Westpac shares have slumped in midday trade after UBS downgraded the stock this morning.
Analysts Jonathon Mott and Rachel Bentvelzen ascribed a target valuation of $26.05 on Westpac (WBC) shares — down from this morning’s opening price of $29.18.
Westpac shares fell by more than 4% in afternoon trade before closing 3.79% lower:
The pair cited revelations from the ongoing bank royal commission — which they called a “game-changer” — as the basis for their downgrade.
It followed the release at the commission of the results from a ‘Targeted Review’ of the big four banks, carried out by APRA in the first half of 2017.
It showed APRA chairman Wayne Byres described Westpac as a “significant outlier”, due to higher levels of interest-only lending and a larger proportion of riskier loans with high loan-to-value ratios.
The Targeted Review revealed that just one out of Westpac’s 10 lending controls required by APRA were working effectively.
The commission also released the list of loans that were assessed as part of the review. They included 420 mortgages approved by Westpac or Westpac subsdiaries between July 2015 and August 2016 that were reviewed by accounting firm PWC.
Among the findings from a preliminary review of the sample by UBS, 35% of borrowers had debt-to-income (DIR) ratios of at least 7 times income, while 12% in the sample had DIRs of more than 10%.
Total debt-to-income is seen as a better indicator of borrowers’ credit worthiness than the ratio of loan-to-income.
In addition, “the majority of WBC borrowers sampled were assessed to have living expenses between 11-30% of their income”, the analysts said. Just 1% of borrowers reported living expenses of above 50%.
UBS said the findings mean Westpac is more exposed than its peers in the event of a significant housing downturn.
And with Westpac now required to tighten its lending approval process, it’s likely that will lead to a deterioration in credit growth.
In response to the downgrade, Westpac released a statement to the market this afternoon.
The bank said it has reassessed 38 loans which PWC believed would fail APRA’s standards, and “on this basis, all the loans would have been approved, apart from one loan (this loan is currently ahead
of its repayments)”.
“Westpac’s mortgage book continues to perform well as outlined in our most recent Pillar 3 disclosures for 31 December 2017,” said Peter King, Westpac’s Chief Financial Officer.
“Our mortgage delinquencies and losses remain low both relative to historical and industry averages.”
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