Morningstar rejects ‘doomsday’ UBS report

Ratings agency Morningstar has described as “exaggerated” a report from UBS which claims that Australian banks hold $500 billion in “liar loans”.

In an analyst note pertaining to CBA, Morningstar advised caution into “reading too much” into what it considers to be “exaggerated reports … particularly when you consider that the conclusions were drawn on a sample size well below 0.01 per cent of total domestic mortgages”.

The analyst continued: “Data coming out of the domestic banks, majors and regionals is at complete odds with such doomsday scenarios. In fact, since the 'liar loans' headlines surfaced on 11 September, major bank share prices are up between 2 and 3 per cent, suggesting [that] the market does not share the view of the report.”

Morningstar said that it believes the current macroeconomic landscape “remains favourable” for the major banks, and particularly CBA, and argued that concerns of an Australian housing crash are “overdone”.

Reflecting on the “significant reputational damage” incurred by CBA’s alleged counter-terrorism and anti-money-laundering compliancy failures, Morningstar said that “it is important to remain focused on CBA’s long track record of strong underlying operating performance”.

Morningstar confirmed its positive view on future earnings and said: “The bank impressed again in fiscal 2017, delivering a solid underlying performance with a 5 per cent increase in cash profit to a record AU$9.88 billion.

“The result was typical CBA — clean, solid and big.”

CBA inquiry panel ‘suitably experienced’

Earlier this week (11 September), the Australian Prudential Regulation Authority (APRA) revealed the three panel members spearheading the inquiry into CBA. They are John Laker AO, chairman of the Banking and Finance Oath; Professor Graeme Samuel AC, professorial fellow in the Monash Business School; and company director Jillian Broadbent AO.

The inquiry panel may incorporate advice from external sources “as it sees fit”, APRA noted.

According to Morningstar, the panel members are “suitably experienced to undertake the inquiry” and added that the inquiry is an “appropriate and welcome regulatory response”.

However, Morningstar’s satisfaction is not shared by all. In a parliamentary hearing held by the standing economics committee, APRA’s appointment of John Laker to the panel was heavily criticised.

Labor's Matt Keogh MP suggested that the appointment of John Laker, who was chairman of APRA for the 11 years to 20 June 2014, presents a conflict of interest.

Given that the majority of the alleged breaches occurred prior to 2014, Mr Keogh said that the appointment implies that “there is a degree of self-reflection there”.

“The question I’m asking is about the extent to which a full assessment of CBA’s management and risk management, and any conflict with its risk management, may reveal things that should have been detected by APRA at a time when the person who will now be conducting that assessment was the regulator.

“That sets up another conflict for that person.”

Defending Mr Laker, current chairman Wayne Byres said that he has “no doubt as to John’s integrity” and expressed confidence that any issues identified “will be caught out”.

Mr Byres said: “At the end of the day, this is an APRA inquiry. It is our inquiry. We are setting it up, we are appointing the people and we set the terms of reference. We shouldn't pretend in any way — and I certainly don't pretend — that this is divorced from APRA.”

[Related: Regulators face grilling over mortgage curbs, CBA conduct]

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Lucy Dean

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