Huge Achilles Heel in Major Bank Valuations

Christopher Joye

Coolabah Capital

In The AFR I present one of my more important analyses of the major banks---a must read for anyone with equities exposure---that tears apart leading analyst forecasts to find an essential Achilles heel at the heart of current valuation models. In short, even the more gloomy analysts like UBS's No. 1 ranked researcher, Jon Mott, assume a heroically benign path for the major banks' record-low bad debt charges, which are currently 48% and 69% below their average level since 2000 and 1991, respectively. (Note that whereas 2000 to 2014 does not include a recession, the 1991-2014 period does.) Notwithstanding much pessimism around the economy, analyst projections do not allow for any meaningful increase in adversity and naively suppose that bad debts remain well below even optimistic historical averages (eg, since 2000). I demonstrate that a modest stress-test involving loan losses that are 50 per cent lower than the majors' 1991 experience, and only one-third above the losses incurred in 2009, would cut their (already declining) return on equity outcomes in half. Read for free by clicking twice here (VIEW LINK)


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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