The market is pricing in a recession scenario for the Australian Banks. The sector is pricing in a ramp-up of bad debts over the next couple of years, however, we think the Australian economy is proving more resilient than many people think and the bad debt experience for the banks will be benign. We have just had two strong months of domestic employment data and the unemployment rate has fallen back to 5.8%. Inflation is low and GDP growth is reasonable despite the mining sector headwinds, helped in part by the decline of the AUD. The low cash rate at 2.00% is assisting households and businesses service their debt obligations and there is scope for the RBA to implement further rate cuts if required. Bank sector valuations are screening cheap versus the broader industrials market and also cheap relative to their own valuation history (on a P/E basis). Bank dividend yields are cheap versus the RBA cash rate and term deposit rates.