Australian bank investors brace for tough times as mortgage demand plummets

[SYDNEY] Investors are questioning the rich valuations on Australia’s biggest banks as a downturn in lucrative mortgage lending threatens to stifle growth and intensify competition for borrowers.

The so-called “Big Four” banks each reported double-digit falls in home-loan applications, citing recent tax policy changes and higher interest rates, in an otherwise strong set of August results.

The outlook reinforced investor fears of a tougher trading environment for the sector that has for years delivered reliable dividends and outperformed the broader market.

“It does feel like the outlook is deteriorating and there’s not a whole lot of bright spots that can be talked about,” said Minh Pham, a senior investment analyst at Milford Asset Management. “We’re definitely more on the bearish side,” she added.

Weaker growth prospects for the Big Four banks – ANZ, Commonwealth Bank, National Australia Bank (NAB) and Westpac – will weigh on the Australian equity market, as they make up about 24 per cent of the benchmark S&P/ASX 200 index and are among the most heavily owned local stocks by global institutional and domestic investors.

Together the four control more than 70 per cent of the country’s A$2.5 trillion (A$1.77 trillion) mortgage market.

That dominance has helped push Australia’s banks to be among the most expensive in the world. On a forward price to earnings ratio, they are more expensive than JPMorgan, Citigroup, Bank of America and HSBC.

Following their quarterly reports, the Australian banks are trading at a price-to-earnings multiple of between 16.2 to 24 times, compared to the larger foreign rivals which sit at 14 to 15 times.

They still hold a premium despite share price declines of between 2 per cent and 12 per cent in three of the four major Australian banks this year, against gains of between 11 per cent and 30 per cent for those four international banks.

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There is downside risk to 2027 earnings from a slowing mortgage market, rising competition, and weaker credit quality, analysts at Morgan Stanley said, adding that this strengthened the case for a de-rating of their shares.

Housing demand in Australia has weakened since the government scrapped generous tax concessions to property investors, threatening the major driver of revenue for the banks.

Auction clearance rates have fallen to the lowest levels in six years and national average prices are down about 2 per cent over four months, according to data from property consultant Cotality. As a result, home-loan applications have slumped, with Westpac reporting the steepest fall, 20 per cent, in its third-quarter update.

NAB and Commonwealth Bank both said that loan applications had dropped 15 per cent, while ANZ flagged a 12 per cent decline.

Citi has forecast a “substantial” slowdown in revenue growth for the sector to 2.9 per cent in the 2027 financial year from 4.4 per cent.

In the latest sign of pain in the property sector, a residential developer, Bathla Group, called in external administrators to restructure US$3.2 billion in debt, citing a “perfect storm of circumstances”.

While Citi said that banks with a bigger exposure to business lending would fare better, some investors are questioning how much that can offset the retail segment’s headwinds.

The “wealth effect” from softer house prices and weaker consumer spending could also impact the business credit growth pipeline, Pham said.

Relative to other parts of the Australian equity market, the banks look expensive, said Cameron McCormack, senior portfolio manager at VanEck.

“From a valuation standpoint, we think that the banks are probably a little bit too expensive,” he noted. “We think there’s better growth at a reasonable price available particularly among mid caps and small caps at the moment.”

Softer demand for home loans will only intensify competition among the banks.

“It’s a tough lending environment,” explained Mark Nathan, head of fundamental research at Regal Funds Management. “(Loan) volumes will moderate, but also you’ve got everybody competing for a small pie.” REUTERS