Ordinarily, investors are quick to overlook risks in the pursuit of profit. For the past 18 months, the converse has been true in the banking sector. This may be about to change.
During the past week, each of the major banks released a profit result or 3rd quarter update. The reaction to ANZ’s release was perhaps the most telling. Whilst ANZ’s result was far from terrific, the share price rallied 5.2% as the market re-based its overly negative outlook.
The key pressures facing our banks are well documented: 1) Increased cost of funding 2) Potentially rising bad debts 3) Heightened competition/low growth 4) The requirement for more capital (hence the spectre of dilutive share placements) 5) The possibility that dividends will decline. From our standing these are ‘known knowns’ – ie they are largely factored in to the current share prices.
But on our assessment, grossed up dividend yields are maintainable in a range of between 7 -9% versus the cash rate at 1.5%. There are 2 parts to every investment equation: in this instance the risk looks to be in synch with the market leading yields.
Whilst, we are less than 50% weighted to the banks at present, we do intend to maintain our current exposure unless the risks materially increase, and potentially look to add on weakness.