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Regulatory crackdown and credit squeeze on CBA horizon

Roger Balch  |  03 Oct 2018Text size  Decrease  Increase  |  
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The harsh headwinds of the banking royal commission could damage the longer-term outlook for wide-moat major banks such as Commonwealth Bank of Australia, says Morningstar senior equity analyst David Ellis.

In his analyst note published today, a day after Kenneth Hayne's scathing 1000-page interim report, Ellis says he expects lending growth to further dampen "as tighter credit standards start to bite, fees and charges will be more heavily scrutinised, and operating expenses will increase due to tougher regulatory and compliance requirements".

At current prices, Commonwealth Bank (ASX: CBA) is trading 16 per cent below Morningstar’s valuation of $83, and its share price is also 16 per cent below its 12-month high, at $69.99.

cba royal commission banking hayne

CBA is trading 16 per cent below Morningstar's valuation of $83

Following the interim report, which outlined unfettered greed among financial institutions, regulators are expected to more aggressively seek legal remedies for breaches of the law rather than the previously negotiated settlements.

At current prices, Westpac (ASX: WBC), Commonwealth Bank, and National Australia Bank (ASX: NAB) are most undervalued, trading 22 per cent, 16 per cent and 15 per cent, respectively below Morningstar valuations. ANZ Bank (ASX: ANZ) is trading 18 per cent below valuation.

"The interim report doesn't materially change our view on Australia's highly profitable major bank oligopoly, but it is clearly not a positive," Ellis says.

In his report, Hayne notes that, "the conduct regulator, ASIC, rarely went to court to seek public denunciation of and punishment for misconduct. The prudential regulator, APRA, never went to court". Ellis says this means that, "too often punishment was inconsequential, particularly compared with the major banks’ massive profits."

Despite this outlook for tighter regulatory and compliance requirements, Ellis says the biggest risk for major banks such as Commonwealth Bank is "the potential for stricter lending criteria to cause a credit squeeze, in turn triggering an economic downturn and leading to weakness in borrower demand".

He sees the key negative from the royal commission as the implementation of tighter lending standards, especially for home loans, credit cards and car loans.

In fact, home-loan growth is already slowing, with growth of 5.4 per cent for the 12 months to 31 August 2018 down from the previous 12 months' 6.6 per cent.

Residential investment is bearing the brunt of the decline and Morningstar expects total housing credit growth to fall into the 4 to 5 per cent range.

However, should average house prices continue to fall, the rate of annual growth credit could even approach 2 to 4 per cent.

Credit growth for residential investment properties declined to just 1.5 per cent year-on-year growth at 31 August 2018 compared with about 5 per cent at 31 August 2017.

The news for the local banking sector is also sobering from a global perspective. S&P Global Ratings says Australian banks are among those suffering the "steepest declines" in their risk-adjusted capital.

As a result, they are now in the bottom half of S&P’s global ranking of the world’s top 100 banks and labelled adequate but not "unquestionably strong".

 

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Roger Balch is a Morningstar contributor

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is a contributor for Morningstar Australia.

© 2020 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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