After a tough 2018 the Aussie banks have bounced back thanks to a loosening of lending restrictions from APRA and a surprise election win by the Coalition. But should investors now pile back into the sector? And does the recent rate cut by the RBA herald lower funding costs for the banks – or a margin squeeze?

From both a short and long-term perspective the banks look attractive, with an expected surge in offshore capital flows and their status as a yield play in a "lower for longer" rate environment only heightening their appeal.

Tune in as Jeremy Hook from TMS Capital hosts Jun Bei Liu from Tribeca Investment Partners and Sam Granger from Totus Capital, who give their take on whether the banks are "back in town," while also naming their standout pick among the Big Four.

Transcript:

Jeremy Hook: Welcome to Buy Hold Sell. I'm Jeremy Hook from TMS Capital. With me on the panel today is Jun Bei Liu from Tribeca and Sam Granger from Totus Capital. And our topic today is the banks. They had a bad 2018, but bounced back strongly this year, and then we've seen rate cuts from the RBA, the APRA move, and the surprise Coalition win. So, are the banks back in town?

Jun Bei, are they now more investible than they were a year ago?

Jun Bei Liu: Look, certainly the tail risk has been removed, so it certainly looks better today than it was beforehand. So, first of all we've got election stability, and second of all, we've got APRA lowering the limit to potentially increase the credit growth that is good for the banks. But the rate cut, it's not great for the banks, but most of the large four, they do have hedging in place to cushion that fall.

Jeremy Hook: Okay. So Sam, banks now, with the price movement up, are they still as investible?

Sam Granger: Yeah look, our concern 12 months ago, was a spike in bad debts. And we really haven't seen that, and actually the labour market's probably been stronger than we would have thought. I agree with Jun Bei, I think that the Coalition victory is good for the banks, and so moving forward, we think the banks are in a better spot now than they were 12 months ago.

Jeremy Hook: And you see that going on, so it's not just something that will disappear, the economic climate's slowing down clearly worries the RBA, otherwise they wouldn't have cut. That's not going to play into the banks ... in further strength really, is it?

Sam Granger: Maybe not, but we think that the victory of the Coalition actually brings forward the bottom of the housing market, which is material for the banks. We also think that the change in APRA serviceability guidelines is a big deal for the banks. That might unwind some of the credit squeeze we've seen. So we think there's some positives and this is some permanent positives for the banks rather than just a one-off sugar hit.

Jeremy Hook: Okay, thanks Sam.

Jun Bei Liu: Just like to add onto that, on the back of it as well. Just something technical for the banks. Now the banks is on big yield, and with earnings it looks somewhat more stable. Yes, there will be further dividend yield cuts but they're still enormous, you look at the dividend yield. And now, with the Aussie market sitting in quite defensively, again amongst that Asia-Pac space, you will see increasing amounts of capital flow into Australia. And where do they go? Top 20. And the banks stand very well in that space, because of the yield, because of our market composition.

Jeremy Hook: So you're saying over short and long term, they still look very attractive?

Jun Bei Liu: I think the technical side is definitely for the short term. In the next three to six months, they look very attractive for foreign investors coming in, supporting the valuation, and in this lower for longer environment, where do you get the yield?

Jeremy Hook: That's a very good question. People will be asking that. Question I've got to ask you though, this rate cut from the RBA, it's a question I think viewers will want to know. Is it actually good news, or is there a negative tinge in that as well?

Jun Bei Liu: Look, there's a reason for the rate cut. The reason is our economy was not strong. It was heading to a very shaky, close to recession sort of level. Particularly if the government did change into Labor and give us some of the policy touching on the negative gearing changes and the like, so it was looking quite shaky, and consumers been very, very tight. High debt, low discretionary spend, no wage growth. So where's the spend come from? Especially if this trade conflict picks up, the iron ore price could fall. And that's the income for our country. On that basis, our economy doesn't look strong. So with the rate cut, it certainly is their signal of saying, "We're here to support you." Same as what government is saying, "Here's the splash, the cash, the tax benefit." So, it's very important.

Jeremy Hook: Okay, that's good. Sam, the idea of a cut to the RBA does reduce some of the funding costs for the banks, but does it also reduce their margins?

Sam Granger: It's a good question and that obviously depends on how much of the cut they choose to pass on. I agree. I think the big issue is, it's very supportive for the yield trade. Their valuations get quite attractive as those cash rates come down, there's no doubt about that. It remains to be seen whether the cuts will stimulate credit growth. We think there's a chance they could. So the banks look okay to us.

Jeremy Hook: So across the bank sector, they're not all the same, we tend to look at them as one big unit. So if you see them as okay at the moment, are their better pockets of value?

Sam Granger: Look, I wouldn't claim to be the expert on which bank is superior to the other. What I would say is I think NAB through the boom, probably maintained the best credit standards, the best lending standards. So I'd probably pick NAB, but overall the peers look okay, the price to books look okay. I think the banks are decent value.

Jeremy Hook: Do you have a view on the majors versus the regionals?

Sam Granger: Not a strong view. I think I'd probably stay with the quality, stay with the majors.

Jeremy Hook: Okay. Great. Jun Bei, before you get in … Well, can I ask you, do you have a favourite in the bank sector? Is there one that stands out for you?

Jun Bei Liu: Absolutely. I think NAB is far better positioned. Yes of course it doesn't have the biggest home loan exposure, but home loans is where the problem was. So it's exposed to the business banking, commercial sides and we do believe that's well positioned, and it's cheap. It's a good three PE points cheaper than the Commonwealth Bank. And dividend yield, there's 6.5%, I think, you know one of the highest, it's massive, and they already revised their dividends. So to me, it's a much better bank to hold. But, look, all top four, they probably trade very similarly, but NAB is better positioned.

Jeremy Hook: Does that mean CBA's a bit expensive?

Jun Bei Liu: CBA has always been expensive because of the high ROE they maintained. But in a latest result we've seen that's coming out. There was weakness across quite a lot of divisions, and we do fear that premium will come out in the next 12, 24 months.

Jeremy Hook: Excellent.

Well our panel is joined with the enthusiasm with the bank sector of late, and thinks there is an opportunity there, and particularly on NAB.