Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Thematic (Sector/Industry)

Australia Financials / Thematic (Sector/Industry)

At its height, in 1989, real estate in Tokyo sold for as much as $139,000 a square foot—more than 350 times as much as choice property in Manhattan. Such valuation made the land under the Imperial Palace in Tokyo notionally worth more than all the real estate in California. We know what happened to Japan shortly after as one of the biggest bubbles in History duly imploded.Headlines like this can speak a thousand words.Last year, a headline crossed the wires, sparking Deja Vu. The Australian Bureau of Statistics announced proudly that average Australian household wealth had exceeded one million dollars. Sure: one million dollars today is not what it used to be. After all, China is said to be printing billionaires by the day.So how did come to pass? As you would expect, it's about household wealth and not income. And yes, it's mainly about property. The worry is that indirect exposure of superannuation, equities and the broader economy to the housing market is elevated. Australians have put all their eggs in one basket and bet the house on red or black. Many must be trying to cash in their chips.Banks which are heavily exposed to mortgages (about 20% of mortgage borrowers are in stress) make up about a quarter of the ASX300. This is unhealthily high. (One thinks of pre-GFC concentration of UK banks in the FTSE). Some 60% of all lending by Oz financial institutions is to the property sector. Superannuation funds invest in the corporate bond market too, of which Australian banks make up approximately 30% of the issuance. Then Supers have deposits and bank equities too."Shovel-ready" construction always seems to fit nicely into a politician's toolkit. Partly because it's a lazy choice. Construction like anything can play a part in a balanced diversified economy. But construction represents around 8% of GDP in Australia and employs around one million inhabitants. This concentration is elevated in China as we know and in Canada as well as parts of Europe and the UK but not as high as in "the land down under".A shock to GDP (compounded by COVID) would hit the labour market, flowing into household wealth and back to GDP again. Australian household wealth is dependent of course on wages and employment which are are a function of GDP which is heavily exposed to the housing market. One could be forgiven for equating the Australian economic model to the housing and banking markets.History rhymes. Ireland springs to mind. Australia’s household debt to GDP stands around 129% (BIS): big by any standard. In 2007, Ireland was around 100%. Australia’s household debt to disposable income is around 180% (RBA). Ireland stood at 200% in 2007. More than two thirds of the country’s net household wealth is invested in real estate. In 2008, that figure was 83% in Ireland. Ratings Agencies have modeled  how Australian banks might fair in an Ireland style property crash (mortgage defaults of 13% and house prices contraction of 43%). Almost half of bank profits would vanish. Bank shares would be mauled and so would both the stock market with its high exposure to financials and Superannuation funds. Then consumers or savers would feel rather less like a millionaire.Litigation-weary Australian banks, at the epicentre of this scheme, do not score well on our quantamental PH Score model. This means that trends are far from benign relative to APAC and globally. Looking at the big picture, one notes that LDRs are sky-high ; Equity/Assets are low in some specific cases; and ROAs are generally modest.What also sticks out is that Australian banks command a premium valuation relative to the world and the region despite the outsized risks. That's a premium on a PER, FV, and PBV basis. They are not just extremely risky but are in fact dear.<div class="content-highlight">The PH Score™ is a fundamental momentum-quantamental score that scores banks according to changes in value-quality. The Score encompasses Profitability, Operating Efficiency, Liquidity, Capital, Asset Quality, and Coverage as well as a valuation variable. Scores lie between 0 and 10, with higher scores representing more positive signs. The PH Score™ was back tested over 2007-17 for global banks and conclusively shows progressively higher returns across quintiles ranked by Score.</div>

At its height, in 1989, real estate in Tokyo sold for as much as $139,000 a square foot—more than 350 times as much as choice property in Manhattan. Such valuation made the land under the Imperial Palace in Tokyo notionally worth more than all the real estate in California. We know what happened to Japan shortly after as one of the biggest bubbles in History duly imploded.Headlines like this can speak a thousand words.Last year, a headline crossed the wires, sparking Deja Vu. The Australian Bureau of Statistics announced proudly that average Australian household wealth had exceeded one million dollars. Sure: one million dollars today is not what it used to be. After all, China is said to be printing billionaires by the day.So how did come to pass? As you would expect, it's about household wealth and not income. And yes, it's mainly about property. The worry is that indirect exposure of superannuation, equities and the broader economy to the housing market is elevated. Australians have put all their eggs in one basket and bet the house on red or black. Many must be trying to cash in their chips.Banks which are heavily exposed to mortgages (about 20% of mortgage borrowers are in stress) make up about a quarter of the ASX300. This is unhealthily high. (One thinks of pre-GFC concentration of UK banks in the FTSE). Some 60% of all lending by Oz financial institutions is to the property sector. Superannuation funds invest in the corporate bond market too, of which Australian banks make up approximately 30% of the issuance. Then Supers have deposits and bank equities too."Shovel-ready" construction always seems to fit nicely into a politician's toolkit. Partly because it's a lazy choice. Construction like anything can play a part in a balanced diversified economy. But construction represents around 8% of GDP in Australia and employs around one million inhabitants. This concentration is elevated in China as we know and in Canada as well as parts of Europe and the UK but not as high as in "the land down under".A shock to GDP (compounded by COVID) would hit the labour market, flowing into household wealth and back to GDP again. Australian household wealth is dependent of course on wages and employment which are are a function of GDP which is heavily exposed to the housing market. One could be forgiven for equating the Australian economic model to the housing and banking markets.History rhymes. Ireland springs to mind. Australia’s household debt to GDP stands around 129% (BIS): big by any standard. In 2007, Ireland was around 100%. Australia’s household debt to disposable income is around 180% (RBA). Ireland stood at 200% in 2007. More than two thirds of the country’s net household wealth is invested in real estate. In 2008, that figure was 83% in Ireland. Ratings Agencies have modeled  how Australian banks might fair in an Ireland style property crash (mortgage defaults of 13% and house prices contraction of 43%). Almost half of bank profits would vanish. Bank shares would be mauled and so would both the stock market with its high exposure to financials and Superannuation funds. Then consumers or savers would feel rather less like a millionaire.Litigation-weary Australian banks, at the epicentre of this scheme, do not score well on our quantamental PH Score model. This means that trends are far from benign relative to APAC and globally. Looking at the big picture, one notes that LDRs are sky-high ; Equity/Assets are low in some specific cases; and ROAs are generally modest.What also sticks out is that Australian banks command a premium valuation relative to the world and the region despite the outsized risks. That's a premium on a PER, FV, and PBV basis. They are not just extremely risky but are in fact dear.The PH Score™ is a fundamental momentum-quantamental score that scores banks according to changes in value-quality. The Score encompasses Profitability, Operating Efficiency, Liquidity, Capital, Asset Quality, and Coverage as well as a valuation variable. Scores lie between 0 and 10, with higher scores representing more positive signs. The PH Score™ was back tested over 2007-17 for global banks and conclusively shows progressively higher returns across quintiles ranked by Score.

Australian Banks: Who Wants to Be a Millionaire? Tales Of "The Land Down Under".