Banks dive as UBS raises home loan concerns By Clancy Yeates
26 April 2018 — 2:47pm
Bank stocks have been savaged as investors react to concerns about the quality of their lending practises in the wake of the Hayne royal commission.
Investors hit Westpac hardest wiping more than $3.7 billion off the bank's market value after analysts said loan data published by the royal commission raised doubts about the quality of the bank's massive mortgage portfolio.
Shares in Westpac, the country's second largest bank dropped 4.22 per cent by 3.15 pm on Thursday, following a report from UBS analyst Jonathan Mott, who recommended clients "sell" the stock, citing exhibits the bank has been forced to hand over to the royal commission into financial misconduct.
UBS said data uncovered by the royal commission raised "concerns" about the quality of Westpac's mortgage portfolio.
Photo: James Alcock
Other banks also fell sharply. The Australia and New Zealand Banking Group fell 2.43 per cent, while National Australia Bank (down 2.24 per cent) and Commonwealth Bank of Australia (down 1.5 per cent) also dropped significantly.
Mr Mott, who has been arguing Australia's banks are at risk of holding "liar loans" - loans with incorrect borrower information - seized on a spreadsheet containing data on 420 Westpac loans.
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The spreadsheet was used by PricewaterhouseCoopers as part of work it completed for Westpac last year, following a request from the banking regulator for all major banks to perform "targeted reviews" of their loan assessment processes.
Mr Mott told investors the data showed Westpac customers were carrying more debt than he expected, and in 29 per cent of the loans, the bank had not completed minimum income verification such as checking a borrower's payslips.
Mr Mott also said 86 per cent of the loans in the sample were approved on the assumption that the customers' expenses were equal to a widely-used benchmark, known as the Household Expenditure Measure (HEM). RELATED ARTICLE
'Liar loan' reviews found flaws in CBA, Westpac processes
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Financial regulators have been pushing banks to be less reliant on the HEM amid concerns it is an unrealistically low measure of the cost of living that many borrowers face in Sydney and Melbourne.
The UBS report also noted that 66 per cent of the Westpac loans had not collected itemised living expenses from customers, and in 30 per cent of the sample, "the borrower's financial position was suggested to have been misrepresented".
Mr Mott said his analysis had also found the median debt-to-income multiple among the sample home loan customers was 5.4 times, and 35 per cent of the sample had a multiple of more than seven times.
"This data raises questions regarding the quality of [Westpac's] $400 billion mortgage book (70 per cent of
of its loans)," Mr Mott wrote.
"While [Westpac] has undertaken significant work to improve its mortgage underwriting standards over the last 12 months, we expect it and the other majors to further sharpen underwriting standards given the royal commission's concerns with responsible lending."
Westpac shares were down 3.7 per cent, at $28.10, shortly after 2pm. The bank has been contacted for comment.
Mr Mott also quoted from Westpac board papers prepared last year that said the bank was a "significant outlier" - which prompted it to tighten underwriting standards last year.
The share plunge drop comes after the royal commission last month published internal reviews that revealed a series of flaws in the systems used by CBA and Westpac for checking customers' expenses, incomes and debts.
Westpac's performance in this review was particularly poor, and a memo from last July to the board's risk and compliance committee had flagged flaws in the banking industry's responsible lending processes as a "real and material risk."
The memo told committee members that although there were few problems with customers repaying loans, there was a risk of lawsuits to the bank from customers who were sold loans in breach of responsible lending laws.
Previously, the risk to the bank from responsible lending breaches was seen as fines, compensation, and damage to reputation. But now, the board needed to consider "there is a risk that responsible lending issues could impact enforceability of our security and accelerate losses in a downturn," the memo said.
