The ‘big four’ banks made huge profits as Australians took out bigger mortgages for more expensive homes
Australia’s big four banks – ANZ, CBA, NAB and Westpac – now hold $1.87 trillion in home loans.
Throughout 2021, as Australian house prices soared, Australians continued to take out bigger mortgages – many worth more than six times their income – driving up profits at the big four banks.
EY’s analysis of the big four banks’ 2022 half-year results found they had a combined after-tax cash profit of $14.4 billion.
This represents an increase of $700 million over the 2021 half-year results, an increase of 5.1%.
The $1.87 trillion share of home loans from the Big Four accounts for the bulk of the nation’s total home loans, which are worth nearly $2 trillion in total.
EY found that out of a $2.9 trillion loan portfolio held by the Big Four (including home loans, personal loans and business loans), about $1.87 trillion is made up of home loans. .
In the year to March 2022, EY says home loans taken out by the big four grew 2.4%, or $43.9 billion.
The report notes that many Australians have also run into high debt ratios, with many of the big four among nearly 300,000 Australians borrowing more than six times their income.
He said the share of the big four customers in this category had increased significantly since March 2020, accounting for about a quarter of new loans made by licensed deposit-taking institutions in the December 2021 quarter.
“However, with enhanced collection capabilities during the pandemic, banks are better positioned to work with borrowers on tailored payment strategies and solutions,” the report said.
Spreads on home loans temporarily tighten, but will rise as interest rates rise
The report found that spreads on home loans have shrunk due to intense competition from other lenders, but spreads will rise again due to rising interest rates.
Average net interest margins decreased by 14 basis points compared to the half of 2021, to 1.75%.
“We have seen through the pandemic, a number of customers refinance – go to another big four lender or another lender that is not in the big four.”
But the tight margins won’t last long, as interest payments will start to rise.
The Reserve Bank last week raised the cash rate to 0.35%, and economists at the big four banks expect more rate hikes to come.
ABC expects cash rate to rise to 1.60% by Feb 2023, Westpac expects it to reach 2.25% by May 2023, NAB expects it to reach 2.60 % by August 2024 and ANZ expects it to reach 2.25% by May. 2023.
RateCity analysis shows that if the cash rate reaches 2.60% by August 2024, someone with a $500,000 mortgage could see their monthly repayments increase by $675 compared to what they are paying currently.
For someone with a $1 million mortgage, repayments could increase by $1,350.
RateCity research director Sally Tindall said economists predict rate hikes are likely to lower house prices by around 15% over two years.
More business lending during the pandemic also helped drive big profits
The rest of the Big Four’s record profits came from business loans, which rose during the pandemic shutdowns.
EY says business loans are now at $974 billion, an increase of 5.68%, or $52.4 billion.
Dring said personal loans to customers were down slightly due to increased competition from Buy Now Pay Later services like Afterpay and Zip.
EY reports that the Big Four’s share of personal loans (credit cards, auto loans, etc.) was worth $44 billion, down 0.91% from a year earlier.
KPMG’s head of banking strategy, Hessel Verbeek, said earnings from the Big Four had returned to pre-COVID rates, but competition, especially for home loans, will intensify.
He said that in this environment, the big four banks must “become more digital, automate more and reduce overhead” in order to remain profitable.
He said spreads on business loans are higher than on mortgages because it is a riskier loan, but all major banks look to business loans for their future performance.
“With higher interest rates, we would expect people to stop borrowing – in terms of mortgages – as much as they have.”
The analysis focuses on the banks’ 2022 half-year results. The semi-annual reporting periods for ANZ, NAB and Westpac ended on March 31, 2022, while the semi-annual reporting period for CBA ended on December 31, 2021.
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