It sounds crazy, but first home buyers could pose a threat to the profitability of the big banks at a time when the sector is already under enormous earnings strain.
Banks are worried that the federal government’s first home buyers’ scheme will hurt the quality of their loan book and drive up their cost of funding, according to a report in the Australian Financial Review.
While the news isn’t hurting the share prices of our big banks this morning, this is something bank investors should pay attention to, and I’ll explain why in a moment.
The Westpac Banking Corp (ASX: WBC) share price, the Commonwealth Bank of Australia (ASX: CBA) share price and the National Australia Bank Ltd. (ASX: NAB) share price are rallying around 1% this morning.
The Australia and New Zealand Banking Group (ASX: ANZ) share price is up 0.5%, which is still ahead of the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index’s gain of 0.4%.
Agency theory and moral hazard
A positive lead from Wall Street and better than expected Chinese trade data are overshadowing the first home buyer issue – at least for now. Also, the grumblings from the banks towards the government’s initiative that allow first home buyers to only put a 5% deposit for a new home isn’t new news.
If you are wondering why banks care, it’s to do with agency theory. Borrowers with more skin in the game are less likely to default on a loan. Having to put 5% down vs. the standard 20% can make a big difference.
The other issue is that…