One last yield party for Megabank?

UBS is looking for another leg up in bank valuations today:


A benign outlook is not a bad thing

With a patchy economy and a pick-up in market volatility, we believe many investors are struggling for high conviction investment alternatives. With many industries under pressure, high quality franchises which offer reasonable growth have become crowded trades with stretched valuations. Australian bond yields are now near record lows and the market is pricing in rate cuts. In this environment, we believe the benign outlook and strong dividend yields of the banks make them relatively attractive investments.

Likely share price drivers over coming months
(1) Interest rates – Lower bond yields and rate cuts are negative for NIM’s. However, strong bank returns and dividends are likely to continue to attract retail investors and yield funds. Although the banks’ absolute valuations are not cheap, further re-rating is possible. (2) Capital – While this ‘can has been kicked’ for a few months, we believe many investors underestimate the potential requirements needed to make capital ratios “unquestionably strong”. The global push for more capital is ongoing with the Basel Committee focused on risk weight floors and calibration of Advanced to Standardised methods. Global peers are continuing to strengthen their capital positions. We believe APRA could adopt higher mortgage risk weights sooner rather than later. (3) Bad Debts – Can the banks continue to write-back provisions and release CP to hold charges at record low levels? (4) Trading income – should bounce back give increased volatility especially in the AUD. This may provide the biggest leverage to ANZ & WBC near term.

Jonathon Mott is a good analyst and I’m inclined to agree with him. Bad debts won’t really rise until the commodity bust begins to drag down housing and that’s probably a 2016 story, outside of Perth.

Last night the US 30 year bond hit another all time low and Australian bond yields will continue to price lower as well as rate cuts come and go, not do enough, and be priced again.

With the Fed not raising rates this year, either, there’s potential for one last leg up in the local yield play. Especially since the global backdrop is ZIRP everywhere. FTAlphaville quotes BofAML which suggests European yield stocks could double:

“Safe” dividend stocks, to be precise.

It’s a straightforward argument: as yields on high-grade government debt increasingly turn negative, so the search for income amongst investors will channel money into quality equities.

Barnaby Martin and Manish Kabra at BoA Merrill Lynch reckon that with the stock of such negative yielding debt in the Eurozone now close to €1.4 trillion and Japan now pushing towards €2.4 trillion, there’s a distinct lack of alternatives…

That’s over the top given the business cycle is clearly getting long in tooth but it may still be valid for another leg up. Then again, that’s kinda contradictory, no? Why would I buy yield for short term trade?

David Llewellyn-Smith

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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  1. harry petropoulosMEMBER

    i have to agree in the short term with the yields re Aussie banks————HOWEVER the party will STOP and the sharp reversal will emerge,ITS A CLASSIC YIELD TRAP

      • harry petropoulosMEMBER

        You are so right and i have been waiting for a log-time…….cba is the one that should be shorted……i am still amazed how it got to $85 and it looks as if it can go higher………do not be surprised that our residential real estate can fall up to 25% in the medium term…….whoever gets it right becomes wealthy

    • i have to agree in the short term with the yields re Aussie banks————HOWEVER the party will STOP and the sharp reversal will emerge,ITS A CLASSIC YIELD TRAP

      +100 – — Anyone trading these markets is brave to the point of being foolish. When the big bang happens it will be so fast there will no time to pull out like a good catholic ! 🙂 Gold and Cash – –

    • Harry you are on to it.CBA has just printed the classic head of a head and shoulders. after this forming shoulder, Target 72.WW

      • H&S possible yes, a LOT of liquidity resting under 82 by the look of things. Will be watching this develop with interest.

      • I love this website… Everyone thinks the same as me. Which means your all a bunch of very intelligent fellows 😉

        Haha… Use commsec cfd to short CBA… Get it wrong you lose, get it right… Well you lose no liquidity.

  2. this property/unemplyment pick up will take a atleast a yr to start, to get going to any degree whereby housing is in trouble.
    Most have enough equity in the family home and a working spouse to survive medium term.
    The Gov being pro housing will happily let the cash rate fall to say 2% to support these “hard working, (silly) Australians”

    • harry petropoulosMEMBER

      Your point is VALID and i agree with your thinking…….whether it takes one year or two……it will be OVER and the notion that we will continue to build our wealth on the capital appreciation of our homes is finally coming to an end…………remember what they said about our commodities———-and hence the prices have collapsed…………….HOUSING is no different…….

      • fair call.
        I just think their is a short,meduim and longer term time horizon here and “yield” now is it, hence you need to own the banks/tls etc.
        The big thematic of housing blowing is real, yet I think it will take a while to gain momentium.
        Their is too much vested interest, in the ear of Government for this to be currently, a serious issue worth worrying about.
        Money is made largely via trends/thematics and todays “bulls are still heading for the “yield chasing” china shop”,

      • Sacrilege. It’s simple economics mate. Supply and demand. Or so i’m told at every bbq for the last 8 years ever. Equidddy maaaattte!! Don’t be a peasant, get on board.

  3. Retired now, the old timer can’t believe how peculiar ‘things are’ with these low interest rates.

    Aware and embarrassed now of beginning too many sentences with ‘back in my day’, he determines to ‘get with the program’ and ‘go with the flow’.

    Seeing the ‘yield’ that ‘might’ be obtained with the big 4 bank stocks and hearing the constant (though completely irritating) bang on from those at the bowls club about how ‘well they’ve done’, he solemnly prepares the CommSec order now that his largest TD has matured.

    He was never one to take crazy chances and he remains proud of this character attribute but he acknowledges daily his other many flaws and still sincerely looks for ways to improve.

    Holding the cursor over the ‘confirm order’ button, he’s reminded of ‘years back’ when he and his mates drove all night as the reds were hitting hard in the Southern west of Warrnambool.

    Casting quite productively from the rocky outcropping and long after the Coleman had ceased to give any light, they had no warning idea of the enormous and fast moving wave approaching.

    It was a near glass sea and in their youthful inexperience and undisputed (yet) indestructibility, they were boiled off the ledge like a driven Taylor Made.

    Recalling how quickly the tranquillity was superseded by chaos and the closest he’s been yet to the final curtain, he cancels the order and determines to renew the TD once more. 

    • Such is the dementia flowing from wellspring of hypocrisy known internationally as the Boomer Generation. Now the Boomer Geriatrics they shuffle listlessly, swayed to and fro like the plates of shuffle board up on deck, from the delirium of nostalgia, to the crushing and defeating realisation that Chronos passes his eye over them…

      • MIg, Us boomers have seen it all before. I made my initial pile by loaning money to solicitors trust funds at 18% for 3 years plus.
        Many had blown huge sums on property and couldn’t tell the clients.
        They were as glad to pay me out as I was to be paid. It will happen again. I still hesitate over the “confirm tab” WW


    @Mig- Watching the Oz Open and bombarded by ads for Euro River Cruise. When did you last take time to ‘sharpen the saw’? Book now for free airfare. “It’s got to be-e-e-e-e-e, purrrrr-fect” PS Think of the dialogue potential.

    @ 88888-Thought the original was great-LOL funny that one-good call!

    @ Wiley- “When I was a boy of fourteen, my father was so ignorant I could hardly stand to have the old man around. But when I got to be twenty-one, I was astonished by how much he’d learned in seven years.” Sam Clemens