Has Bendigo Bank called the top of the housing market?

It’s not often an accounting change made by a regional bank attracts any attention at all, let alone the grand proclamation that the housing market has peaked.

But that sums up the reaction to Bendigo and Adelaide Bank’s decision to change the way it accounts for property gains relating to its Homesafe product.

On Monday the bank told the market it would no longer book unrealised gains or losses relating to the product which effectively allows senior citizens to sell stakes in their homes to fund their retirement in exchange for the profits upon sale.

The entire portfolio is concentrated in Australia’s two hottest markets -Sydney and Melbourne. Bendigo’s cash earnings bottom line has been boosted – by as much as 15 per cent per annum – by positive property revaluations in these cities.

This week they decided it was no longer appropriate to book the unrealised gains, and more importantly be exposed to unrealised losses. That led analysts to a cynical conclusion – they were calling the top of the property market.

UBS banking analyst John Mott titled his report “Ding Ding Ding” and asked whether the bank had “rung the bell on the housing market.”

“It is only now as Sydney and Melbourne house prices are in bubble territory and house prices have begun to slip in recent weeks that BEN has changed its policy.”

“In effect, Bendigo booked the gains a rising market and will exclude the losses in a falling market,” said one investor.

“Imagine if a fund manager only reported unrealised changes in the portfolio’s value when they were positive but excluded them when they were negative!?”

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More than just an accounting change 

In theory, this is just an accounting change. But for analysts and their models it matters. The move results in a 9 per cent downgrade to its first half earnings of 2017 and triggered a 5 per cent fall in the bank’s share price on Monday and a further 2.5 per cent fall on Tuesday.

Cash earnings, which a company says represents “key indicator of underlying performance of the core business” are tracked by analysts.

Some have accused the bank of effectively distributing real cash dividends to shareholders based on the unrealised Homesafe gains that have been used to calculate its cash earnings – a move that has attracted some criticism.

UBS calculates under the new accounting system, the bank’s dividend pay-out ratio increases to over 75 per cent, the top end of its 60-80 per cent target range.

In an analyst call on Monday , the notion that the move was done ahead of a fall in the property market was rejected by the bank.

The line was that the change has come about because there was a material increase in house sales under the program, whereas previously the completions were more modest. With more realisations occurring, the bank told analysts the move made sense.

Analysts were also told the bank would defer recognising the funding costs relating to Homesafe until the underlying property is sold, so that income and expenses were matched.

While there was a general agreement among analysts that it made sense to change the accounting treatment to better reflect the bank’s operations, analysts weren’t entirely sold on the rationale for the change, and the decision not to recognise funding costs .

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In fact, one investor went further and explained that because Bendigo has now restated their historic cash earnings to exclude unrealised gains in Homesafe they will effectively re-book these earnings once the gains are ultimately realised.

Whether the bank’s move is a sign that they believe the property market has peaked remains to be seen. But it highlights the discretion of companies when it comes to accounting policies and the market’s willingness to run off management numbers.

What is clear is that perhaps more than any other lender, Bendigo and Adelaide Bank is exposed not just to residential mortgages, but the property cycle more generally. And for that reason alone, it will be attracting more attention.

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