By Paulina Duran and Byron Kaye
SYDNEY (Reuters) - Australian bank shares posted their biggest rally in a decade on Monday as a surprise conservative election win eased regulation fears, though a housing downturn and strict rules baked in since a misconduct inquiry could temper longer-term bullishness.
With every major opinion poll suggesting a win for the center-left opposition Labor party, bank stocks had traded at multiples below the broader market partly because of the party's policies to end tax breaks for landlords and for share investors who don't earn other income.
With those proposals now off the legislative agenda, shares of the top banks stormed to their biggest single-session rise since the 2008 financial crisis.
Shares of No. 1 lender Commonwealth Bank of Australia jumped as much as 7%, its biggest gain since 2009, while No. 2 lender Westpac Banking Corp was up over 8%, its biggest trading day by volume in 10 years. That pushed the broader Australian market up 1.4% and the financial sub-index 5.7% higher, the sharpest gain since November 2008.
The third-largest lender Australia and New Zealand Banking Group Ltd rose 7% and No. 4 player National Australia Bank Ltd was up 7.5% on the first trading day since the election.
The combined market value of the "Big Four" banks added over A$25 billion.
"The election outcome has removed the downside risk that certain policies posed to asset values (but) banks are now following the law that they should have been following for 10 years and the election outcome won't change that," said Deutsche Bank banking analyst Matthew Wilson, referring to responsible lending rules.
"We now return to the fundamentals associated with the extent of household debt."
Australia's central bank has warned of sluggish inflation as a housing correction and wage stagnation erode people's spending power right in the aftermath of a protacted borrowing frenzy when house prices were rising rapidly until 2018.
Banks have already earmarked some A$6 billion to reimburse wronged customers, mostly for inappropriately charged fees, amid sustained criticism about an practice aired in an industry inquiry known as "fees for no service".
Even after Monday's rally, the Big Four banks were trading below their valuations before November 2017 when the inquiry was announced.
"The problems for the banks are not going away just because the government remains the same," said Sean Sequeira, chief investment officer at Alleron Investment Management.
"Slowing credit growth, increases in regulatory costs, a slowing economy and other issues related to the Royal Commission haven't gone away."
(Reporting by Byron Kaye; Editing by Sam Holmes)
