Why this fundie thinks he can beat the Big Four Banks with his hands tied

Aussie banks have always owned a special place in the hearts of Aussie investors. 

Sure, the Hayne Royal Commission revealed some skeletons in the closet. But it was probably the enema the industry needed to have, and the banks came out the other end stronger than ever from an investing point of view. And that’s not a subjective call – the banks are trading above what they did prior to the Commission.

But do banks deserve this ongoing love, with all that’s happened in markets?

Chris Kourtis from Ellerston Capital isn’t a fan, to put it mildly.

In this wire, I’ll run you through Chris’ bear case for the banks, and why he reckons he can beat their current yield “with one hand tied behind my back.” 

Perfect storm of headwinds

It's hard to think of a company that is more impacted by cash rates, economic growth, the property market and consumer sentiment than banks.

Today, all those indicators and industries are working against the financial performance of banks.   

"We’re in an environment where you’re going to see continued tightening by the RBA, credit growth is slowing already, housing is coming off the boil, and rates are going higher," says Kourtis. 

"[RBA Governor Lowe] might slow the rate of interest rate increases, but we’ve had four 50 basis point rate rises in a row, and that’s on top of the initial 25 basis point increase. So we’re at 2.35% now and going higher."

On one level, banks are not complex businesses. They take deposits and loan it back out to borrowers at a rate of interest. Aussie banks also used to provide financial advice, but that cash cow was killed off following the revelations that came out of the banking commission. 

Things are not looking good for the second part of that equation. 

"When interest rates were zero a lot of consumers were locking in 2 and 3 year honeymoon rates at 1.99%," says Kourtis. 

"All of those deals are starting to roll over now and unfortunately it’s going to be a rude awaking, as these loans roll over they’ll be hit with a 5% mortgage, not a 1.99% mortgage, and they’ve borrowed maybe 80% with 20% equity."

The impending tsunami will manifest in the form of bad and doubtful debts. 

"Every second day I pick up a newspaper and a Melbourne construction company has gone under or Queensland developer or construction company has gone under, and there’s a little bit of stress starting in the system. That hasn’t come through in the profit and loss reporting of the banks because the reporting thus far has been reasonable. They won’t see the stress for another nine months."

According to Kourtis, the Big Four banks would have exposure to construction to the tune of about $40 billion plus, and to development to the tune of maybe $300 billion.

"That’s not all going to go pear shaped, but all it takes is a normalised historical rate of those exposures from 2% of those exposures to 4% and there goes the neighbourhood for the banks. So what you’ll see is the bad and doubtful debt line to start to squeeze higher from a very benign level up until now to where banks have been starting to write back bad provisions."

Nor is it a good sign when the CEO of one of the Big Four relieves himself of millions of dollars worth of stock in his own bank.  

"Matt Comyn just recently sold $5.4 million of stock."

"That’s a fair chunk of his shareholding. He’s no dill, maybe he can see what’s over the valley better than what you or I can. If he was buying $5.5 million I’d be interested, but no he’s going the other way."

Commonwealth Bank has always traded at a premium to the other three, and deservedly so. 

"I look at Commonwealth Bank… great bank but the reality is it’s probably one of the most expensive retail banks because of its strong deposit base, 2.3x to book."

"[But] gone are the days when the banks are yielding 7,8,9%. CBA’s yield on consensus numbers is down to 4.3% for this year. I can do better than that with one hand tied behind my back."

Rent-seeking 

What does a bank do when it can't drive revenue and the economy is getting deliberately throttled down by central banks? 

If you're ANZ, you go for market share. 

"The shareprice has gone nowhere in five years [but] they’ve just paid $4 billion for Suncorp’s banking operations to strengthen their market share. Historically they’ve been a bit weak in Queensland. But they’re only winning back the market share they’ve lost over the last few years."

Kourtis doesn't mince his words when rating this move. 

"Here is a bank that just finished a share buy-back not that long ago at $27 a share, and then they go and acquire Suncorp’s banking operation at close to $4 billion, and then they issued capital at $18.10."

"I’m not a rocket scientist but the numbers don’t add up as far as I’m concerned." 

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