Federal election 2016: political uncertainty spooks bank investors

Political deadlock in the wake of the inconclusive federal election has spooked bank investors.

The major banks’ AA- ratings are partly tied to the health of the government’s AAA rating

Political deadlock in the wake of the inconclusive federal election has spooked bank investors, fearful that a range of potentially damaging spotfires could flare into bigger problems for a sector already on the nose.

As the prospect of the first hung parliament since 2010 worried the three major credit ratings agencies, bank stocks bucked broader gains yesterday to end in the red, led by Westpac’s 1 per cent decline to $28.98.

With the additional prospect of a royal commission should Labor form government, National Australia Bank slipped 0.8 per cent to $25.07, Commonwealth Bank slid 0.61 per cent to $73.38 and ANZ ended down 0.84 per cent at $23.75.

The diminished prospect of reform and greater uncertainty also increased bets the Reserve Bank would be forced into further lowering the cash rate to support the economy, crunching the banks’ margins at a politically delicate time for them to pass on any uptick in costs to customers.

“Maybe there were some offshore sellers worried about the fact that with what may be an unworkable Senate, the budget repair will not get through,” Richard Coppleson, director of institutional sales and trading at Bell Potter, told clients.

“Which will mean that Australia may lose its AAA credit rating — which would hurt the banks through higher funding.

“Also if rates go up and confidence collapses, then the property market could this time really get smacked and that would see the banks under even more pressure.”

The major banks’ AA- ratings are partly tied to the health of the government’s AAA rating, which Standard & Poor’s has a stable outlook on assuming deficits and government debt are reined in.

“Irrespective of the political composition of any new government, we could lower the rating if parliamentary gridlock on the budget continues and Australia’s budgetary performance does not improve broadly as we expected a year ago,” S&P warned.

Any downgrade to the banks’ credit ratings could increase the cost of the debt they raise from wholesale markets, which still make up around 30 per cent of their funding. The sting would also flow through to smaller lenders, with Bank of Queensland shares falling 1.3 per cent to $10.34 while Bendigo and Adelaide Bank decreased 0.9 per cent to $9.70.

In the last financial year, the banks index on the stockmarket slumped 17 per cent — the worst since 2008.

David Ellis, an analyst at Morningstar, said the challenging outlook for the banks was “not helped” by the unclear election result, increasing political uncertainty and dampening business and consumer confidence.

But Mark Nathan, a fund manager at Arnhem Investment Management, said a cut to the major banks’ credit ratings would not be the “end of the world”, noting that many global banks were rated A by the agencies and the marginal ­increase in funding costs could probably be passed through to customers over time.

“They’ve got in the ballpark of $80 billion-$90bn each outstanding and they’re only funding a quarter of that each year, so it’s a gradual process and they’ve got plenty of time to pass that on,” he said.

Mr Nathan said the “more immediate impact” from the election was the prospect of a royal commission, which Labor has promised after a string of scandals at the major banks.

He said greater political scrutiny would limit the ability for the banks to “reprice” mortgages in their favour to offset rising funding costs and capital requirements.

“The banks don’t want to be seen to be gouging by doing that, which is probably why you saw them, apart from ANZ, not repricing with the last rate cut,” Mr Nathan said.

His comments came as UBS analysts released a downbeat report on CBA, warning that the bank was suffering issues including intensifying pressure on margins. “With the challenging political environment for banks likely to intensify, CBA will need to address these issues to continue to outperform,” UBS analyst Jonathan Mott said.

Bank of America Merrill Lynch economist Alexandra Veroude said while Labor appeared unlikely to form majority government, uncertainty about signature policies of removing negative gearing and holding a royal commission would weigh on the ­market.