UBS says 'shadow banks' have picked up some of the slack as mortgage lending in Australia slows

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  • UBS research indicates that lending from smaller banks and non-bank lenders has been gathering steam this year.
  • The growth has partially offset a continued slowdown in credit growth from major lenders.
  • While UBS analysts found the trend concerning, they said a lack of scaling capability and increased regulatory oversight should cap further growth in “shadow bank” lending.

Housing credit growth is slowing markedly in Australia in response to regulatory restrictions and a cooling housing market.

According to Jonathon Mott and the UBS banking team, that slowdown has been driven entirely by a contraction in lending from larger banks which have been the subject of increased regulatory oversight.

But there’s another group of smaller lenders, for whom credit growth has been rising. The analysts called this cohort “shadow banks”, and said the recent growth in their lending was troubling.

“Over the last three months the major banks’ housing credit growth has slowed to 3.7% annualised (not seasonally adjusted),” UBS said.

“This compares to 5% growth for the system as a whole. By comparison the smaller banks and non-banks — excluding the regionals — were growing their books at around 12% annualised over the quarter to May.”

(By “regionals”, UBS is referring to mid-tier banks such as Suncorp and Bank of Queensland).

As a result, the major banks’ share of overall credit growth has fallen to around 75% — the lowest level since the 2008 financial crisis:

“This would suggest that much of the credit tightening by the major banks year to date has been offset by the smaller banks and non-banks, a situation we believe is concerning,” UBS said.

But while shadow bank lending has been on the rise, UBS doesn’t expect the trend to continue for much longer.

The analysts estimate that Australia’s major banks funded around $280 billion worth of mortgages in the 2018 financial year. They expect that to fall by around 20% over the next 12 months — a drop of around $56 billion in dollar terms.

“By comparison, we estimate the smaller banks and non-banks originated around $100bn in mortgages over the last year (including investment property).”

So to pick up the slack they’d have to raise mortgage issuance by more than 50% — a move akin to “trying to drink from a fire-hose”.

“We do not believe the smaller banks and non-banks have the operational or funding capacity to absorb such a large increase in flow — this would be unprecedented,” the analysts said.

In addition to scaling problems, UBS said more regulatory changes are also likely to be on the way.

“We are concerned that a regulatory mismatch has been created, whereby the focus on lending standards and complying with responsible lending is heavily skewed towards the major and regional banks. This appears to be pushing credit down into the ‘shadows’ of the smaller banks and the non-banks.”

However, once the banking regulator is satisfied that bigger banks don’t pose a systemic risk to financial stability, it will then turn its focus to smaller lenders.

The net result is that tighter credit conditions in Australia’s mortgage market are likely to remain ongoing. That will weigh on bank profitability, and UBS said bank stocks look on the expensive side again following their recent bounce.

“We remain concerned with the large number of headwinds weighing on credit availability and the housing market which do not appear to be factored into consensus expectations,” the analysts said.

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