The share price of Westpac Banking Corp (ASX: WBC) is taking a belting today after UBS cut its recommendation on the stock as it highlighted concerns that the bank is the worst offender when it comes to lax lending practices.
The stock crashed nearly 4% to $28.06 ahead of the market close when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is down a mere 0.2%.
Westpac's underperformance is also stark against its peers with Commonwealth Bank of Australia (ASX: CBA) down 1.6% to $72.29, National Australia Bank Ltd. (ASX: NAB) losing 1.9% to $28.52 and Australia and New Zealand Banking Group (ASX: ANZ) shedding 2.1% to $26.57.
Westpac appears to be the worst when it comes to checking that loan applicants qualified for loans they have applied for, according to the Australian Prudential Regulation Authority's (APRA) Targeted Review of Mortgage Serviceability Assessments on the big four banks.
APRA's chairman Wayne Byres described Westpac as a "significant outlier" – meaning it was performing far worse than its peers on this front – and PwC found that 8 out of the bank's 10 lending controls were "ineffective", according to UBS.
Westpac has hit back by releasing a statement to the ASX late in the trading day to reassure investors that there was nothing to look at here.
The bank said that of the 38 loans (or 9% of the 420 applications used in the study) that PwC believed would not have qualified for the loan, only one actually would have been rejected by the bank.
Westpac added that PwC didn't have the information it had to assess the applications and that was why things aren't as bad as it seems!
But that's the problem with the banks isn't it? How can anyone truly get a handle on the risks posed by their loan books when things are this opaque? And why wasn't the extra information provided to PwC?
It makes Westpac's defence a bit harder to swallow as the bank has effectively said PwC and APRA's chairman have got all this wrong. Westpac is really one of the good guys, according to Westpac.
This stands in contrast to UBS' report as well.
Its analysts believe that minimum income verification was not carried out in 29% of the 420 applications, two thirds of applicants didn't itemise living expenses, the median household expenses only equated to a mere 23% of household income, and 30% of the applicants had misrepresented their income.
"For the first time information on borrower's Total Debt-to-Income ratios (not Loan-to-Income) has been made available," said UBS, who cut its rating on the stock to "sell" from "neutral" as it slashed its share price target to $26.50 from $31.00 a share.
"We found WBC's median Debt-to-Income at 5.4x, with 35% of the sample having Debt-to-Income ratios of >7x. Further 46% of the mortgage applications had an assessed Net Income Surplus of <$250 per week."
What UBS, PwC and APRA have said seems to run contrary to Westpac's reassurances that the performance of its mortgage portfolio is robust.
I am a shareholder of Westpac and even I am not convinced. You can understand why investors are selling first and asking questions later.
What you can bank on is that this won't be the last we hear about the issue. Westpac will hand in its profit results next month.
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