The selling in Australian bank stocks is about a realisation that property market wildness 'just doesn't add up'

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Australian banks came under heavy selling pressure yesterday in the wake of the rumours about dodgy underwriting practices sourced to mortgage brokers and concerns about a bubble in Sydney property hit the headlines.

There are no doubt many, like Mortgage Choice CEO John Flavelle, who will dispute the core tenets of the issues raised by hedge fund manager John Hempton and economist Jonathan Tepper.

But the focus once again highlighted concerns about, and the question of, Australian bank profitability at a time when globally banks are on the nose.

In a note to clients this morning Scott Schuberg, CEO of Rivkin Securities, neatly summarised the debate and what it means for the banks.

“The rise in median house prices in Sydney is unsustainable, and anyone who thinks otherwise is nuts,” Schuberg said.

He highlighted ABS data which shows “over the last five years Sydney residential property has averaged +15% gains per annum, while wage growth in NSW for that entire period was 12%. Of course, the math just doesn’t add up.”

Put another way the maths only adds up if Australians are borrowing more and taking out bigger loans at greater leverage, as the most recent APRA statistics suggest.

Australia’s Big 4 banks share price daily (Reuters Eikon)

On the topic of underwriting standards and fears that arose from the story yesterday Schuberg says “any dim view relating to the potential impact of a deteriorating loan book relating to certain sections of the Australian property market have not been ignored over the last year, as anyone with a portfolio holding banks will well know.”

The question of course, is whether or not this is new news and whether these concerns are reflected in the price already. “Should this particular concern, which is valid, have effortlessly wiped close to 4% of Australian banks yesterday?” Schuberg asked.

The selling is “more of an illustration of the nervous nature of the average investor at present than any significant new research coming to market,” he said.

But it’s also a warning that Australian banks may not have found bottom yet.

“Irrespective of the falls in banks over the last year–shares in the big four can easily fall further. Sellers are much more euphoric at present than buyers,” he said.

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