Consumer Credit in Australia

Consumer Credit in Australia

HEADLINES

Gross consumer credit lending increases by 5% in 2010, rising to A$270 billion

Education lending continues to post the strongest growth, increasing by 17% in gross lending

With foreign players such as GE Capital reducing their presence in Australia, the ‘big four’ banks are filling the void

Gross consumer credit lending is set to increase by 4% CAGR in constant value over the forecast period

TRENDS

Consumer credit in Australia recovered in 2010 after very low growth amid a high degree of instability during 2008 and 2009. Consumer credit gross lending increased by 1% in 2008 and 2% in 2009 as lenders took pre-emptive steps to tighten their credit requirements. With latent and unsatisfied demand for credit having been bottled up, strong growth of 5% was experienced in consumer credit gross lending during 2010 as borrowers were encouraged by low interest rates which, although having risen significantly since 2009 when interest rates were lower in Australia than at any time since the 1950s, were still relatively low. The ‘big four’ banks also contributed to the growth in consumer credit gross lending in 2010. Having concentrated on mortgage lending over the course of 2009, the ‘big four’ decided in 2010 to engage in the cross-selling of other consumer lending products to their core customer bases.

Much of the slowdown in growth recorded in consumer credit during 2008/09, which would have been very much negative had it not been for the positive impact of education lending, a category not at all affected by the global financial crisis, was not due to a decline in demand for credit. Declining consumer confidence was an initial issue over the first half of 2009 before recovering during the second half of the year to reach levels similar to what was considered typical prior to the onset of the global financial crisis. However, the main reason for the slowdown in consumer credit gross lending was a lack of supply of credit, with many lenders either tightening credit requirements or withdrawing from consumer lending altogether. The lenders most apt to withdraw turned out to be foreign players such as GE Capital, which felt the need to look after its key operations in its home market, and as a result exited auto lending in 2010. Local players were more likely merely to tighten credit requirements. Tighter restrictions on lending were imposed mainly due to concerns over the potential generation of non-performing loans, but also because funds for lending were difficult to source on the global money market. This scarcity of funds on the global money market is a situation which continues to trouble many Australian lenders, despite the widespread eagerness among them to compete strongly in consumer lending.

Whilst mortgage lending was very heavily supported during the review period through the Australian Government’s first home owners grant, such support was not extended to any other categories of consumer lending, with the exception of auto lending, which was subject to the OzCar scheme. This involved the Government offering access to funds for car dealers after GE Money and GMAC withdrew from auto lending in Australia in October 2008. However, the OzCar scheme was not necessary in the end as the majority of new car dealers were able to find alternative sources of financing for their customers. However, this did not prevent credit from becoming more difficult for consumers to access, with the result that gross auto lending fell by 15% in 2009, although the high proportion of Australian consumers who chose to postpone purchasing a new car also had a significant impact on the decline recorded in auto lending. Once consumers felt confident enough to once again contemplate a new car purchase in 2010, gross auto lending rebounded, posting 6% growth.

Education lending is predominately offered by the Australian Government through its Higher Education Contribution Scheme (HECS) as well as, to a lesser extent, the FEE-HELP scheme for the payment of tuition fees. These schemes are only available to domestic students, who make up 70% of student numbers in Australia, and borrowers only pay the loan back once their incomes have reached a minimum threshold of A$43,151 in 2009/10, which increased in line with inflation to A$44,912 in 2010/11.

The outstanding balance in education lending increased in 2009, as the stagnant economic environment in Australia made it difficult for new graduates to find employment, more specifically employment that offered a salary in excess of the minimum repayment threshold. Government education loans are repaid through the taxation system, and as such repayment rates rise progressively with income. With the incomes of borrowers unlike to rise significantly during the ongoing economic slowdown, this has ensured strong growth in the accumulation of the outstanding balance in education lending, which consequently increased by 21% in 2010.

Durables lending predominately consists of funding for the purchase of furniture and purchases of other big ticket items. The furniture component of durables lending is strongly related to the condition of the housing market, but also the availability of credit, which was significantly tightened over the course of 2009 and 2010 due to concerns about the economic slowdown and the ability of borrowers to repay loans.

Other personal lending is primarily made up of debt consolidation, and thus increases at times when consumers are especially concerned about their ability to pay off their debts. Thus, other personal lending increased in both outstanding balance and gross lending in 2010 as the RBA raised interest rates from the 3% which had been in place over much of 2009 to the 4.3% by April 2010. With banks raising interest rates on credit cards and auto lending to a greater extent than on the more visible and politically contentious mortgage lending, a growing need to consolidate debt and refinance became apparent.

After putting a hold on increases in credit limits for cardholders, Australian banks are now beginning to return to the relaxation of credit limits again as a means of generating growth in credit among existing customers. After engaging in the prudent use of their credit cards in 2009, characterised by the use of the windfall cash from government stimulus payments to pay off credit card debt, Australians have already returned to their previous habits and card lending outstanding balance is showing strong growth again as a result. Such growth in card lending outstanding balance is also due to interest rates on credit cards gradually being raised by banks since these are not subject to the same high level of media attention as the interest rates on mortgage lending.

Durables lending continued to decline in importance relative to other forms of consumer lending in Australia during 2010 as the ‘big four’ banks increasingly focused upon more profitable mortgage lending in an environment in which house prices have recovered and are again showing strong growth. At the same time, the increased availability of credit cards and the willingness of Australians to expose themselves to credit card debt, has provided consumers with a far more convenient, if more costly, means of funding their durables purchases.

Non-performing loans did not rise significantly in Australia over 2009, despite the effects of the global financial crisis. This is mainly because the main factor behind the inability of borrowers to repay their debts, unemployment, did not emerge as a significant concern from the economic slowdown, by from 4.1% in April 2008 to 5.7% in August 2009, before falling again. The high number of Australian workers who chose to use their A$900 stimulus payments to pay off their debts also contributed to non-performing loans remaining only an insignificant proportion of consumer credit in Australia in 2010.

COMPETITIVE LANDSCAPE

Macquarie Bank is becoming an increasingly important player in auto lending in Australia, having acquired the bulk of the auto lending portfolios of both GMAC and Ford during 2009/10 in a transaction worth a total of A$2billion. In the absence of the previous major players, GMAC Financial Services and GE Finance, other players have moved in to fill the vacuum left by the departure of these big guns, including Esanda, St George and Capital Finance, each of which already had a significant presence in Auto lending. All of these players were able to take advantage of the departure of GMAC and GE Finance to further establish themselves in auto lending. Esanda achieved particularly good growth through its partnership with Subaru, backed by its owners ANZ Banking Group.

The main players in durables lending are major retailers such as Harvey Norman, which offers credit under such favourable terms as ‘four years interest free’ through GE Capital. Such offers have become a crucial part of the business plan of Harvey Norman and feature in virtually all of the company’s marketing communications in order to encourage consumers to make purchases that they otherwise might not. The tightening of credit led to a significant decline in durables lending in 2009, although GE Capital continued to expand the range of stores through which it provides in-store finance, which now includes the majority of major furniture, consumer electronics and consumer appliance retailers in Australia, as well as major jewellery retailers. Such major retailers funded by GE Capital include Freedom Furniture, Snooze, Forty Winks, Retravision, The Good Guys, Zamel’s Jewellers and Proud’s Jewellers.

Since the deregulation of the Australian banking industry in the 1980s, the ‘big four’ banks have concentrated more on mortgage lending and less on consumer credit products, with specialist players in each consumer finance category filling the void. This trend reversed slightly in 2010 as the ‘big four’ increased their attempts to cross-sell consumer credit products to their existing customers. This had an effect their presence in durables lending and auto lending. The ‘big four’ have, however. always been the dominant players in home lending and other personal lending, the latter because it largely consists of debt consolidation. The categories in which other lenders besides the ‘big four’ have been able to dominate, auto lending and durables lending, are generally characterised by being provided at the point-of-sale, with consumers opting to take out credit in accordance with existing agreements with retailers. This allows consumer credit players from outside the ‘big four’ access to consumers. In situations where point-of-sale finance does not exist, consumers tend to simply choose the bank which is to provide them with credit.

The National Consumer Credit Protection Act 2009, which requires lenders to register for a licence as well as placing the onus on the lender to determine the creditworthiness or otherwise of the borrower, has been designed to facilitate the removal of so-called ‘rogue lenders’ from Australia. It is also likely to strengthen the dominance of the ‘big four’ banks. Formerly, when rejected by the ‘big four’ banks, consumers would resort to other, smaller lenders, but under the National Consumer Credit Protection Act 2009, these smaller players are now required to operate under the same restrictions and will also therefore be equally likely to reject applications. Competing with the ‘big four’ on their willingness to dispense credit will therefore no longer be such a popular means of competition.

Many foreign players, most notably GE Money, withdrew from Australia during 2008/09 in order to concentrate on their core home markets, thereby allowing domestic players to fill the void left by their departures. With Australia continuing to be one of the best performing of all developed economies during 2010, it is looking like an increasingly attractive country in which to maintain a presence in consumer lending.

PROSPECTS

Growth in consumer credit is set to slow down over the forecast period. Gross lending is expected to increase in constant value by 4% CAGR while outstanding balance is expected to increase in constant value by 5% CAGR. Much of this slowdown is due to the fall in the level of card lending as the payment habits of Australian consumers shift from using credit cards towards the use of debit cards. Growth in consumer credit shall instead by encouraged by relatively low interest rates as well as the RBA practices caution as the RBA is concerned with the instability of the global economy and its impact upon Australia, as well as the new policy of the ‘big four’ banks to cross sell consumer credit products to their mortgage customers.

The Australian economy has proven to be surprisingly resilient during the global financial crisis, and is looking increasingly attractive to new players, both domestic and foreign. As the global economy continues to perform in a sluggish manner however, access to funds will be restrained, and as a result credit will be rendered more expensive. This will have the effect of reducing the margins able to be achieved by lenders, although this may be made up for by the fact that, at 4.5%, official interest rates in Australia are higher than in the majority of other developed economies, where interest rates are generally around 1%. The combination of high interest rates (relative to other developed economies) and a stable economy are set to combine to make Australia very popular among consumer lending companies over the forecast period.

With demand for consumer credit returning strongly over the forecast period, lenders are eager to ramp up supply again, but they shall been restrained in their ability to do so whilst the global economy remains troubled, and access to funds is consequently retarded. Whilst lenders will find a way to gain access to funds, growth in consumer credit shall remain far lower than what would otherwise be the case.

Growth in auto lending is set to bounce back over the forecast period, and not only due to the recovering Australian economy. Cuts in car tariffs from 10% to 5% in January 2010 have made many cars more affordable to Australian consumers, therefore providing a significant trigger for growth in auto lending. This impact has been further intensified by an appreciating Australian dollar, although regular fluctuations in currency markets do raise questions over the continued impact of this driver of demand for auto lending.

The position of HECS at the centre of the Australian education system was reinforced in November 2009 when the Australian Government, in an attempt to foster social equality, eliminated full-fee paying places for domestic undergraduate students. Although full-fee paying students only made up 1% of domestic students prior to this move, this reform will still produce a small lift in the growth of education lending over the forecast period. Education lending shall therefore generate the strongest growth in consumer lending, rising in gross lending by 11% CAGR in constant value terms. However, since this shall be exclusively through the Government administered HECS and FEE-HELP systems, this increase will of no benefit to education lenders in the private sector.

Growth in other personal lending and durables lending is likely to be relatively strong over the forecast period, as Australian banks attempt to consolidate gains during the closing stages of the global financial crisis by cross-selling to existing customers, encouraging them to take out other personal loans in addition to their existing mortgages.