Big bank short-sellers now getting long

Christopher Joye

Coolabah Capital

In my AFR column today I explain how the big banking bear, Perpetual's Anthony Aboud, has closed out his shorts and got aggressively long the major banks (or via Twitter here). The full column also has some cool stuff on the RBA and the budget. Excerpt enclosed:

Enter the diminutive Aboud, who was a sneaky rugby union halfback to this rampaging, barrel-chested hooker in a stellar under-13s team. (The side was undefeated the next year with the addition of TDM’s energetic Hamish Corlett behind the scrum and a staunch Tom Cowan at full-back.)

“I have been negatively positioned in the banks for a long time,” Aboud says. “My main concern has been the net interest margin (NIM) pressure coming from low interest rates and a flattening yield curve, competition from non-banks as open-banking is implemented, and back-to-front book re-pricing.”

While noting that “over the last year NAB, WBC and ANZ have fallen by 42 per cent on average”, Aboud reveals he has now “neutralised and gone long” those three stocks. (He will not be drawn on whether neutralised means short-covering!)

“While the NIM pressures are still present, we feel that this is well reflected in the analysts’ forecasts and the banks’ prices.”

He highlights that with the introduction of a new accounting standard called AASB 9 (or IFRS 9), banks have to provision for future expected losses upfront rather than the historical practice of waiting for defaults and losses to materialise.

“ANZ, WBC and NAB had to make this call in late April and early May when they reported their results,” he says. “Suffice to say that was close to the peak of despair and hence their assumptions about 2021 unemployment and house prices were predictably extremely dire.

“Even more interesting was the fact that all analysts apart from Coolabah’s team thought these banks were being overly optimistic. Yet if unemployment is not as bad as what was thought in April/May – flash to Bill Evans’ recent forecast changes – and house prices actually increase rather than decrease, then there will be provision write-backs in 2021 and beyond."

“If we see better-than-expected economic conditions in 2021 relative to April expectations, this will create a tailwind for earnings, reduce the prospect of risk-weighted asset inflation (as a function of deteriorating credit quality), and increase the chance of a proper fully-franked dividend around the 6 per cent level."

"Throw in medium-term cost-cutting opportunities through digitisation, and those three banks are starting to look like good value.” (We also own these three stocks in one institutional portfolio.)

Read the full column here or via Twitter here.

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Christopher Joye
Portfolio Manager & Chief Investment Officer
Coolabah Capital

Chris co-founded Coolabah in 2011, which today runs $7 billion with a team of 33 executives focussed on generating credit alpha from mispricings across fixed-income markets. In 2019, Chris was selected as one of FE fundinfo’s Top 10 “Alpha...

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