House price correction could trigger Australian bank sector whiplash

House price correction could trigger Australian bank sector whiplash
Jonathan ChancellorDecember 7, 2020

Australian banks are more fearful of the prospect rising interest rates could reduce their customers’ ability to repay home loans, an international PricewaterhouseCoopers' (PwC) survey has revealed.

The high exposure of banks to the home mortgage market has seen interest rate risk move from 30th on a 2012 list of concerns for banks to currently sixth place.

The international PwC biennial survey had interest rates ranked as the 12th biggest concern ­globally. Regulation and political interference topped the list of risks among the global banking industry replacing 2012’s leading threat, the macro-economic environment.

A breakdown of global responses shows respondents (bankers, observers and risk managers) had the highest concerns about regulation and politics within Europe and North America. The top concerns in the Asia Pacific region focused more on the macro-economy and the risk of sharp changes in interest rates.

Banking professionals are particularly anxious in Singapore, Malaysia and Turkey. 

China remains on top of the most important business growth markets globally, though concerns about increasing tax burden and the lack of stability in the capital market, according to PwC with 33% of 1,344 global CEOs from 68 countries believing that China ranked as the most important growth market for their corporations this year.

PwC’s Australian head of financial services, Hugh Harley says the major reason for the local ­sensitivity about interest rate moves was their housing loan book accounted for about 60% of the banking sector’s total credit commitments, compared with 30% a generation ago.

Barclays chief economist Kieran Davies estimated that Australian household debt was 177% of annual disposable income.

Lending to households has been the biggest contributor to the bank profits since the financial crisis, with investment bank UBS, recently finding total profits from retail lending for ANZ, Commonwealth and Westpac banks had doubled from $3.5 billion in 2007 to $7 billion in the 2013-14 financial year. 

Clime Asset Management’s chief investment officer, John Abernethy, told the Australian Financial Review “when we see a correction in housing prices, higher interest rates, and a lack of capacity to repay back loans quickly – you can get whiplashed dramatically in the banking sector”.

The current thinking as seen stockbrokers sounding caution on bank share prices ahead of half-year profits, with Bell Potter director Charlie Aitken downgrading his recommendation on the big banks to “hold”. One reason was that he considered the stock market surge in bank stocks by investors seeking out attractive dividend yields, and spurred on by record low interest rates, had possibly reached its peak.

The ASX 200 bank index has risen 50% over the past two years with Charlie Aitken noting the yield on big bank stocks was now about 5%.

Jonathan Chancellor

Jonathan Chancellor is one of Australia's most respected property journalists, having been at the top of the game since the early 1980s. Jonathan co-founded the property industry website Property Observer and has written for national and international publications.
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