NAB, CBA and Westpac, among others, report in early May. In those results we expect credit growth to be stronger than what the market expects. However, we expect relatively poor topline growth for the banks as their net interest margins remain under pressure. Given that the banks have already said that they are going to see costs higher this year than last year, we therefore expect earnings to come under stress in this half.

Consequently, earnings growth for the banks is going to be very minimal this year and potentially for the next two to three years.  If investing in the banks you are not in there for the short term. You should be happy with the dividend that you're getting. Delinquencies are likely to be stable, and we think the strength of the global economy will feed back into Australia. Over the medium term, we think the Australian economy will pick up and these delinquencies will top off at the level where still manageable for the banks.

In the long run we believe banks will be strong. They are providing a yield of 7% and those dividends are not likely to come under pressure. If you include franking credits in that an investor is looking at close to a 9% fully franked return if you buy the banks at this level. They look particularly attractive now because of their 8% fall last month.

Of course, the biggest issue now is the Royal Commission. It’s hard the predict what the likely impact on banking regulations will be, but we think the likely outcome will be greater supervision and reporting requirements, rather than structural changes to business models. As a result, we feel the market is already pricing in a large portion of the potential negative impacts.

We have more concerns about the insurance sector. Personal insurance, commercial insurance, and health insurance are all tough places to be. But we think that over the next two to three years, premiums, particularly in the personal and the home space, will come under pressure. Any potential change in government will also have an impact on the health insurance market. However, stocks in the sector remain at all-time highs and earnings expectations are quite strong.

Uday Cheruvu, Portfolio Manager