Australia’s banks still priced for perfection

Markets have ‘baked in’ expectations that interest rates and inflation will stay low for a long time, but Simon Mawhinney, Chief Investment Officer at Allan Gray, thinks that assuming low rates for an extended period could be dangerous.

“There’s quite a few things that could go wrong, and probably only one thing that can go right for the banks – credit growth in the low single digits going forwards. I would think that’s quite an optimistic outcome.”

Headwinds for the banks:

• Loan serviceability could fall as borrowers struggle to pay higher interest costs
• Flat or negative credit growth, combined with growing costs bases, could hurt the banks’ bottom line
• NAB recently announced that they’re spending $1.5B on restructuring; Mawhinney expects the others will need to follow suit.

In the video below, he shares two other sectors he would avoid as rates rise.

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