Why you can’t cash in quick on banks
BANK shares are among the most popular stocks on the ASX but the big four have been sluggish since the Reserve Bank began to crank up interest rates three months ago.
Even over the past 12 months, NAB is the only one of the big banks to have gained ground, rising 16 per cent.
Analysts say the banks’ outlook is uncertain, although investors who focus on their strong dividend yields should not be disappointed.
Saxo Capital Markets Australian market strategist Jessica Amir said banks traditionally enjoyed bigger profit margins on mortgages when interest rates rose.
“However, this time is different as we have 30-year high inflation,” she said. “Consumers are being forced to spend more on groceries and petrol, while they’re also grappling with higher rates. So there’s been a reduction in lending, which has fallen like a stone rolling down a hill from its 2021 high.
“If inflation sticks around for longer – which we think will be the case – this will further crimp borrowing, and thus how much banks earn.”
NAB has been the best ASX performer of the big four, and Ms Amir said it had been taking market share from the others – especially ANZ.
She said regional banks such as Bendigo and Adelaide Bank were also performing well.
Baker Young Financial Services managed portfolio analyst Toby Grimm said market cycles now moved extremely quickly, and positivity around rate rises had been overtaken by other issues. “Investors have moved past rising interest rates that are good for profitability … to concerns about
credit quality in the event of a severe recession, with falling property prices and bad loans and the risks of that.”
Mr Grimm said bank shares had recovered slightly since July but their short-term outlook was probably a “muddle-through”.
“I’m not negative on the banks, I don’t see a great deal of credit risk, but unfortunately the really attractive profit growth that may have come from higher interest rates is not there,” he said. “The real return comes from the income side.
“The attraction of a 5 per cent fully franked dividend yield with the comfort of a very long-term track record of reasonable capital growth is tempting enough for most people.”
Mr Grimm’s top pick was Westpac, which had lagged its peers through regulatory issues, while ANZ should benefit from buying Suncorp’s banking business through cost savings and synergy gains.
Catapult Wealth portfolio manager Timothy Haselum said ANZ was the
“value choice” after recent weakness, while CBA was “the best on quality of all the banks, but you pay for that”.
He said the main issues holding back banks were rising bad debts and the prospect of lower loan volumes.
“The effect of interest rate rises will take time to flow through to the numbers, and so we expect the market will remain cautious of banks for some time,” he said.
New Macquarie research says the key risks are unsecured loans, SMEs and regional property.
“Business credit growth is likely to slow, but margins should improve,” it says. “Near-term underlying expenses are likely to continue to rise.”
Too many problems for us to be bullish on banks, but happy to hold for income investors. Timothy Haselum