar/greenback spread fairly wide in recent years.
And, he claimed, lower credit growth will also lower banks’ incremental demand for High Quality Liquid Asset-eligible securities.
The fall in demand for HQLA securities implies a cheapening of bonds to swap, which should tighten spreads.
Compositionally, he says bank balance sheets are more likely to drift away from housing and towards business credit over time as regulators slow growth in housing credit.
And in a lower rate environment, he pointed out, this might suggest less hedging flow.
The economist stressed that his note is an attempt to paint a picture of how markets will react to a structurally slower rate of credit growth.
“Global market dynamics, which have significant pass-through to mortgage rates via banks’ net interest margins are likely to be a key factor, since this raises the likelihood of a harsh deleveraging event for households.
“Similarly, currency implications are somewhat ambiguous, with slower credit growth boosting the exchange rate through a reduced funding ask.”