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Rankings & dataFebruary 26 2016

Housing dominates Australian loan books

As banks struggle worldwide, Australian lenders seem a mainstay of stability but they depend heavily on the housing sector.
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Recent years have been some of the most lucrative in history for Australia’s lenders with the past year being the most profitable to date, as the country’s 'big four' lenders – Commonwealth Bank, National Australia Bank (NAB), ANZ and Westpac – posted an impressive combined A$43.71bn ($31.54bn) pre-tax profit (see chart one).

Chart one

Sheltered by a healthy economy, the lenders tapped into the buoyant housing market. This is where the key to the success of Australian lenders lies. The big four were already reliant on the housing sector, but over the past seven years their holdings of housing loans doubled and the high margins that followed bolstered interest income (see chart two).

Chart two

Australian house prices received a boost from the low-interest rate environment; residential property index for the country's eight state capitals – Canberra, Sydney, Melbourne, Brisbane, Adelaide, Perth, Hobart and Darwin – rose by more than a third since 2008 (see chart three). However, as the US's Federal Reserve is slowly drawing the low-interest rate era to a close, the Australian central bank may follow suit. The market looks even frothier considering the record levels of indebtedness of Australian households – Australian households are among the most indebted in the world. 

Chart three

Meanwhile, mortgages are the lion’s share of the portfolio at each of the big four banks (see chart four). They play the most prominent role at Westpac, where the A$417.97bn of housing loans amounted to 67.06% of the loan book. The share is nearly as high at the Commonwealth Bank, where the A$437.18bn of mortgages constitute 64.85% of the loan portfolio.

Chart four

The exposure to the housing sector is somewhat more modest at the two remaining banks. At NAB, which holds A$341.97bn in housing loans, the share is 58.54% and at ANZ, the A$300,47bn of real estate loans amounts to 52.32% of the loan book. Unlike the other three banks, which increased the share of home loans in their loan books since 2008, ANZ has not substantially increased the share of the real estate lending. The big four lenders are now also faced with the double whammy of slow-down in China and the commodity rout, to both of which they have exposure.

Still, the banks are well braced against any setbacks. The default rates are low and they remain well capitalised with an average 11.36% Tier 1 capital ratio.

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