Bank shares are on the nose again today and reports from UBS and Morgan Stanley are adding to the bearish sentiment.
UBS warned that the risk to bank earnings from a credit crunch is real and rising following the release of the Banking Royal Commission’s interim report, while Morgan Stanley believes our biggest banks are losing market share to non-bank mortgage lenders.
The share prices of Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd. (ASX: NAB) have fallen around 1% each in after lunch trade as investors weigh up Commissioner Kenneth Hayne’s early thoughts on potential regulatory changes to the sector.
The banks could keep underperforming the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index for a while yet as UBS believes the sector is facing a sustained and substantial earnings squeeze that’s likely to last several years, reported the Australian Financial Review.
While the interim report made no recommendations (that will come in the final report due early next year), stricter assessment of household expenses from loan applicants and improved bank obligations to small and medium business (SMB) customers are two obvious areas for reform.
The question of whether we are facing a credit crunch environment where the availability of loans is greatly diminished has split experts in recent weeks. The interim report has given the bears the upper hand as the Royal Commission found that banks have not bothered or did little to verify expenses claimed by loan applicants.
A stricter process will restrict the flow of credit to the market and the prospect of extending responsible lending obligations to SMB and agriculture customers will have a big negative impact on the availability of loans that are not reflected in UBS’ earnings estimates.
A credit crunch will not only impact on bank earnings but on the bottom line of companies linked to the residential property market, such as Mirvac Group (ASX: MGR) and Stockland Corporation Ltd (ASX: SGP).
Meanwhile, Morgan Stanley warns that the November profit reporting season for three of the big four banks could be a dicey affair for investors with ANZ most at risk of disappointing from a market share growth perspective.
“Housing system growth remained resilient at ~5.5% in August. However, majors fell to a new 10YR low of 4.2% as non-banks took market share,” said Morgan Stanley.
“While we think the impact of IOL [interest only loans] restrictions have largely played out, the effect of restrictions on high debt-to-income customers and more scrutiny on income and expenses are only starting to become visible in the growth data. These factors underpin our forecast for the majors’ housing growth to slow further to ~2% in FY19/20E.”
Morgan Stanley estimates that ANZ Bank’s growth rate of around 1% in the second half of FY18 is the weakest among the big banks and furthest from the broker’s forecast of 3% growth.
Westpac is modestly below the broker’s forecast of circa 4% while NAB is a little head of the broker’s circa 5% growth estimate.
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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited and Westpac Banking. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.