Bank lending ‘clampdown’ a booster for the big four

Investors has just handed the banks a gift: the opportunity to raise rates when official rates are falling.

Bank investors find the stocks super resilient in the face of almost any pressure.

Could the banks have planned it better? In a remarkable turn of events the so-called clampdown on lending to property investors has just handed the banks a gift: The opportunity to raise rates when official rates are falling.

In raising rates to property ­investors the banks immediately get a profit-booster. It’s simple: The gap (interest margin) between what the banks pay for some funding and what banks earn from property investor ­customers has widened.

Maybe it’s because bank stocks have come to represent the biggest single sector of the stock market that any news which might affect them has suddenly become material for headlines. Or maybe there is a deep-seated desire to highlight just about anything that might mean trouble for what has long been a useful punching bag for the wider community.

Either way the reading of new regulation for banks as “trouble” does not hold up. Banking analysts look only at the hard numbers and Macquarie Equities has estimated that ANZ, CBA and NAB will get an improvement of close to 2 per cent on profits from the changed terms for residential property lenders.

If that percentage seems small, when banks are making several billion a year it is substantial in cash terms. Look at it this way: Macquarie estimates that when Westpac — the biggest lender in the space — follows the other three banks, it will get a 3 per cent earning boost. Last year Westpac made$6.8 billion — so the application of these higher lending rates would have added $204 million.

Better still, looking beyond the “clampdown” in residential investor lending the move should see the banks do slightly less ­volume but more profitable business from the property investment brigade.

Who would have thought tighter regulatory action could be so beneficial? Maybe it is not APRA that should be getting the headlines in relation to its bank initiative but the competition regulator, the ACCC. Each major bank has lifted its lending rates to residential property investors by almost the exact proportion in terms of basis points. This was a rare occasion where the glaring oligopoly of our bank industry might have been shaken up but instead everyone once again moved in tandem. Indeed we are led to believe the only reason Westpac’s new chief Brian Hartzer has not moved yet is because his bank’s computer systems can’t handle the upheaval.

Some analysts have sought to temper this positive news on profitability from the imposed regulatory changes suggesting the new capital demands made on banks means dividend growth may be harder from here — no doubt that’s true but with dividend ratios at a peak they were unlikely to have gone higher anyway. What’s more bank stocks are paying out some of the highest dividend yields since the GFC — to stick with Westpac as an example the dividend yield on the Sydney bank now is 5.4 per cent and with franking credits that brings it over 7 per cent.

You have to wonder why anybody would buy the new Westpac hybrid, which pays at best 4.2 per cent above cash (2 per cent) bringing a total income of maybe 6.2 per cent. This may be better than many recent hybrid issues — but from a risk-reward ratio Westpac ordinary shares win hands down. In fact, if the confidence with which Westpac is seeking to raise $750m for its ­current hybrid tells us anything, it is that retail investors will queue to take up bank securities.

As a result it looks like the banks are sitting pretty — they are at reasonable valuations; they have stable and relatively high dividend yields and they can raise capital at will.

Meanwhile, in a twist that could only please both banks and bank stock holders immensely: if the RBA is satisfied some heat has been drawn out of the speculative end of the property market then it will almost certainly cut official rates, further improving bank margins. At that point, the major banks will have more volume from first-home buyers and owner-occupiers while enjoying better margin from residential ­investors — game, set and match to the banks. No wonder there is not a “sell” note in sight from the brokers on bank stocks.

In fact, the only broker who had an actual “sell” note on the banks — Citi for CBA and Westpac — upgraded its outlook for both banks on July 22 suggesting the APRA ruling was “less onerous than expected”.

So, once again, bank investors find the stocks super resilient in the face of almost any pressure.

One last thing: the one factor still to be weighed in the equation is ASIC’s late entry into the ­debate around banks, with boss Greg Medcraft warning that banks’ consumer-lending standards are not up to scratch. Medcraft would seem to have little tangible influence on bank ­behaviour in recent times.

He does, however, offer a clear warning to bank customers that your local bank manager will probably never tell you: bank mortgage rates may be as low at 4 per cent but Medcraft is warning all and sundry they should be doing their mortgage numbers on a more realistic rate of 7 per cent. That’s definitely true, but it’s going to take a lot more than huffing and puffing from ASIC or anyone else to create anything like big problems for the majors.

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