Bank Stocks Looking Strong On The Back Of APRA Guidelines

SMSF investors may want to hold onto their big four bank shares with the latest APRA guidelines a positive development for the major banks and their profits expected to remain solid, according to a Morningstar analysis.

A recent analysis report from Morningstar said the new capital guidelines from the Australian Prudential Regulation Authority have been a positive development for the major banks as they contained no major surprises.

The new guidelines require the banks to hold slightly more capital for high-risk loans relative to low-risk loans, but are expected to help strengthen capital levels by providing a greater buffer for potential increases in loan losses and help encourage responsible lending, the report said.

“For shareholders, the changes were only incremental and, importantly, there were no nasty surprises,” it said.

“The proposed changes do not materially change the banks’ capital requirements nor do they significantly alter the competitive landscape.”

The report said that Westpac is a slight outlier to the other major banks, as it holds a comparably larger portion of interest-only and investment property loans. It did note, however, that the proportion of high-risk loans in its mortgage portfolio has declined from 40 per cent a year ago down to 31 per cent now.

While the new capital guidelines may disincentivise the writing on riskier, high-margin loans, slower growth in volumes and a greater focus high-quality loans should result in less risk and lower credit losses in the future.

The report also predicted that there may be potential upside for the earnings of the major banks if property markets recover.

“The Coalition’s electoral victory, the new First Home Buyer Deposit Scheme, APRA’s proposed changes to the mortgage serviceability benchmark and potential further RBA rate cuts, suggest property prices should at least stabilize,” it stated.

“The rate of decline in Sydney and Melbourne house prices reached its lowest point in 12 months and auction clearance rates have rebounded, with Sydney experiencing a 66 per cent clearance rate for the first weekend in June.”

Despite the reputational damage from the royal commission, Morningstar said the major banks managed to navigate through the royal commission with dominant market positions undiminished and pricing power in place.

“We believe commercial banking licences in Australia are very valuable as all four banks benefit from substantial competitive advantages, resulting from their dominant oligopoly within the regulated industry, extensive pricing power, high barriers to entry, low-cost operations, high-profile brands and very profitable operations,” it said.


By Miranda Brownlee

SMSF Adviser

14 June 2019

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