Banks, Borrowers & B.S.

Dodgy Dealers

There was news this week that will send a shiver through the mortgage lending industry. Despite its efforts over many years to root out the liars, cheats and thieves, it appears some have found new hiding places and continue to operate on the fringes.

The financial transactions cop, AUSTRAC, has analysed 2,000 customers from 20 loan referrers, including brokers, accountants and lawyers, and identified potentially hundreds of millions of dollars in fraudulent loans.

The alleged frauds involve false and misleading documents used to obscure the source of deposits and income. Now, the cavalry is on its way. AUSTRAC has referred matters to ASIC, the ATO, the Australian Federal Police, NSW Police, the Australian Criminal Intelligence Commission and the Tax Practitioners Board, with AUSTRAC chief executive Brendan Thomas saying he would be surprised if the alleged fraud didn’t lead to charges. So would the rest of us.

Profits Up, Customers Down

Australia’s big four banks celebrated great end-of-year financial results. Unfortunately, the party was spoiled by news that their customers are heading for the hills.

CBA produced a record cash profit of $10.98 billion, up 7 per cent. The bosses at NAB, Westpac and ANZ were also toasting their results.

Then came the less flattering bit. Mortgage applications have fallen across the majors. CBA was down 17 per cent in the four weeks to July 31 and 15 per cent since the May Federal Budget. Westpac was down 20 per cent since May, NAB 15 per cent since the end of March and ANZ 12 per cent since the Budget.

At the same time, arrears are edging higher. NAB’s “watch loans” suggest more customers are beginning to show signs of stress.

Nothing ruins a banking boom like customers deciding they don’t want your money.

Mowing The Lawn

While the majors have been congratulating themselves on their profits, non-bank lenders have been quietly cutting their grass.

New home lending by non-banks in the June quarter was up a whopping 65.2 per cent from a year earlier, rising from $6.35 billion to $10.49 billion.

Over the same period, lending by major banks and other ADIs grew just 2.6 per cent.

Part of the attraction is simple. Non-banks aren’t subject to the prudential rules in the same way as banks, including the 3 per cent serviceability buffer that deposit-taking banks must apply. That can mean greater borrowing capacity for customers who don’t fit the narrow boxes of mainstream lenders.

Small Business Gets A Sale

There is some genuinely good news for SMEs: you’re paying less for business loans.

The margin above the cash rate charged by banks has fallen to a five-year low.

Banks are fighting harder for small business customers while total lending to the sector has reached record levels.

The catch, because this is Money Road and we are obliged to find one, is that businesses are also showing signs of financial stress.

The Australian Banking Association reports that payment arrears are up, commercial debts are being paid later, and business defaults are on the rise.

It looks like some customers are borrowing the cheaper money because they need to keep the lights on.

Savers Squeezed

The banks have started taking money off the table. CommBank has cut its 12-month special term-deposit rate by 10 basis points to 5.15 per cent. ANZ has trimmed its best 12-month rate to 5.25 per cent.

The cuts might look insignificant, but he bigger story is what sits behind those numbers.

Economists from the big four are now broadly agreed: no more rate rises this cycle, with cuts expected sometime in 2027. Good news if you owe the bank money. If you’ve spent the last few years enjoying the rare pleasure of having the bank owe you money, the clock may be ticking.

Judo Gets Off The Floor

The bad-loan hangover wasn’t fatal. Judo Bank had an unpleasant June, when a handful of soured loans triggered a profit downgrade and sent its share price crashing by as much as 46 per cent in a single session.

This week came the rehab. Judo reported statutory net profit after tax of $111.1 million, up about 29 per cent on the previous year. Its lending book also grew, reaching $14.7 billion.

Management’s argument is straightforward: the June credit blow-up was a contained problem rather than evidence that the whole SME lending model is falling apart. Investors appear to be listening.

But the central risk remains. Judo makes its money by lending to the sort of medium-sized businesses the major banks can find difficult to price. The reward is higher margins. The price is higher credit risk.

The Final Word

It’s been a mixed week on Money Road. There’s good news if you’re borrowing or running a small business. Encouraging news if you believe the rate rises are behind us. Then, there’s the other stuff which reminds us that humans operate the machinery of Australian finance, with all the failings and frailties they bring to the table.

That’s life on Money Road. Nobody said it was going to be pretty.