- Top bankers say the Australian economy may be lifting, but volatility from tariffs is likely.
- Unquestionably strong bank capital to stay in Australia.
- The February RBA rate cut might have made a positive difference for household sentiment, but business confidence is more attached to the global environment.
- Australia is also grappling with low productivity and potentially needs to work out how to ensure bank lending finds its way to businesses and equitably across society.
Near-term economic optimism amid productivity and trade challenges
Having attended the AFR Banking Summit this week, we noted how an optimistic chord was struck, particularly in conversations with (Commonwealth and NAB) bank CEOs, Matt Comyn and Andrew Irvine.
Irvine spoke earnestly about NAB’s journey to be Australia’s most client centric company. He contrasted Australia against Canada’s current geopolitical situation and noted how lucky the nation is to be blessed as a great place to live. Unafraid of any political backlash, and unusually for a senior banker, Irvine in the same breath tackled the regulatory settings in the housing market, the development timeline for business investment (particularly in the mining sector) and the shambles that is Australia’s energy market. It was a brave summary of the core productivity problems facing Australia. Comyn in a typically upbeat tone, spoke about CBA’s commitment to keep building the bank for the next decade, but then echoed Irvine in outlining the challenges to come in 2026 if Australia didn’t address prevalent core productivity issues.
While he gave an upbeat take on the Australian economy in 2025, Comyn was less enthusiastic about the outlook for 2026 and 2027,
“Tariffs mean lower global growth and higher inflation”.
Irvine was perhaps less concerned about the growth outlook for Australia, providing China continues to improve.
The US and UK are peeling back from implementing stronger bank capital, but Australia is unmoved.
The rollback of commitments to bank capital requirements in the US and the UK under the Basel III proposals means the dialogues on bank capital will likely come to Australia. Indeed, this is underway in New Zealand. APRA chief John Lonsdale clearly likes Australia’s unquestionably strong bank capital and pushed back remarking, “It’s served us well”.
It’s clear that Comyn supports a strong bank capital position. CBA easily clears the current Australian hurdles for bank capital. He said that strong bank capital serves CBA shareholders, Australia and the financial market well. “It’s good to have (the biggest) bank with a very strong capital position especially with all the uncertainty”.
Has one Australian rate cut already sparked the consumer?
There are early signs that consumer and household lending is picking up further. ING, Bendigo and CBA retail bankers said that mortgage pre-approvals have shown strong growth since the February cut in the cash rate. The digital, broker and proprietary channels for mortgage applications had “jumped” in recent weeks. This could just be households checking in on their capacity to borrow and might not spill into actual loan growth, but the line of discussion pointed to more engaged house buyers.
Irvine had recently been to Victoria, NSW and Queensland (following the cyclone) seeing bank branches and some businesses. He shared that he was pleased with feedback, feeling more optimistic about 2025 relative to last year.
Back to a focus on lending to the business sector
Before the 1990s, two-thirds of bank lending was to the business sector, whereas two-thirds is now to the Australian housing sector. The focus on housing is simply a factor of where the highest return on bank equity has been. But perhaps that is changing, the rise of digital mortgage lending, the price discovery through mortgage brokers and some fierce mortgage pricing have been key topics of discussion over the last year. These signals seem to have pointed nearly every bank toward lifting their sights to the business sector. NAB remains the largest business sector lender, but nearly every other bank wants to extend their business lending books.
And where specifically would they like to invest? Bank lending executives mentioned looking to lend more in the energy transition space, developing the resource sector, and then more wildly perhaps in establishing an Australian semi-conductor industry, and in the healthcare (specifically biotech) sector.
In the last year, only 8% of total household lending has gone to households with incomes less than $120,000; a fall from 13% in 2019. These households comprise about 60% of the population. In the last year, 9% of total lending has been to the investor category, (i.e. those investing in rental properties, with incomes above $500,000) receiving more credit than households earning less than $120,000. That’s a more than 160% increase to investors from the data of five years ago. The impact of tighter lending standards, unquestionably strong capital and firmer risk weights seem to be significantly impacting the allocation of capital.
CBA’s CEO said that it’s all well and good to ask banks to lend more to the less affluent, and through various programmes CBA does extend credit to lower income households. But imagine if CBA lent money to people who couldn’t repay their loans. Matt Comyn said, “instead of just reporting that our bad debts were 7bp in the last half, or about $250mn, I reported that our bad debts were 90bps or close to $3bn. I would have shareholders in the streets with pitchforks”. Prominent bank commentator Jon Mott noted, “if this (where banks lend) doesn’t change and you live in Sydney, you’ll never know your grandkids.” Perhaps this says more about housing affordability in Australia than lending standards.
We came away from a couple of days in Sydney with a fresh glimpse of the lucky country concerned about Trump and tariffs, low productivity and a valid debate on the trade-off between unquestionably strong bank capital and how the financial system extends lending to businesses and lower income households. The difference to New Zealand, Australia faces an election in a couple of months.
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