The threat by regulators to act on the credit binge might not be the biggest danger to the big bank stocks.

Record low interest rates triggered a surge in lending that benefited many big bank stocks and other lenders. For months the RBA has flagged concern about the impact on housing prices and last week, the Morrison government finally followed suit and threatened policy changes.

While the government hasn’t been too specific, among the most commonly speculated include debt to income ratios and caps on the levels of broker-originated loans.

Morningstar analyst Nathan Zaia said in a client note that it would ultimately depend on the regulations that were bought in and he reiterated these comments speaking with Stockhead.

“The major banks tend to do more in the investor market and high LVR and trickier types of loans than smaller regional lenders,” he said.

“So if it’s investor loans that they’re targeting – and they have a larger share – that could hurt them more.”


Delayed economic recovery a threat

But Zaia said potential restrictions on lending were not the biggest threat facing the big bank stocks.

“Probably the biggest threat is if the economic recovery doesn’t continue if it has been after the stimulus. I don’t think we’ve seen the impact on a lot of small businesses that were doing it tough before or coming out of it [COVID],” he said.

“I think in the next 6-12 months we’re probably going to see whether households or businesses have or haven’t been able to come through the other side so where that lands is a risk to their earnings.

“And if we do have another shock – it’s hard to know what the shock would be – but if you look at their customer base now they’ve geared up even more. I think if you look at their book – how many borrowers are borrowing at a higher loan to income ratio – it leaves them less room to pay should they lose their job.

“I think the risk just keeps going up, that if we have another shock the loan losses is where it could be problematic.

“But we don’t expect that in our base case – I think they’re well provisioned at the moment but it’s always a risk with the banks.”


The best big bank stock?

When asked for the best big bank stock Zaia named the Commonwealth Bank (ASX:CBA).

“It’s got its house in order, capabilities second to none, invested the most in technology from the back to the front end. And because they’re in such a strong position they can just keep on investing and making sure they’re at the forefront of the industry,” he said.

“I think it’s a nice edge to have, I think some of their peers are looking at how to bring cost base down but for CBA that doesn’t need to be such a large focus at the moment and that could see them continue to take share.

“But in terms of value we think CBA is overvalued so it’s not where we would be recommending investors pile into at the moment.”

As for the most undervalued big bank stock, Zaia named Westpac (ASX:WBC).

“I think coming through the AUSTRAC penalty, change of CEO, they’ve been spending a lot on compliance,” he explained.

“I think it’s been hurting them in the mortgage market. When there’s such a spotlight on you you tend to get a bit conservative everywhere and that did hurt their loan growth performance for a little while.

“The discount Westpac was trading at to our fair value has closed but there still is a bit of nervousness about how consistently they can continue to improve trying to recoup some of that lost market share in mortgages.”