Investment
Outlook darkens for bank stocks

Major bank stocks could tumble up to 40% if the correction in the housing market gets more disorderly, UBS analysts led by Jonathan Mott said in a research note dated May 30.

However, this "credit crunch" is not yet UBS' base case, even though it is starting to look more plausible.

As its base case, UBS analysts see banks maintaining dividend payouts at current levels. It sees housing credit growth stall by the end of FY20, as the credit conditions tighten. It also assumes house prices will fall by 5% over the coming year but bad debts will not swell significantly.

The dividends could dry up and stocks of major banks fall up to 40% if credit growth falls more substantially by a 2-3% compound, and credit impairment charges rise significantly as the credit cycle turns. Class actions for mortgage mis-selling also present litigation risks as a tail risk in UBS's downside scenario.

"The housing market is slowing, with house prices falling and credit conditions tightening. Given the number of headwinds the market is facing, many investors are now questioning whether the housing correction could become disorderly. We expect credit growth to slow sharply and believe the risk of a credit crunch is rising," Mott writes.

UBS is not yet pegging a 40% downturn as its base, primarily because it sees potential for a "political solution" where the Royal Commission's findings are not implemented immediately.

However, the two to three month window between Royal Commission's February 1 final report and the Federal Election in April/May could spur the government to adopt the RC recommendations especially regarding responsible lending, tightening credit conditions for banks.

UBS has cut the 12-month rating for Westpac to sell from neutral since its last credit crunch report in March.

Westpac joins NAB and Bank of Queensland which also currently have a sell rating from the investment bank.

ANZ and CBA are neutral while Macquarie is a buy.

Read more: UBSBank stocksRoyal CommissionJonathan Mott
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