Australia House Prices `Very Elevated,' ANZ Chief Executive Says

(Bloomberg) -- The chief executive of Australia & New Zealand Banking Group Ltd. has joined the chorus of voices warning of risks in Australia's surging housing market, though he said the probability of an outright crash is “really low.”

Home prices are “very inflated,” ANZ's Chief Executive Officer Shayne Elliott said in an interview Tuesday with Bloomberg Television's Stephen Engle in Beijing. In Sydney, prices have gained 75 percent in the past five years, ranking it behind only Hong Kong as the world's least affordable housing market.

Asked whether a crash is looming, Elliott said it's “a really low probability, but it is certainly something we stress test a lot, and think about.”

S&P Global Ratings downgraded the credit scores of almost all of Australia's financial institutions in May as it warned that the risks of a “sharp correction'' in property prices had increased. The country's four largest mortgage lenders, including ANZ, were spared from the downgrade because S&P said it assumed the government would step in to provide support if needed.

'Regrettable' Levy

Elliott criticized the Australian government's recent decision to raise revenues by imposing a levy on the country's large lenders, though he said the priority now should be to work out the best way to implement the measure. “It is regrettable, we don't think it is good policy, we do think it will have unintended consequences. But we've seen very little value in bleating about it,” Elliott said in the interview.

The concern from offshore investors is less the financial implications of the levy than what it says about the banks' relationship with government, Elliott said. “We've seen in other parts of the world -- the U.K. in particular -- it starts in one way, then changes form over time. That's what people are worried a little about.”

Despite Elliott's criticism, ANZ has generally taken a more conciliatory approach to the levy than some of the country's other lenders. National Australia Bank Ltd. Chairman Ken Henry described it as “simply incoherent,” while Commonwealth Bank of Australia CEO Ian Narev said it was “policy concocted on the run”

An explainer on what's driving the Australian property boom

Even before the levy, Australia's big banks were facing a more difficult outlook due to slowing economic growth and stagnant wages, following a run of record-breaking annual profits. 

Elliott said there was no doubt the outlook for earnings is getting “tougher.” The Melbourne-based lender's first half-profit missed estimates as its revenue growth flat-lined and its net interest margin –- a key measure of lending profitability –- shrank to its lowest level since the global financial crisis.

Tougher Outlook

“What's driven bank earnings over the last 20 years has been an increase in household leverage which has been afforded because of a lowering of interest rates. That's just not going to drive the future,” Elliott said, adding that for consumers used to boom times, even slower growth can feel like a recession.

“In that lower-growth environment, you've got to be really on your game, we've got to pick a few things and do them really well,” Elliott said.

ANZ has been selling down its lower-returning overseas operations, which, when Elliott took over in early 2016, were using a third of the bank's capital to generate less than a fifth of its profit.

In January, ANZ said it would sell its 20 percent stake in Shanghai Rural Commercial Bank Co. for A$1.84 billion ($1.36 billion) to China Cosco Shipping Corp. and Shanghai Sino-Poland Enterprise Management. It also sold retail and wealth-management businesses in five Asian markets to Singapore's DBS Group Holdings Ltd. in October.

AMMB Stake

The announcement last week that Malaysia's RHB Bank Bhd. and AMMB Holdings Bhd. were given clearance to start merger talks could help ANZ offload its 24 percent state in AMMB, which it has been trying to sell for several years.

Elliott said he is still waiting to see the details of the proposed Malaysian bank merger, though he added that it's likely to be “a good thing for ANZ.”

To contact the reporter on this story: Emily Cadman in Sydney at ecadman2@bloomberg.net.

To contact the editors responsible for this story: Marcus Wright at mwright115@bloomberg.net, Darren Boey