Speaking to InvestorDaily, Ms Howitt said whether or not Australian banks look attractive depends on one’s view of the bad debt cycle in Australia.
On the one hand, many investors are buying the banks to position themselves for a recovery in the domestic cyclical space (home building) on the grounds that “it’s been so bad for so long that it’s likely to get better from here”, she said.
“And yet at the same time, you’ve got people saying they don’t want to own the banks because bad debts have been so low that surely they’ve got to get worse from here,” said Ms Howitt.
But she added that the second view fails to take into account the caution the banks have exercised in their commercial loan books since the global financial crisis (GFC).
Many of the bad debts during the GFC came from the very top end of town – billions of dollars in the case of Babcock & Brown, Ms Howitt said.
“That’s gone, and it hasn’t been replaced – partly because the banks have been much more careful with their lending, and partly because anyone who is borrowing half a million or above is just going offshore,” she said.
Corporate borrowers that can go offshore are doing so because the reference rate is much lower overseas compared with Australia.
“So in terms of bad debts, it’s hard to see how you could have a repeat of the big losses you saw in the institutional space [during the GFC] because the banks just haven’t been renewing that business,” she said.
On the consumer side (residential mortgages) there would have to be an enormous housing meltdown to create serious problems for Australian banks, according to Ms Howitt.
“The banks will strenuously go through all their modelling that they do for [the Australian Prudential Regulation Authority], showing that even with pretty significant 30 per cent falls in house prices they don’t think they will end up with an unmanageable outcome,” she said.
In addition, the underwriting of residential mortgages in Australia has been “much better” than in the US market.
The fact that interest rates have been falling also means that Australians are overpaying on their mortgages, which means the loans are being amortised quite quickly, she said. “So you might originate a loan at an 80 per cent [loan to value ratio], but it falls pretty quickly from there,” Ms Howitt said.
“People who have had a very bearish view on bad losses at the banks have lost a lot of money in the last couple of years,” she said, but conceded that the bears’ case is now a “bit more plausible”, given that three of the big four Australian banks are trading at all-time highs.
“And then you look at banks in the rest of the world, and they’re half what they were pre-GFC.”
