Outstanding margin lending in Australia peaked in December 2007 at $37.7 Billion, with an average loan to value ratio of 40.7%. Just 3 years later outstanding margin lending has fallen by 53% to $17.7 Billion. And the trend is down.
We know there is no growth in Banks' overall lending. What drove the boom in the economy was overall annual lending growth of 15%, and topping out pre-GFC at 20% growth.
The current overall growth of 5% pa shows that commercial lending is struggling to post positive growth, with Home/Personal lending on a clear down trend.
Then there are the bank profit reports. Bendigo Bank's headline number was "profit increase of 67% from 1st Half 2010 to 1st Half 2011 - or $70m". BBY stockbrokers point out that this result includes a $19m profit due to a revaluation of an investment property portfolio and there was a $17m loss on a disposal of securitization notes classified as a non-recurring item. BBY feels that Bendigo's Net Interest Margin will be squeezed as the new capital adequacy liquidity rules are introduced. In addition there are asset quality issues and a lack of reduction in costs within a low growth environment.
CBA reported a 13% increase in cash Net Profit After Tax (NPAT) or an increase of $392m to $3,335m for the first half year to December 2010. $661 m of this increase was due to a reduction in impairment expense from $1,383 m to $721 m.
The interesting aspect of Bank Balance Sheets is the Capital Adequacy reporting. Bendigo Bank reported a Tier 1 capital of 8.06%. Bendigo increased its asset base by 5.25% to $53.5 Billion, but the Risk Weighted Assets fell by 1% from $25.3 Billion to $25.1 Billion. This appears to be a feature of Bank balance sheets whereby assets such as home lending can be weighted at less than 100% (and down to 35%) on the basis of their perceived lower risk. So in a capital constrained environment, Banks will tend to favor home lending over commercial lending due to their lower risk weights. According to MacroBusiness.com.au, Banks are able to revalue the homes of their existing home lending portfolio so as to qualify for lower risk weights as property prices rise. CBA reported a reduction of $12.2 Billion in Risk Weighted Assets due to "Improving credit quality", growth in lower risk retail portfolios, and some other changes in methodology. This reduction in risk assets was despite CBA's total assets growing by $4 Billion to $650 Billion.
If property prices fall will Banks need to raise more capital, as their Assets move up the risk scale? There is not much written on this subject so thank goodness for blog sites like MacroBusiness highlighting this information.