The bankers will come back

RBA assistant governor Malcolm Edey delivered a very interesting speech to the banking fraternity yesterday, basically saying that the days of strong loan growth looks to be over, as households pull back from debt.

“It seems unlikely that we’ll be going back to the days of consistent double-digit growth in credit that we saw in the pre-crisis years,” he said.

“That growth was driven in part by factors that can’t be repeated – the deregulation of the financial system in the 1980s, and the transition to low inflation in the 1990s.”

“In the post-crisis environment, borrowers and investors are more cautious than they were, both at home and abroad. That’s likely to mean less demand for leverage and less growth in private balance sheets, even when the economy itself is growing strongly.”

As Edey points out, the trend towards lower borrowings at households and businesses is great news in terms of our ability to ride out future economic crises.

But it’s not great news for the banks, which have enjoyed a decade of impressive profit growth thanks to strong borrowing, particularly for property. And our bankers agree – they know that mortgages will no longer be the bonanza they were before the GFC and understand that the will have to look elsewhere for growth.

That’s why we’ve seen a recent surge in bank advertising, led by National Australia Bank’s giant “break-up” campaign, which seems to have worked.

But the slowdown in mortgages is also likely to lead banks to increase their activity in the other major segment of the market – lending to SMEs.

Certainly, all the banks are talking up their focus on business banking, although anecdotal evidence suggests it remains extremely difficult for entrepreneurs at a certain stage (that is, anything the bank doesn’t consider to be really well established) or from a certain sector (anything to do with property and retail stand out) to access credit.

That’s not likely to change in the very short-term, but bankers will need to move back into these markets if they want to drive growth.

They are likely to be more risk adverse than they were five years ago, and perhaps better informed about industry conditions.

But they will soon have to get back to the business of backing fast-growing entrepreneurs who need capital for growth in a much more substantial way than they are now.

And that is going to lead to some very interesting conversations. I reckon entrepreneurs who had their risk premiums raised during the GFC will take particular satisfaction from the idea they may be able to play one bank off against another.