While the potential of macroprudential controls, or more closer scrutiny of lending practices, would have an impact on the profit margins of the major banks, we are unconvinced that the RBA is likely to introduce such measures. Rather, Glenn Stevens is sounding the warning to the banks that as property prices rise, so do the risks. These risks are well known to Australia’s senior bankers. Tighter controls and a robust banking system are the real reason that Australia fared better during the GFC than most northern hemisphere countries.
Glenn Stevens’ pronouncements on the RBA’s concerns about the state of housing lending in Australia represents a continuation of a sound, sensible central banker doing his job well. In raising concerns about the level of investment lending for housing, bankers across the country will more closely scrutinise their lending practices. Rational lending practices will go a long way to ensure that the macroprudential controls recently suggested are not required.
The recent severe share price declines in the major banks – partly due to media speculation over tighter lending controls and a housing market bubble – have created an opportunity for long-term investors to buy these quality businesses at an attractive price. From their high on 28 April, ANZ shares have fallen nearly 10%, NAB 7.8% and Westpac 3.4%. Commonwealth Bank shares reached a high of $83.75 on 31 July, and have since fallen 8.3%. We now see these shares as being attractively priced on a fundamental basis. As ANZ, NAB and Westpac draw a close to their financial year on 30 September, reports are likely to show a strong rise in lending activity combined with a healthy funding mix.
NAB and ANZ remain our preferred banking exposures. NAB is trading on a forecast dividend yield of 6.1% fully franked and a forecast PE of 13x. ANZ’s forecast yield is 5.3% fully franked with a prospective PE of 12.6x (based on Bloomberg consensus forecasts). In the third quarter trading update released in August, NAB announced a rise of 7% in unaudited cash earnings, and had raised $23 billion in term wholesale funding. ANZ’s unaudited cash profit rose 8%. Both banks experienced declines in provisioning for bad debts and mentioned softer revenue.
Long-term investors should be encouraged by the recent softness of share prices, providing an opportunity to purchase quality businesses at reasonable prices. With ANZ, NAB and Westpac due to release their annual profit results in mid-November, investors have the opportunity to position themselves ahead of what should be strong results – possibly stronger than the market has been anticipating if the RBA’s concern about borrowing demand is to be believed.
David Lane is director of Wealth Management at Pitcher Partners