Lenders can look forward to a fall in credit growth of as much as 60 per cent, with the trough more than a year away, if previous rate hike cycles are any guide.
Macquarie Securities has analysed credit growth trends during interest rates cycles going back to 1994 and found credit growth moderated in every rate hike cycle. In the last five rate cycles, credit growth generally peaked at the beginning of the cycle and took six to 16 months to reach the trough, which was between 30 and 60 per cent below the peak.
The longest slowdown was in 2007, when rates started going up in August and rose 100 basis points over seven months. Housing credit growth was running at 13.2 per cent at the start of the rate cycle and fell 59.5 per cent over 16 months to a growth rate of 5.3 per cent at the trough.
The biggest slowdown was in 1994, when rates started going up in August and rose 275 basis points over five months. Housing credit growth was running at 22.8 per cent at the start of the rate cycle and fell 61.8 per cent over 14 months to a growth rate of 8.7 per cent at the trough.
Macquarie said the impact of rising rates on credit growth has increased since the last cycle due to the credit assessment floor implementation in 2014.
“We estimate housing credit growth of around 2 to 3 per cent in 2022/23 and 3 to 4 per cent in 2024/25 [down from the current level of 7.9 per cent],” Macquarie said.
The heavy fall in banks’ stock prices since the start of June indicates that investors are now more concerned about the impact of a slowdown than they are about the gains from higher margins.
Macquarie said the risks and opportunities are balanced. Banks will show the benefit of higher interest rates on their margins in the upcoming results but longer term they are exposed to a likely economic downturn.
While falling house prices create a risk to growth, high savings rates coupled with a material build-up of equity during the last two years, as well as healthy capital and provisioning levels, provide protection against elevated losses.
Even if actual credit losses do not occur, banks will likely need forward-looking increases in their provision coverage as interest rates increase and the risk of unemployment rises, Macquarie said.
Australian banks have relatively low-risk balance sheets, with secured housing lending making up 55 to 80 per cent of exposures and unsecured lending only 1 to 2 per cent.
Housing makes up 57 per cent of ANZ’s lending, 71 per cent of Commonwealth Bank’s, 57 per cent of NAB’s, 71 per cent of Westpac’s, 78 per cent of Bendigo and Adelaide bank’s and 78 per cent of Bank of Queensland’s.
Macquarie estimates that unsecured lending accounts for 10 to 20 per cent of the exposures of international peers.
Macquarie said one positive is that the current level of provision coverage is well above cyclically low provision levels that usually precede a downturn.
“Despite