Home lending a problem for big banks

Mortgages are the mainstay of the banks’ business models, but lately home loan growth has eluded three of the big lenders.

ANZ chief executive Shayne Elliott. Picture: Adam Yip

Mortgages are the mainstay of the banks’ business models, but lately home loan growth has eluded three of the big lenders as their strategies went amiss.

That was a common tread of the annual profit results of a trio of major banks over the past two weeks.

ANZ, Westpac and National Australia Bank all reported issues within their mortgage books as they navigated the post-Hayne royal commission climate and greater political pressure on several fronts.

ANZ pulled back too much on risk-taking and reacted too fiercely to heightened regulator focus on responsible lending laws.

Westpac bungled the implementation of new expense fields into home loan processes and went too far on its management of margins on mortgages, hurting growth.

NAB had issues around processes, its interpretation of responsible lending and the overlaps between its business and home loan customers.

The bottlenecks and delays in loan approvals at the big banks went so far they squarely got the attention of the RBA governor Philip Lowe and Treasurer Josh Frydenberg. Both stepped up warnings earlier this year saying banks needed to keep credit flowing to support the economy.

“The lack of (bank) risk appetite is a problem. You’ve clearly had the government and the Reserve Bank jawboning saying they must be open for business,” Merlon Capital Partners principal Hamish Carlisle said. “The political pressure can shift from bank bashing to trying to save the economy very quickly.”

Mr Carlisle noted the problem was exacerbated because the sector was waiting for clarity from the corporate regulator on the application of responsible lending laws. “The banks would agree that clarity around the regulation is critical moving forward,” he said.

The Australian Securities & Investments Commission released a consultation paper early this year and held public hearings on the topic in August ahead of updating its regulatory guide. But industry is still waiting for more detail on its final position.

In September, ASIC also filed an appeal in the Full Federal Court over a case it lost against Westpac after alleging the bank breached responsible lending laws. The case was made more colourful by Justice Nye Perram’s rationale for siding with the bank.

“I may eat Wagyu beef everyday washed down with the finest shiraz but, if I really want my new home, I can make do on much more modest fare,” he said, in reference to how the bank assessed a home loan customer’s ability to repay their mortgage.

Regal Funds Management portfolio manager Mark Nathan said the challenge was that responsible lending laws were “still not universally applied in the same way” by banks. “There are certainly issues around processes and applying rules … there were blow-outs in time to approval for some of the banks.”

“ANZ arguably applied the rules … in the most stringent fashion,” Mr Nathan added, noting this caused a blow-out in approval times and fewer broker-introduced loans as intermediaries were discouraged by the lower approval rates.

In handing down his annual results, ANZ chief executive Shayne Elliott admitted home lending had been a problem after a spate of systems issues and the bank’s stricter interpretation of responsible lending laws.

Those problems coupled with slower demand put a $7bn dent in the bank’s housing book for the year ended September 30. It now sits at $265bn.

ANZ said application volumes picked up in the fourth quarter and cited improved momentum into its 2020 year.

On Friday, Westpac CEO Brian Hartzer said there were “unintended consequences” stemming from the requirements of the prudential and corporate regulators of banks, including that small businesses were caught up in responsible lending rules.

“The combination of those things have meant that the process of getting a mortgage has become more complicated in terms of the amount of verification and document and checking that needs to go on,” he added.

“It’s clear that some of the requirements are making it more challenging for bankers to feel confident to exercise that judgment.”

The government this week said it wanted small business more clearly excluded from responsible lending laws, despite many linking their personal and business finances.

Mr Hartzer has vowed to restore mortgage growth to keep pace with the sector’s growth rate.

Westpac’s net mortgage growth — new flows minus loans that are running off — in the six months ended September 30 tumbled to $2bn, compared to $7.5bn in the same period in 2018.

The bank also warned that it expected average lending to be flat over its 2020 year as the “likely decline” in mortgages in the first half was offset by expected growth in the latter six months.

Big bank process issues have created room for the likes of ING, Macquarie and HSBC to pick up market share alongside some of the non-bank lenders.

“Home loan growth in Australia is clearly an area of disappointment for us, ” NAB’s acting CEO Phil Chronican said. He, however, said applications in the past four to six weeks had improved.

The big four banks have posted a combined annual cash profit of $26.9bn, down 7.8 per cent on 2018, as cash earnings fell to 2012 levels. Commonwealth Bank provides a quarterly trading update on Tuesday. For the year ended June 30, CBA reported a 4 per cent rise home loan volumes.