Big four strong enough to withstand mounting pressures, says Fidelity

'The banks can adjust to slowing credit growth': Fidelity's Kate Howitt

2019 is shaping up to be a challenging year for Australia's banks as tighter regulation, a weakening housing market and slowing credit growth put pressure on the big four.

But despite these pressures, risks to the banking oligopoly are well contained and banks could end up having a stronger year.

This is the view of Fidelity Australian Opportunities Fund portfolio manager Kate Howitt, who shared her take on bank stocks with Morningstar.

Howitt outlined four factors that she thinks will influence bank stocks in 2019: compensation, housing credit growth, disruption and regulation.

Howitt says it’s crucial for the big four to work through their remediation programs in the wake of the banking royal commission, and the series of scandals it exposed, including the charging of financial advice fees to customers who were not provided advice.

As the sector braces for commissioner Kenneth Hayne’s final report at the end of the month, the banking sector's compensation bill has reportedly swelled to more than $1.4 billion. At least two of the major banks – ANZ (ASX: ANZ) and Westpac (ASX: WBC) – have started repaying thousands of customers.

Despite the long road ahead, Howitt is optimistic. By her reckoning, we are witnessing the tailend of remediation and decades’ long increases in regulatory capital requirements.

"Even if it doesn't feel like it, I think we're finally getting closer to the beginning of the end," she says. "I think the banks are well positioned to withstand the tailend of this compliance framework."

Howitt’s second concern is the slowing of housing credit growth. As the Reserve Bank of Australia noted last month, lending standards have tightened at a time when property prices in key markets are falling and demand is weakening. However, Howitt is confident Australia’s major lenders can withstand the slowdown.

Ultimately, Howitt thinks that the slowing of mortgage lending is a good thing for the long-term financial stability of the economy and the banks.

This time last year, Australia's household debt to income ratio stood at nearly 200 per cent, a level UBS analysts have called "extremely elevated" and "one of the highest in the world".

Howitt is alive to this reality.

"For decades we've had housing credit growth running at multiples of GDP. It would be very bad for the fragility of our economy if that were to continue," she says. "I think the banks can adjust to slowing credit growth."

Nor is Howitt overly worried by the disruption posed by smaller entrants to Australia’s banking sector. She says Australian banks are earning strong returns, and are reinvesting those returns in improving online banking – something they already do well, in her view.

"There's a lot of fintech focusing on retail financial services in the rest of the world because retail financial services globally deliver a horrible customer experience," she says.

"For all the dreadful things that have come out in the royal commission, our banks have provided us with a really good deposit environment and some of the best digitally enabled customer experience of anywhere in the world today.

"If you're a fintech looking for a market to disrupt, Australian banks is probably not going to be on the top of your list. The bar is already set pretty high."

One thing that does concern Howitt is the increased criticism of the big four. Howitt fears the royal commission has made it even more acceptable to "bash banks" – a reality which could hurt their business model, and the economy more broadly.

"Bank bashing as a verbal sport has been around for decades and we all love to hate banks," she says.

"Where that becomes a risk is where we are going into a 2008-type environment. In 2008, the banks received a lot of coordinated policy support, and that's very good for the Australian economy and we need that to continue.

"Everyone is having lot of fun bashing banks, but we do actually need them functioning well for the lifeblood of the economy to continue to flow. I think we need to move on from this period of bank bashing as quickly as we can and go back into sensible economically rational policies."

With the 2019 federal election due in May, Howitt says the only thing investors can't price in right now is what a Labor government might have planned.

Labor has flagged plans to scrap negative gearing for existing homes, and increase capital gains tax, by reducing the present discount from 50 to 25 per cent. It also wants to axe cash refunds for excess franking credits.

Labor is short-priced favourite to win the election, ($1.14) while the Coalition is $5, according to Sportsbet. And 45 per cent of voters aged 50 and older say they are dissatisfied with Scott Morrison’s performance as Prime Minister.

While she declined to speculate on a winner, Howitt hopes whichever party wins will step back from any policy that is too destructive to the economy.