Analysts support credit changes

The Morrison government’s move to ­reform the nation’s credit framework would unshackle the banks and improve credit growth, say analysts.

Only Commonwealth Bank was trading above book value, Mr Triggs said, with ANZ, National Australia Bank and Westpac all valued at a discount to book value.

The Morrison government’s controversial move last week to ­reform the nation’s credit framework would unshackle the banks and lead to improved credit growth, according to analysts.

By removing the responsible lending obligations in consumer protection legislation, the government is hoping to remove impediments to the flow of credit by enabling lenders to rely on information provided by borrowers, as well as reduce reliance on costly verification processes.

JPMorgan said in a note it was difficult to forecast the likely impact on credit growth. However, the investment bank estimated that every percentage point of extra growth in home lending would add about 0.8 per cent to cash earnings. “While an improvement in system loan growth would be a positive, there are limits to how much loan growth is desirable, and we remain concerned about the impact of low rates and mortgage competition on profitability in the mortgage market,” analyst Andrew Triggs said.

“Nonetheless, we are cognisant of the potential signal that the government has become friendlier to the industry post-royal commission and there remains good valuation support for the sector.”

Only Commonwealth Bank was trading above book value, Mr Triggs said, with ANZ, National Australia Bank and Westpac all valued at a discount to book value.

Consumer advocates have been sharply critical of the proposed changes, arguing that the banks had only just tightened their lending processes in response to abuses highlighted in the Hayne royal commission.

But with the nation in the middle of a pandemic-induced recession, Josh Frydenberg said last week it was critical that “unnecessary barriers” to obtaining credit were removed so that consumers could continue to spend and businesses could invest and create jobs.

“What started a decade ago as a principles-based framework to regulate the provision of consumer credit has now evolved into a regime that is overly prescriptive, complex and unnecessarily onerous on consumers,” the Treasurer said.

“The government will simplify the system by moving away from a ‘one-size-fits-all’ approach while at the same time strengthening consumer protections for those who need it.”

The initiatives effectively transfer more responsibility for the lending contract on to the borrower, relieving the burden on the lender.

Mr Frydenberg said the value of personal responsibility and accountability should remain central to society, and if the pendulum swung too far in the other direction the availability of credit would be restricted and its price would increase.

Morgan Stanley analyst Richard Wiles said in a report that the reforms would mean household expenses would be less important in the approval process, and they were also likely to encourage more loans through the broker channel.

“However, we believe high debt-to-income and loan-to-value ratios remain constraints on loan growth, particularly if income growth does not recover,” Mr Wiles said.

While ANZ, NAB and Westpac share prices lifted by 6-7 per cent in response to the announcement, he said this was greater than the potential valuation upside from the changes in the law.

The magnitude of the gains was also a reflection of investors’ underweight position in the banks, the sector’s relatively poor recent performance, and its 46 per cent discount to industrial stocks excluding the banks.

There was a degree of optimism, as well, about the potential economic benefits from a range of measures in the upcoming federal budget.

The Australian Banking Association said the banks remained committed to strong protections for their customers.

The regulatory framework would still include the conduct requirements of the National Consumer Credit Protection Act, lending standards imposed by the Australian Prudential Regulation Authority and the Banking Code of Practice, and the jurisdiction of the Australian Financial Complaints Authority.