Bank of Queensland chief executive Jon Sutton expects the slowdown in the $1.6 trillion mortgage market has further to run, as “anaemic” wage growth and a clampdown on risky lending drags on a key source of profit for the industry.
As the regional lender rewarded shareholders with a special dividend at its full-year results, Mr Sutton predicted there would be further slowing in the pace of housing credit growth – a market that accounts for about 60 per cent of the banking system’s loans.
The comments highlight the softer conditions facing ‘s mortgage-heavy banks, which have in recent years benefited from household debt increasing at a far quicker pace than wages, leading to growing concerns about over-indebtedness.
In a further challenge for regional banks such as BoQ, the regulator’s clampdown on investor lending has effectively locked in the market share of second-tier banks in this segment, a concern also highlighted on Thursday by Dutch online bank ING Direct.
Despite these challenges, BOQ notched up a 5 per cent lift in its full-year cash profit, to $378 million, helped by a sharp fall in impaired loans, and wider profit margins on the back of rising interest rates.
In its outlook, BoQ said it was “cautious” on the residential property market, and Mr Sutton tipped a slowdown in housing credit growth from its current pace of about 6 per cent.
“You need to take into account that wages growth has slowed considerably, and wage growth is pretty anemic. I think housing growth will probably moderate to somewhere slightly above where wages growth is over time,” Mr Sutton said.
He said the n Prudential Regulation Authority’s caps on investor and interest-only loans would further weigh on credit.
The regional lender revealed it would pay a special dividend of 8?? a share, on top of its 38?? final dividend, because it was on track to exceed capital requirements that were finalised earlier this year.
UBS analyst Jonathan Mott questioned whether the special dividend was a sign of a permanent higher payout ratio. Mr Sutton said further capital management was one potential option, alongside increased investment in technology, or pursuing faster growth in its lending assets.
As well as dampening industry-wide growth, APRA’s 10 per cent speed limit in the investor market effectively stops smaller banks from expanding their market share, pushing competition more towards the owner-occuiper market.
ING Direct chief executive Uday Sareen joined the ranks of smaller banks arguing the regulator’s clampdown has put too much emphasis on financial stability, at the expense of competition.
He noted that as well as effectively having their market share preserved, the major banks are able to set aside less capital for every dollar lent out than their smaller peers, due to the “risk weight” system used to determine banks’ capital targets.
“If risk weights are divergent and you have caps on certain segments, then really you’re just competing in a very limited market with a funding cost disadvantage. That kind of restricts competition and I think there’s an opportunity to definitely recalibrate,” Mr Sareen said.
The prediction of softer growth from Mr Sutton came as Bureau of Statistics figures showed the value of new loans to property investors bounced back in August, growing by a surprisingly strong 4.3 per cent. Economists said the regulators would be watching keenly in coming months for any signs of a rebound in investor lending, which they have been trying to slow.
BOQ’s result included the lowest level of impaired loans in at least five years, but Mr Sutton emphasised it was an very low interest rate environment, and the bank needed to remain “vigilant.”
“Sometime in the not too distant future or medium term, rates will rise,” Mr Sutton said.
BoQ’s annual report, also published on Thursday, showed Mr Sutton’s statutory remuneration was $3.26 million, up from $3.09 million last year.