Mind the gap in bank shares v bank deposits

For higher income returns, bank shares are best, writes

Anthony Keane

BANK shares have blitzed bank deposits in the battle for higher investment returns, and the gap is widening.

As savings account interest rates tumble below 1.5 per cent, shares in the big four banks are paying dividend yields between 5.8 and 6.8 per cent, or 8 per cent-plus once franking credit benefits are added.

While it’s tempting to transfer cash savings into bank shares, share specialists warn that it’s higher risk, illustrated by last week’s stock sell-off.

Baker Young Stockbrokers managed portfolio analyst Toby Grimm said financial markets were predicting more interest rate cuts to come, but he stressed that shares and cash were “not the same”.

“Money in the bank is secure and you are not going to lose your capital,” Mr Grimm said of cash deposits.

“With any listed company there’s a risk that you could lose capital. Share prices do fall.”

This was painfully illustrated during the Global Financial Crisis, when big bank shares more than halved in value between 2007 and 2009.

Since late last year, big four bank shares have climbed 12-18 per cent, helped by a favourable federal election result and Reserve Bank interest rate cuts.

However, over the past 12 months, bank shares are generally weaker, meaning the only real gain for investors has come from the dividends.

“It’s compelling from an income perspective, but investors need to be very well aware that it’s not the same and they are risking capital,” Mr Grimm said.

“Market conditions have recently become more volatile, and that has not necessarily played out in full.

“On a short-term basis we are cautious, but medium-tolong term we think there’s value there for Australian banks.”

Shaw and Partners senior investment adviser Jed Richards said banks were exiting higher-growth businesses such as financial advice and were now “coming back to basics” in a lowergrowth environment.

“I wouldn’t be surprised if the bank shares are still the same price in two years, but you are still getting that nice dividend along the way,” he said.

Mr Richards said bank deposits of up to $250,000 per person were guaranteed by the government.

“Yes, the dividend yields are a lot greater for the banks but that’s because their earnings are at risk,” he said.

“They have managed to maintain dividends so far but there’s still a risk in the future that they could decrease.”

A growing number of investors were buying bank hybrid securities, which were less risky than shares but still paid incomes near 4 per cent, Mr Richards said.