The share prices of the bank stocks are leading the market higher today but these stocks could be vulnerable to a sharp sell off if the warning from UBS comes to pass.
The broker estimates that around a third of the 900 mortgagees they surveyed have understated their expenses and/or overstated their income and assets in order to secure a housing loan. The total value of these so called "liar loans" stands at $500 billion.
That is a very significant amount, particularly in contrast to the market capitalisation of our banks. The market caps have risen today as shares in Australia's largest home lender, Commonwealth Bank of Australia (ASX: CBA) are up 1.2% at $74.05 in late afternoon trade, while National Australia Bank Ltd. (ASX: NAB) is up 1.8% at $30.56, Westpac Banking Corp (ASX: WBC) is 1.8% higher at $31.35 and Australia and New Zealand Banking Group (ASX: ANZ) is a whopping 2.3% higher at $29.51.
Even smaller lenders like Bendigo and Adelaide Bank Ltd (ASX: BEN) are powering ahead with a 1.2% gain to $11.45 and Bank of Queensland Limited (ASX: BOQ) is 2% in the black at $12.98.
The combined market cap of these six banks is around $413.5 billion. Sure, these aren't the only residential home lenders in the country, but they essentially control a very large part of the market.
UBS is recommending investors to be "underweight" the banks due in large part to liar loans, an issue which has been growing in recent times as more borrowers have put in inaccurate information on their loan documents.
Furthermore, the banks and government regulators have brushed this issue under the carpet, said the broker.
What's perhaps just as alarming is that the inaccuracies given by borrowers may be giving us a sense of false security as the Reserve Bank of Australia and other experts have long claimed that borrowers have little trouble servicing their loans. Overstating income and downplaying the true level of expenses may have influenced this assessment.
Meanwhile, banks seem to be more aggressive in selling their loans after a brief period where they tightened lending criteria due to pressure from government regulators. This pressure seems to have eased and the level of loan discounting – particularly for home occupiers and first home buyers – suggests that banks are ramping up their efforts to steal market share.
The UBS survey certainly paints a similar picture with borrowers saying that it has become easier to get a loan these days.
I suspect you will find other experts coming out to downplay the UBS finding and we won't get much consensus on this potentially explosive issue. Nonetheless, investors should be alert if not alarmed.
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