Australia's resurgent housing boom lifts banks from doldrums

SYDNEY, Feb 11 (Reuters) – Australia’s housing market is pulling the A$2 trillion ($1.6 trillion) economy out of its first recession in three decades with prices hitting record highs, home loans surging and building approvals at 19-year peaks.

Among the key beneficiaries of this boom are Australia’s biggest banks, which have seen stocks rally on expectations of a return to profits and dividends in 2021.

Australian banks fell out of favour last year when the COVID-19 pandemic forced entire sectors of the economy to shut down, prompting the central bank to cut rates three times to a record low 0.1% and launch an unprecedented bond buying programme.

A solid property market recovery since, lower-than-expected loan deferrals and strong credit growth have sent consensus earnings expectations for banks rising to as much as 31% over the last two months, said Shane Oliver, Sydney-based chief investment officer for AMP.

An ultra-low interest rate environment is generally negative for bank earnings, and a flat yield curve, where the spread between short- and long-term yields narrow, should squeeze profits.

However, in Australia’s case, looser financing conditions and strong government stimulus have driven loan volumes higher, more than offsetting the hit from tighter net interest margins.

Property transactions have soared as residents take advantage of cheaper borrowing costs and as remote working technology allows people to buy larger dwellings away from urban centres.

Top lender Commonwealth Bank of Australia on Wednesday boosted its dividend payout ratio to 67% after posting above-forecast first-half cash profit.

The Sydney-based bank also reported a jump in household and business deposits amid solid lending growth while loan deferrals slipped to 25,000 as at Jan. 31 from 145,000 loans at the end of June.

“Short-term, macro tailwinds appear supportive for banks,” said Anthony Doyle, cross-asset investment specialist at Fidelity International.

“Rising house prices, a re-opening economy, and the absence of provisions suggest a sharp bounce back of earnings and dividend growth in 2021,” added Doyle.

Shares of the so called “Big Four” banks – CBA, Westpac Banking Corp, ANZ Banking Group, and National Australia Bank – have jumped between 5% and 15% since the start of the year.

By comparison, global peers such as Lloyds Banking, Citi, ING and HSBC are either down or only marginally higher.

Australia’s REA Group, which advertises property and property-related services on websites and mobile apps, is also reaping the benefits of the housing resurgence.

“We forecast listings to grow 10% in 2021 driven by higher confidence among vendors due to strong buyer interest, low interest rates and healthy bank liquidity,” said Jefferies analyst Roger Samuel, upgrading REA to “buy”.

FUTURE CHALLENGED

The housing boom, fuelled by massive monetary and fiscal stimulus, augurs well for an economy that is growing at a faster rate than initially thought after the country successfully curbed its coronavirus outbreak last year.

The monetary easing and close to A$300 billion of fiscal stimulus have helped revive the housing market, with economists predicting values to rise by 7-10% in 2021.

With interest rates expected to remain at 0.1% for some time and a third round of quantitative easing likely later this year, the outlook for bank earnings remains challenging.

While the central bank upgraded Australia’s economic outlook last week, it does not expect the jobless rate to reach its estimate of full employment and inflation is not seen hitting its 2-3% target band until 2023.

Prime Minister Scott Morrison has signalled international borders will remain shut this year despite vaccine rollouts globally, meaning population growth from migration will remain next to zero.

In addition, the government is also gradually tapering some of its fiscal stimulus launched in the wake of the pandemic, creating uncertainties over employment and consumer spending.

Fidelity’s Doyle is still “underweight” Australian banks and notes several structural headwinds.

“Banks’ underlying earnings will remain challenged in an environment of ultra-low interest rates and quantitative easing,” he said. “Ample liquidity has resulted in intense competition within the sector, as the banks seek to increase lending and gain market share.” ($1 = 1.2932 Australian dollars)

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