Great article. Almost every fundie you hear is underweight banks, as they see it as their best chance of beating the benchmark short-term. Yet the opportunity in 'plain sight'. Dividends alone will generate a 100%+ return over 10 years. The hunt for yield will be even greater in a zero-rate world. They have postponed dividends to please regulators/politicians, but are fundamentally in good shape. Unlike almost all other listed companies, they have already taken the pain through their provisions.
Thanks Romano It seems that around the world bank indices are seeing very similar falls (top to bottom) - ie. what we are seeing in Australia is no different in a relative sense. It hurts us more because the market index is higher weighted to banks (as opposed to tech in the US). So, do you think that the banking sector globally has undervalued bank stocks or are you calling out Australia as different?
Thanks Romano- I am just debating with myself now should I participate in the NAB spp. This article will help me to decide.
Refreshing to see a different perspective from the usual beat-up on banks. Given that banks are required to hold significantly more capital than before, combined with other regulatory risks, do you think those are significant enough to affect their future valuation (compared to e.g. post-GFC)?
Banks are effectively 'spread plays' - they borrow from 'savers' (depositors) and wholesale markets at X%, and on-lend that via fractional banking for y% in home, business loans etc...- typically a margin of about 200bps or more of x%. It is interesting to hear that we may soon have 'negative' rates in Australia - which effectively means that 'prudent savers' will take all the risk of lending their capital to banks, AND now PAY THEM for the privilege of doing so - taking on ALL of the risks of lending money, for a guaranteed negative return?????? How is that sustainable.
Interesting read, thanks. I wonder what second or third order effects will result from a drop in bank deposits as people chase fixed dividend income to replace interest... Also, overlaying the ASX 200 and the financials index chart with the house price index seems to show a greater disconnect when house prices decline (intuitively). Whether or not the value you discuss will be realised seems to hinge on the macro tussle in the housing market that will play out this year.
With respect to the banking sector globally, the first point to note is that bank indices around the world haven't fallen universally; the North American experience is quite different to that of the UK/Europe. In part this is due to the dysfunctional workings of EU constituents (eg Italy) contaminating the wider sphere. In terms of bank valuations, we see it as a combination of the 2 factors you highlighted : a) banks are undervalued globally (and some for good reason!) and b) the Australian situation is different due to the reasons highlighted in the article.
The Big 4 Banks have had the stuffing knocked out of them over the past 3 years, firstly the Banking RC depressed the share prices, they started picking up after Hayne announced the results of the RC in early Feb 2019, then the lead up to the May 18th election with the very real possibility of a Labor Govt again took the banks down and then most recent the Covid19 saga has again sent the big 4 to the dungeon. So I believe there is a lot of pent up demand just waiting on the sidelines for a little more confidence to re-appear for the banks and then it will be a mad scramble. As the historical dividends and share price table show the76 are undoubtedly a long term hold for the "not so" nervous patient investors.
I'm interested to see how much of the 'provisions'witheld are actually used to cover bad debts, or as some coverage in the USA mentioned, it is more palatable to see the banks taking provisions for potential bad debts now, only to return the uneeded provisions to the balance sheet later, so as not to appear to being very profitable now whilst many / most are genuinely struggling.
Over the next three or so months we will have a good indication how much banks are worth, with one bank heavily skewed to the mortgage market !!