by Chris Becker
Morgan Stanley has a research note out today suggesting the big four banks will face quiet onerous capital requirements following the Murray Inquiry and have moved “underweight”
With the banks outperforming the market for the past 3.5 years, and now accounting for 30% of the ASX200, we have moved underweight the sector.
Our concerns centre on:
1) the FSI (Murray Inquiry) leading to more onerous capital requirements, which depress sustainable ROEs,
2) any business credit recovery will be ROE-mix negative,
3) the upgrade cycle has come to an end, and
4) sector valuations remain elevated.
MS rightly points to the market underpricing the huge risks entailed into the Murray Inquiry. However, do not discount the “mum and dad” investor willing to pump their savings into the relatively high dividend yield that bank stocks provide.
Further, they contend that the extra capital required by the banks would come from dividend reinvestment plans. Although this would dilute existing shareholdings, bank stocks are as addictive as house prices and are unlikely to fall substantially on that one catalyst.
Analysis of the massive capital raisings immediately after the GFC in 2009 show the market is more than willing to concentrate their holdings in almost-guaranteed financial stocks.
The share price performance of the financials has been nothing less than stellar having almost reached its pre-GFC nominal high:
