Banks not immune to contagious fear

SHARES in Australia’s banks have fallen harder than the overall market as collapses and bailouts in the US and Europe spook investors.

Since their February highs, the big four banks have lost between 11 and 15 per cent in market value, while the S&P/ ASX200 index is down 8.5 per cent in the same period.

The Australian bank stock weakness is mild compared with carnage elsewhere, including Silicon Valley Bank and Signature Bank in the US, Credit Suisse’s woes in Europe and the share price of US-based First Republic Bank plunging 90 per cent.

Bank of America, the second-largest in the US and bigger than any Australian bank, has suffered a 27 per cent share price fall in recent weeks. Analysts say our banks are strong and secure, but their share prices are not immune from contagion and the outlook remains volatile.

Saxo Markets Australia market strategist Jessica Amir said pressure on the financial system was still building overseas and “the pain and turmoil abroad is not yet resolved”.

Ms Amir said some financial institutions were short selling Australian banks, betting on further weakness, despite our banks being much stronger financially than US banks. “If we do have a banking collapse in the US in the lending part of their market, the fear and hysteria will probably hit our market too – when the US sneezes we catch a cold,” she said. “We are telling clients to be quite cautious at the moment. I think there’s better opportunities in the market for growth right now. We don’t believe we are out of the woods yet.”

Ms Amir said Australian banks faced uncertainty at home with the looming mortgage cliff, as almost 900,000 households came off low fixed-rate mortgages and onto variable rates more than 3.1 percentage points higher.

“Almost one million people are going to get a rude shock,” she said. “Bank stocks are quite risky.”

Shaw and Partners senior investment adviser Jed Richards was more positive, declaring Australian banks safer and in better shape than the rest of the world.

“Sentiment towards banks right across the world has suddenly got a bit rough,” he said. “There is talk that there is no growth in the banking sector – however, the dividend yield we believe is safe. If you can ride it out for a little while and you get a good dividend yield – mission accomplished.”

The big four banks are paying dividend yields between 4.4 and 6.5 per cent, and franking credits add extra cream for many investors

Mr Richards said future falls in bank shares would probably be less than the overall market.

“If the market gets knocked back 10 per cent, they might be down 3 per cent,” he said.

Mr Richards said Shaw’s top pick in the banking sector was Westpac, followed by ANZ, with both having a “great yield”.

“CBA relative to the other banks is expensive – they are the best performing bank,” he said. Banks overall were a “hold” and investors should stick with the big four rather than smaller regional banks, Mr Richards said.

Catapult Wealth portfolio manager Tim Haselum said in the short-term Australian banks would see loan impairment tick up and profit margins decrease.

“We think bank profitability and hence the share prices will struggle in the short term, but we are not worried about liquidity or solvency in Australia,” he said. “Longer term, as long as Australians continue their love affair of property and investors continue to seek dividends, the big four banks will have a place in portfolios.”

Mr Haselum said investors should stick with the big four banks, and his top pick was “ANZ for a balance between quality and valuation”.

Macquarie Research says the strong financial position of Australian banks means the likelihood of large deposit outflows is “very low”, but there are risks to their 2023-24 earnings. “We see Australian banks as defensive but expensive in a global context and remain Underweight the sector,” it says.