Bendigo warns, Westpac tightens

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Via UBS:

BEN issues market update with its AGM

BEN provided some commentary on key line-items at its AGM this morning. Key statements: (1) Balance Sheet growth is expected to be “relatively flat” in 1H18 as it has had to “slam on the brakes in investor and interest only lending” to comply with Macro Prudential limits; (2) BEN expects its 1H18 headline NIM to be around 2.34% (pre Community Bank and Alliance payouts) which implies an underlying NIM of ~1.97%. Although this is in-line with its ‘exit NIM’ commentary at the result this was weaker than expected given BEN repriced Interest Only loans after period end in July. This implies BEN’s NIM rose at the start of the period and has subsequently begun to contract, as mortgage competition has intensified; (3) Fee income remains under pressure, e.g. removal of foreign ATM fees; (4) Costs managed diligently. 1H18 costs are expected to be up ~2% vs pcp; (5) CET1 is expected to be >8.5% at 1H18.

Downgrading forecasts by 6%

Following these comments we have downgraded our EPS forecasts by ~6% in FY18 and the outer years. This was primarily a function of softer Net Interest Income given lower NIM and Average Interest Earning Assets. This illustrates the sensitivity of BEN’s earnings to changes in mortgage pricing. We continue to assume benign credit conditions and expect the dividend to be held flat.

BEN continues to be a price-taker subject to repricing and competitive forces

BEN’s NIM remains volatile. We believe it is a price-taker subject to moves by the Majors. While back-book mortgage repricing is positive (especially as BEN does not have to pay the Bank Levy), it is regularly offset by competition. We believe that further out-of-cycle mortgage repricing by the Major banks is becoming increasingly socially and economically challenging, especially given the difficult political situation in Australia. As a result, further NIM erosion over time remains our base case.

And slower lending growth is coming, via the AFR:

Westpac Group, the nation’s second largest mortgage lender, is set to blitz ‘liar loans’ by introducing stringent tests on residential property borrowers’ existing and future capacity to meet their repayments.

Clients will be quizzed on dozens of potential scenarios that might impact on their future capacity to repay, including having dependents with special needs that might require long-term spending on care and treatment.

Mortgage brokers’ onus of proof will be switched from establishing whether a loan is suitable for a client to making a declaration as to why it is “not unsuitable”.

It comes amid growing pressure from prudential and consumer regulators to tighten lending criteria because of concerns that excessive household debt could contribute to systemic economic problems if the economy slows.

“Westpac is committed to responsible lending and meeting our conduct obligations,” according to a bank spokesman.

The full “liar loan” horror is here.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.