Monday 12 February 2018 by Company research

Credit outlook 2018 - Financial Institutions

Last week, we published our inaugural Credit outlook report. This week we publish part of the Financial Institutions sector review to give you an idea of what is in the report. Each of the five sector overviews cover the important issues pertaining to the sector, our expectations for the coming year and a relative value analysis


Please note the complete report is only available to FIIG wholesale clients. For clients unable to access the complete report, please speak to your relationship manager. 

The financial services sector is Australia’s largest industry and plays a critical role in domestic employment and economic growth. We believe that Australian banks and non-bank financial institutions enjoy the benefits of operating in a strong economy with a high degree of resilience, institutional and government financial strength, well-regarded and supportive regulatory structure, and low susceptibility of event risk. The funding environment has been improving, with funding costs gradually moving lower.

The Australian Prudential Regulatory Authority (APRA), the Australian Securities and Investment Commission (ASIC), the Reserve Bank of Australia (RBA) and the Australian Treasury are all responsible for the regulation and supervision of the Australian financial system.

The Financial Institutions (FI) sector can be broadly segmented into three categories:

1.   Authorised Deposits-taking Institutions (ADIs), which comprise of banks, building societies and credit unions. This is the largest segment within the sector by assets (AUD4.3trn as at June 2017, based on RBA statistics). ADIs are regulated by APRA and provide a wide range of financial services to all sectors of the economy including deposits, personal and housing lending, payment services and commercial and wholesale banking services.

2.   Non-Bank Financial Institutions (NBFIs) comprising of finance companies including general financiers, peer-to-peer lenders and pastoral finance companies (e.g. StockCo), as well as broker-dealers and securitisers (e.g. zipMoney Trust 2017-1). Companies in this segment are regulated by ASIC. Finance companies provide loans to consumers and small to medium sized businesses (SMEs) and are predominantly funded through the wholesale markets. 

3.   Insurers and Fund Managers including life, general and health insurers as well as superannuation and approved deposit funds. APRA is the main regulator for insurers and superannuation funds. The majority of the companies analysed in this Credit Report are NBFIs and insurers.

Figure 1: FI segments by Assets (Jun 2017, AUDbn)

Source: RBA

Lending growth

In 2017, overall lending growth was relatively unchanged. Housing credit growth was tempered by APRA’s announcement of limits on investor and interest only loans, while business credit growth picked up in 2017 but remained low compared to historical trend. 

Figure 2: Lending growth 

Source: ABS, APRA, RBA


Competition in the lending market has been increasing, however levels of competition are different in different lending segments. Consumer and mortgage lending is relatively competitive and the four major banks (ANZ, CBA, NAB and WBC) have been losing market share to smaller entities, with the share of mortgage approvals having fallen to 76.9% in June 2017 from a peak of 86.3% in March 2009. In 2017, APRA announced changes to the macroprudential regulations and capital requirements, which have led to a further market share grab by NBFIs.

SME lending competition is not as intense and APRA has suggested it could use reform to its licensing processes to allow more technology start-ups (also known as Fintechs) to exert competitive pressures on the major banks. Technological innovation is rapidly transforming bank competition, sowing seeds for a fundamental change in how financial services are developed and delivered. Australia has been at the forefront of developing one of the world’s dynamic Fintech industries that is expected to grow from an AUD250m industry in 2015 to an AUD4bn industry by 2020. There are around 400 Fintech companies based in Australia (such as Axsesstoday, Moneytech and zipMoney) providing a diverse range of products to SMEs and retail consumers. Fintech companies are an alternative to traditional lenders and offer customers improved lending outcomes and a quicker deliver time compared to traditional lenders.

Credit quality

Credit quality in Australia has been excellent for a number of years due to a combination of stringent lending controls and supportive economic conditions as illustrated in Figure 3 ... 

To read the complete report, please click here if you are an existing FIIG wholesale client. 

If you are not yet a client and would like to read the whole report please call Chris Ip on 1800 01 01 81.

Financial companies covered in the Credit Outlook – please click on the name to read to read the research. Note the research below requires a FIIG wholesale login.