Australian Prudential Regulation Authority, or APRA, has again tightened residential Lending controls and flagged higher capital requirements to further strengthen financial system stability and reduce risk build-up in the overheated residential property market. The Reserve Bank of Australia Governor weighed into the debate focusing on increasing levels of risky lending and the need for banks to apply responsible lending practices. The Chairman of the Australian Securities and Investment Commission, or ASIC, sensationally compared higher risk mortgage lending in Australia with the subprime lending disaster in the U.S. that caused the GFC and repeated his view that housing markets in Sydney and Melbourne are in a “bubble.” Following years of strong house price growth, we expect the rate of growth in Sydney and Melbourne to slow and, in our opinion, an extended period of flat house prices would be a good outcome. Despite the risk build-up, our assessment is a serious collapse in Australia’s residential real estate market is unlikely. The recent round of regulatory tightening should slow rampant house price growth with the nearly 20% increase for Sydney house prices and 16% for Melbourne prices over the past 12 months not sustainable.
At current prices, the four Major Banks [Australia And New Zealand Banking Group (ANZ) (ANZ AU), Commonwealth Bank Of Australia (CBA AU), National Australia Bank Ltd (NAB AU) and Westpac Banking Corp (WBC AU)] are trading around our fair value estimates. We expect a total of approximately AUD 20 billion in new capital will be needed by the major banks during the next three to four years to fund asset growth and satisfy higher future capital requirements. A stronger-than-expected performance from the Australian and New Zealand economies could surprise driven by stronger-than-consensus China growth rates, high net migration levels, residential property market strength and increasing infrastructure investment. Business, economic, political and operational concerns impacting the banks are not as bad as the market and media fears. We do not expect any change to the major banks' privileged market position.
Analysts: David Ellis and Ravi Reddy
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