Four pillars under pressure

BATTERED by a series of scandals, damning revelations in the financial services royal commission and concerns about the outlook for their earnings, the four pillars of Australian banking are under pressure.

The big banks have now lost a quarter of their market value in the past three years.

They remain among the most popular stocks on the Australian bourse but investors — disillusioned by a relentless flow of bad publicity — are questioning the quartet’s growth prospects.

While another round of royal commission hearings starts on Monday and may bring more nasty headlines, some analysts say long-term shareholders shouldn’t sell.

The banks’ dividend payments are likely to withstand the onslaught, they say.

However, there are mixed views on whether investors should buy bank shares now as interest rates, increased competition and the end of the housing boom cloud the outlook.

“I think it’s going to take some time for these banks to wash the royal commission issues off them, but over time they will,” says Tony Catt, director at financial planning group Catapult Wealth. “The banking system certainly is not broken, and I don’t think it’s a terminal problem for the banks.

“If you have got them, hold them, and if you don’t have them at the moment, it may be an opportunity to start accumulating.”

Australian Stock Report chief market strategist Chris Conway says now is not the time to sell. “We all know the banks have a lot of work to do and will have to spend money on compliance, but it’s a small proportion of their earnings,” Mr Conway says.

He says the banks could seek to maintain or bolster profitability by cutting costs.

Dividends paid by the big four banks have barely moved in three years despite the weakness in their share prices.

Since 2015, shares in all four banks have tumbled more than 20 per cent.

Westpac and National Australia Bank have suffered most, down 27 per cent, while the Commonwealth Bank and ANZ have fallen 26 per cent and 22 per cent respectively.

Over the same period, the benchmark ASX 200 share index has climbed 8 per cent.

As a proportion of the banks’ share prices now, their dividends range from 5.8 per cent at ANZ to 7.2 per cent at NAB.

Once franking credits are factored in, the dividends yields range from 8.3 per cent and 10.3 per cent.

“I would say the dividends are sustainable,” Mr Conway says.