What accelerating business loan portfolio growth means for banks
The Australian Prudential Regulation Authority (APRA) and the Reserve Bank of Australia (RBA) released loan and deposit statistics for the month of April last week. The data shows a further acceleration in the growth of the loan portfolio, which is now at its highest level since 2008.
Business loan growth continued to accelerate while mortgage loan growth appears to have stabilized. Business loan portfolio growth is now at its highest level since the start of the GFC as businesses spend to support their re-emergence from COVID lockdowns, while facing high levels of competition in the economy for a scarce workforce.
Overall credit growth continues to accelerate and reached 8.6% year-on-year in April. The current level of growth remains well below the peak at the end of 2007 but higher than anything observed over the past 10 years.
Figure 1: Growth of the Australian total authorized deposit institution ADI loan book value – year over year
Business loan portfolio growth represents a larger share of banks’ overall loan portfolio growth. As the chart below shows, business loan growth is much more cyclical than mortgage loan growth. Therefore, the sustainability of the current strong growth over the medium term will depend on how well the RBA walks the tightrope between raising rates to stifle inflation without sending the economy into a recession.
Figure 2: Drivers of Overall Australian ADI Loan Portfolio Growth – Year-over-Year
In terms of the performance of individual large banks, National Australia Bank (ASX:NAB) and Commonwealth Bank of Australia (ASX:CBA) widen the gap with Australia and New Zealand Banking Group (ASX:ANZ) and Westpac Banking Corp (ASX:WBC) in terms of loan book growth.
This is not surprising given the mortgage processing problems experienced by WBC and ANZ, but it is also the result of the relatively strong position that CBA and NAB enjoy in the SME and corporate lending markets (e.g. opposition to institutional markets).
Figure 3: Growth in the Australian loan portfolio of major banks – year on year
Figure 4: Growth in the Australian mortgage portfolio of major banks – year on year
Figure 5: Growth in the corporate loan portfolio of major Australian banks – year-over-year
Banks posted significant outperformances in the calendar year to date as market concerns about lower net interest margins resulting from discounted front books and diluted portfolio yields from liquidities reversed on anticipation that the RBA will rapidly raise official rates in the coming months. . This could see strong growth in loan portfolio growth spurred by sequential improvements in net interest margins and continue through calendar year 2002.
Given their stronger loan book growth, NAB and CBA are better placed to benefit from this improved outlook for net interest margins.
However, as we move further into the economic cycle, the market should begin to push back the investment horizon until the time when the tightening of monetary conditions affects economic activity. This would lead to slower loan growth, especially corporate loans, and increased risk to the quality of loan portfolios.
The RBA is walking a very fine line between mitigating what has become more sustained and significantly higher than expected inflation rates during the pandemic, and trying to prevent the necessary slowdown in demand from turning into a recession. Inevitably, the market will have bouts of fear regarding the potential for increased loan losses over this period. As such, investors should be wary of excessive optimism creeping into bank stock prices due to short-term operating conditions.
The Montgomery Funds owns shares of National Australia Bank and Commonwealth Bank of Australia. This article was prepared on June 06, 2022 with information available to us today, and our views may change. It does not constitute formal advice or professional investment advice. If you want to trade these companies, you should seek financial advice.