Australian house price falls could send your bank shares tumbling

As crazy as it first sounds, a hard landing in the property market may actually be what the big banks need to regain favour with investors.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

As crazy as it first sounds, a hard landing in the property market may actually be what the big banks need to regain favour with investors.

Just to be clear, I am not forecasting a residential market slump nor am I advocating for one, but the idea is an interesting one worth pondering on as I read a Bell Potter report downgrading Westpac Banking Corp (ASX: WBC) to "hold" from "buy" following the bank's quarterly update last week.

Shareholders in Westpac are enjoying a some respite as its share price recovered from its morning sell-off to trade 0.4% higher at $27.76 in after lunch trade as the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index added 0.3%.

The bank recently caught investors and analysts off-guard when it reported a sharp drop in net interest margin (NIM) to 2.06% from 2.17% due to higher funding costs and weaker performance from its Treasury Markets operations.

The saving grace was the bank's Common Equity Tier-1 (CET-1) ratio, a key measure of balance sheet strength, and that's one of the few things going in favour of Westpac and its fellow big banks.

Bell Potter noted that Westpac's CET-1 ratio of 10.4% puts it in the top quartile of the major global banks.

What's more, Westpac's CET-1 ratio only dropped slightly from 10.5% in the previous quarter despite the bank paying an interim dividend and a $566 million conversion of preference shares.

"Our cash NPAT estimates are lowered by 4%, with NIM decline of up to 8bp in the medium-term offset by slightly better loan impairment outcomes," said the broker.

"Taking into consideration potential political and resulting economic uncertainties in the next 12-18 months, we have reluctantly lowered WBC's valuation and price target by 6% to $30.00 (previously $31.90)."

While brokers are largely divided on the outlook for the big banks, which include Westpac, Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd. (AX:NAB) and Australia and New Zealand Banking Group (ASX: ANZ), no one is disputing their ability to weather a reasonably hard fall in the housing market.

The same can't necessarily be said of their smaller rivals and rising competition is one of the reasons why some analysts are warning investors to avoid the sector.

I am not saying that banks stocks won't tumble if the property market falls more than expected, and it's a fine line between a "hard enough" landing and a "too hard" landing that sends our economy in a tailspin, but what's obvious is that the big banks will be the only ones able to pick themselves up after the storm.

In the meantime, there's just too much uncertainty to go overweight on the sector – at least until we become more confident that the property slowdown has turned a corner. The problem is we may not see signs of this for a few months yet.

Banks are in the "too hard" basket when there are more attractive blue-chip stocks paying good dividends to focus on.

The experts at the Motley Fool have picked three of their favourite blue-chips for FY19 and you can find out what these stocks are for free by following the link below.

Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, National Australia Bank Limited, and Westpac Banking. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Dividend Investing

Male hands holding Australian dollar banknotes, symbolising dividends.
Dividend Investing

Buy Telstra and this ASX dividend stock for 4% to 7% yields

The telco giant and this stock are expected to offer big yields.

Read more »

guy helping girl invest in shares and dividends
Dividend Investing

2 ASX dividend shares to buy this month: experts

Here’s why these high-yield dividend stocks are appealing…

Read more »

A man in a suit looks serious while discussing business dealings with a couple as they sit around a computer at a desk in a bank home lending scenario.
Dividend Investing

Beat low interest rates with these top ASX dividend shares

Analysts think these shares could be top picks for income investors.

Read more »

Two funeral workers with a laptop surrounded by cofins.
Dividend Investing

1 ASX dividend stock down 25% I'd buy right now

I think this is a great buy for a few different reasons.

Read more »

Three people in a corporate office pour over a tablet, ready to invest.
Dividend Investing

2 of the best ASX dividend shares to buy in July

Bell Potter has named these shares as best buys this month.

Read more »

A woman wearing dark clothing and sporting a few tattoos and piercings holds a phone and a takeaway coffee cup as she strolls under the Sydney Harbour Bridge which looms in the background.
Dividend Investing

1 practically perfect Australian stock down 45% to buy now for lifelong income!

Income investors might want to check out this beaten down stock.

Read more »

A man with a wry smile on his face is shown close up behind ascending piles of coins as he places another coin on top of the tallest stack representing rising dividends
Dividend Investing

Here are the 3 biggest dividend payers in my ASX stock portfolio today

These three stocks pour cash in to my portfolio...

Read more »

A senior investor wearing glasses sits at his desk and works on his ASX shares portfolio on his laptop.
Dividend Investing

Overinvested in Fortescue shares? I'd buy these ASX dividend shares

Fortescue may not be the best choice for dividend income.

Read more »