Seems there's not a day that goes by without another story of liar loans or irresponsible lending by banks in the Australian property market.
Yet are these true warning signs for bank investors, or just the natural response of storytellers (journalists) feeding an audience that's looking for the next GFC?
Are Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) headed for a downturn?
It's hard for the retail investor to know for sure, even if they do extensive research.
There are large entrenched interests on both sides of the debate. Property spruikers reckon there's nothing wrong with property and it's all gravy, in fact we don't even need lending restrictions, just lend to everybody that wants a house.
On the other hand, you have fund managers and share investors who think that Australian property is hugely overpriced and set for a collapse. (I note that the suggested solution is often to invest in equities outside Australia, conveniently enough in international funds that these fund managers offer…)
So it's hard for investors to get an unbiased view (for the record, I'm biased in favour of shares also). But I think of the situation like this:
- Australian banks are a concentrated bet on Australian property
- Australian bank valuations are high (at about 2.5x book value)
- Interest rates are low and have only gotten lower in the last few years (enhancing affordability and minimising the risk of loan default, reducing bad bank loans)
- Interest only loans are widely used
- Recent caps on interest only loans will lead to a substantial number of borrowers having to switch to principal and interest repayments (increasing borrower stress somewhat)
- US interest rates are rising which will increase the cost of bank funding
- The industry isn't getting any less competitive, with Westpac recently slashing rates on some loan packages to as low as 3.89%
- Banks are looking at divesting their wealth management arms (which may reduce earnings)
- There is some evidence of less than responsible behaviour, such as Commbank's 'ATM-gate' and Westpac having up to 50% interest-only loans (which does raise questions over whether these banks are lending appropriately)
- There is a Royal Commission into the banks & others (which carries the unlikely prospect of additional regulation)
In this situation, it looks to me as though to be an investor in the big banks, you have to believe that conditions in the banking industry will be 'more of the same' despite mounting evidence that suggests otherwise.
With so many changes coming in, and wage growth also being flat, it's hard to see property lending volumes rising. It's also hard to imagine lending getting more profitable in the near term given the pressures of competition and funding costs. Despite this, bank prices look high-ish, affording minimal margin for safety.
The question is not "are the banks doomed to crash?" because nobody knows the answer to that.
In my opinion, the question is "can an ordinary investor be sure enough of industry conditions to accurately determine if they are likely to make money/not lose money by investing in the banks today?"
I would submit that the answer to that is "No."
