Australian Banks Face Tough Times as Mortgage Demand Falls
Synopsis
Australia’s biggest banks are facing weaker mortgage demand, falling housing activity and tougher competition, raising concerns about future growth.
Key Highlights
- Home loan demand is weakening, a concern for the future of Australia’s biggest banks.
- Home loan applications dropped 20% at Westpac, 15% at NAB and Commonwealth Bank and nearly 12% at ANZ.
- Over 70% of Australia's $2.5 trillion mortgage market is dominated by the four major banks.
- Demand for housing will weaken in 2027 and competition for borrowers will be higher, analysts forecast slower growth at the bank.
As hints of a slowing in growth from weaker mortgage demand appeared, investors became increasingly uneasy with the huge valuations now ascribed to Australia’s largest banks.
Last week, ANZ (ASX: ANZ), Commonwealth Bank (ASX: CBA), the National Australia Bank (ASX: NAB) and Westpac (ASX: WBC) all reported significant double-digit falls in home-loan applications in their respective results. The banks pointed the finger at the recent changes in tax policy and higher interest rates.
The four banks have provided years of solid returns and dependable dividends, but investors are now anticipating a more difficult operating environment. Banks account for about 24% of the S&P/ASX 200 index, and are some of the most collected stocks in Australia among both local and global investors.
Australian Banks Remain Expensive
More than 70% of Australia's $2.5 trillion mortgage market is held by the four major banks. Their strong standing means they are among the most valued banks globally.
In the wake of their most recent results, Australian banks were trading at price-to-earnings multiples from 16.2 to 24 times. Some of the big international banks like JPMorgan, Citigroup, Bank of America and HSBC were going at about 14 to 15 times.
The shares of three of the four major Australian banks have also tumbled between 2 per cent and 12 per cent so far this year. By contrast, the four foreign banks have risen by between 11% and 30%.
Morgan Stanley analysts said a gradual slowdown in mortgage growth, fiercer competition for loans, and decreased credit quality could weigh on the banks’ earnings in 2027.
This demand for housing is waning, after the government eliminated tax advantages for investors in the property sector. Property consultant Cotality says auction clearance rates have slumped to their lowest level in six years, and average home prices are down some 2 per cent over four months.
As a result, home-loan applications have taken a significant nosedive. The largest loss of the six banks was Westpac’s 20%. NAB and Commonwealth Bank both fell by 15%, while ANZ registered a 12% drop.
Bank Revenue Growth Could Slow
Citi is looking for 2.9% revenue growth in the banking sector by financial year ’27, down from 4.4%. The property market is also under pressure. Brisbane’s Crows Nest Residential developer Bathla Group appointed external administrators to address an account of $3.2 billion in debt, saying the lot of issues currently biting into profit-making capacity had worn out its financial fortitude.
Lending to businesses is in a stronger position, but banks with greater exposure to that will likely be subject to more scrutiny from investors who are unsure if it is enough to compensate for disappearing home borrowing demand.
Weaker Property Market Piles on More Pressure
Investors also think that weak consumer spending and lower home prices could hit business lending.
Australian banks looked “quite expensive” relative to other sectors of the local share market, according to Cameron McCormack, portfolio manager at VanEck. He said that even at multiples of earnings, smaller and mid-cap companies were more attractive in terms of growth potential.
The weaker demand for housing loans is likely to enhance competition between the banks. It's a tough lending environment, said Mark Nathan head of fundamental research at Regal Funds Management. He said banks would compete for a smaller pool of borrowers, slowing loan volumes.
Source: Reuters
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