Charlie Aitken likes banks:
The boom part of the mining boom is over; the boom part of the mining investment boom is over: the boom part of China’s demand for commodities is over: the boom part of the Australian Dollar boom is over. That all means we recouple to the rest of the developed world in terms of relying on ultra-low cash rates to spur household and business confidence.
An extended period of ultra-low domestic cash rates would make fully franked bank dividend yields extremely attractive to Australian investors, who by the way, already own over 50% of every Australian bank. It will also spark a further rise in residential property prices, a rise in credit growth and a continued benign bad debts as most Australian’s continue service their mortgage above everything else.
One thing I am certain of is that demand for reliable fully franked dividend yield in Australia will never be “over”. Australian investors seek and reward reliable income streams over everything else due to the unique attributes of the Australian superannuation and taxation system. That underlying structural demand for yield will never change, it may even increase with an ageing population, growth in SMSFs, and increases in SGC contributions. The shorter-term swings in demand/supply in Australian yields stocks appears to be foreign investors who then drag in/out domestic relative investors. Don’t confuse short-term “yield traders” with underlying structural demand for reliable income streams.
The selling in Australian banks also got a little disorderly yesterday, in fact it did look like a capitulation event, but if you take a step back from the trading noise and headlines what do we have in front of us today??
Firstly all the banks are ex dividend which actually exacerbates selling pressure. The ex-dividend period is the seasonally weak period for big 4 banks but this year global macro events have conspired with seasonality.
At the investment strategy level I attempt to focus on FY14 to look for total returns and set price targets. In terms of the big 4 banks, on last night’s closing prices, the prospective FY14 FF yields are..(these don’t include special dividend forecasts which are also likely due to the excess capital banks find themselves with).
ANZ 6.08%
CBA 5.65%
NAB 6.33%
WBC 6.33%
With 3 of the 4 major banks now yielding prospectively over 6.00%ff in FY14 I think that should be a floor under the sector. In fact, I believe the 18 month trading range in major banks will effectively be a 6.00% to 5.00% ff yield range. I remain of the view that the big 4 banks will eventually be bid down to 5.00% ff yields by yield hungry domestic investors, remembering 5.00%ff is 7.14% grossed up. When domestic cash rates hit 2.00%, 7.14% grossed up, despite equity volatility, will look attractive.
FY14 5.00%FF yield based share price targets
ANZ $33.60
CBA $75.60
NAB $38.70
WBC $36.40
This is obviously a very global macro period, but when CBA pays a special dividend in August I’ll bet the Australian market forgets what US bond yields are. Similarly, the only country in the world where anyone compares banks to mining companies is Australia, and that is solely because of relative index weights. In reality it’s a ridiculous comparison.
I simply can’t see how selling Australian banks on prospective 6.00%ff yields is a good idea. Similarly, buying miners as iron ore craters and China wobbles also seems counterintuitive to me.
This is a clear buying opportunity in Australian banks for the short, medium and long term. The trading heat has come out of them, very quickly, and they now offer the potential for strong total returns.
All four major banks and Suncorp remain in my high conviction buy portfolio. Today TS Lim UPGRADES his view on Suncorp, a stock that has been a sensational total return idea for us for many years. TS really has called this one very, very well and you should read and act on his updated view below.
Honestly, I would not buy banks if you paid me. Why? The risk is simply too great. While they’ll be protected and financial repression will work in their favour there is a material risk that they will sucked into the developing mining bust via deflation in their overvalued residential lending books as unemployment rises and household income growth stalls.
Do know its going to happen? No. Is it a serious risk? Yes.
Playing the falling dollar is a far safer bet.
