Don’t be tempted by bank stocks

Its time. Time to buy banks. Resistance is futile! Your portfolio shall be one with Megabank!

As the bullish research reports come through from the local institutions, as seen here from Credit Suisse and here from Deutsche Bank yesterday, and prices fall to 2014 lows, the bargain hunters are back!


The banking sector has had a huge retracement from the highs experienced in 2015, as the RBA effectively communicated the end of its easing cycle that saw bank stocks nearly double in price. With a 20% discount to price,  grossed up yields approaching 7% why wouldn’t you?

Well we have to look overseas – again – for sanity to prevail. Barrons has the bear call via CLSA:

While miners like BHP Billiton ( BHP.AU ) and Rio Tinto ( RIO.AU ) have been under pressure since peaking in early 2011, the selloff in the major bank stocks reflects a major reversal of fortune for the lenders that had been eagerly bought by investors hungry for their juicy yields.

The foursome of ANZ ( ANZ.AU ), Commonwealth Bank of Australia ( CBA.AU ), National Australia Bank ( NAB.AU ) and Westpac ( WBC.AU ), which together make up 30% of the Australian stock market, are down almost 9% on average so far in 2016. But while the recent declines may have brought valuations to around historic lows of roughly 11 times forward 12-month earnings, now is probably not the time to go bargain hunting as there could more pain to come. CLSA’s head of Australian banks research, Brian Johnson, sees a number of headwinds that could buffet the big four lenders.

Aussie bank stocks are no longer as attractive as they once were to U.S. dollar-denominated funds, which have been notable buyers in recent years. While the juicy 5%-plus dividend yields offered by the big four banks, combined with a strong Australian dollar, had made the stocks a no-brainer for yield chasers faced with zero interest rates in the U.S., conditions have now changed.

The U.S. Federal Reserve is raising interest rates, while China’s slowing economy could further pressure the Aussie dollar. Additional weakening of the Aussie, which AMP Capital economist Shane Oliver expects to slide to as low as $0.60 by the end of the year from current levels around $0.70, could quicken the pace at which foreign investors sell bank stocks to avoid further foreign exchange losses. At the same time, U.S. banks, which enjoy lower valuations than Aussie banks and offer reasonable dividend yields, are also looking in better shape with lower risks, says CLSA’s Johnson.

Its all about dividends which have reached their peak in sustainability, as bad and doubtful debt charges (and accounting chicanery including non-recurring write offs) cannot go any lower, while razor thin capital buffers still need to be widened, with another $30 billion plus probably still on the cards to be raised.

This will suck the obscene mid-teens ROE down to the low teens or even high single digit region, reducing valuations substantially.

So yes, buy away from the inevitable bear market rally and 20% some price appreciation in a few months or even weeks. But be wary of the Borg that is Megabank and her institutional houses flouting the goods. Bank stocks are stinkers.



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  1. So, was starting up a fund so that I, and others, can give you my money to play with one of your new years resolutions Mr. Becker? I do hope so.

    • Keep asking Mr Lorax

      i wont tweet my specific trading calls, the main reason being my main or longer term trading system has a win rate of less than 50%…so I will be wrong more than half the time. I dont give a shit, I only care about making money when i win but people remember the “bad” calls.

      On my other short term system which has a high win rate, I would be tweeting nearly all day long….

      • scottb1978MEMBER

        The people who are most interested probably also understand that trading is a numbers game where you might lose more than 50% of the trades but your risk reward ratio is 3 to 1 or more so you profit. As you so eloquently put, who gives a shi*t what the other people think.

      • exactly scott! It took me 2 full years of trading before my wife was convinced that when I came upstairs and said “oops, got that wrong, lost a couple grand” was not “oh my god, we’re destitute”. She’s smarter than me too (which hurts understanding and doing trading actually), but it took meticulous going over the numbers and for her to understand risk/reward/losing streak probabilities/randomness of trading events etc etc each month – and we still do it as a team, she keeps me in check.
        I just can’t see myself doing that with anyone elses money, holding their hand even though Ive explained all of the above – Im very antisocial as a rule, I dont want to be bombarded with “whats the market doing? are you short? when are you going to take profit? why did you take the last 3 trades which were all losers”.
        Also the whole regulation and compliance is a PITA – but hey, dangle a big enough carrot and who knows?
        If I wanted to make the big bucks and have that stress, Id be living in Sydney or Singapore or Switzerland. I prefer the Sunshine Coast!

      • BoomToBustMEMBER

        I’d happily drop some money into the CB investment fund as part of my broad strategy. I am happy with the win some loose some strategy, so long as the win is greater than the losses. Also I havnt a snowflakes hell chance of matching you CB in this game, so why not use your expertise. I wont be needing my money till house prices bottom out, so 2 – 3 years at this rate.

  2. This from Dr Shane Oliver:

    “The key for investors is to recognise that shares offer a higher return potential after sharp falls, selling after big declines just locks in a loss and that dividend income from a well-diversified portfolio is little affected by share market volatility.”

    Because everything is always going to be alright…

    • That’s the logic they always use. You can’t sell after prices drop because you should never take a loss and just holding on forever always solves the problem of the loss. But you can never sell to take a profit either.

      • Bulls never tell you to sell when the market is at multi-month highs.
        Bears never tell you to buy when the market is at multi-month lows.
        Tis the nature of things.

    • “The key for investors is to recognise that shares offer a higher return potential after sharp falls…”

      One wonders if Dr Oliver ever says “The key for investors is to recognise that property offers a lower return potential after sharp rises…”

  3. Aussie1929MEMBER

    They’re all showing similar downward patterns like in late 2007 to early 2009. I told a colleague to sell her Westpac shares last year around early march and she thought I was crazy.

  4. For over 6 years I personally ran a risk division for one of the Majors, covering customers which include the banking segment (e.g. the Big 4’s loans and derivatives to other banks), so hopefully have some insight to the current health of the Australian banking system.

    IMHO when this cycle has ended, at least one of the major’s will have been nationalised, under heavy government control or bought at fire sale by a foreign institution. Institutional investors really have no idea about the internal machinations and true risk of the banks they cover, nor does the regulator. There is a very wide gap between the best of the big 4 to the worst, but not one of them is worth of their AA rating through a true cycle. Its pretty clear which is the weakest of the bunch.

    • Which one Jim? Personally I would have picked one with the biggest Asia exposure – followed by the one with the biggest percentage of retail loans!

      • WBC has the biggest percentage of retail loans as a percentage of its total loan book… historically I would have put CBA above WBC in risk, but talking to a person within the operational apparatus, apparently they put the kibosh on Bank West and really cleaned things up after the GFC WA. Shame. But i also heard that no such thing has occurred via St George operations, which has a disproportionate exposure in NSW… licking lips…

        The whole problem I have with all this, is that targets are set – but when to go??? Unlike companies such as BHP, Rio, other others I won’t mention, they have structural weaknesses. Easy prey. For the banks to work (and they will, very well) you are depending upon the market, then waiting 12 months later for the bad loans to roll in. Its a lot harder. And I am genuinely sh1t at trading…

      • I can tell you, that you guys are sharper on analysis than about 99.9% of the credit and equity analysts out there and have hit the nail on the head. I would put WBC as riskier than CBA, because as you point out, BankWest was largely cleaned up and de-risked a while back, and those rubbish loans written by the old BoS crew have mainly matured or been repaid / restructured by now. Arguably CBA and NAB have the best risk cultures of the 4. WBC has some very large construction loans that will look very dicey once the oversupply problems really hit Syd/Melb. ANZ…. well…lets just say that Elliot had better start making some major restructures day 1 to turn the ship around before it hits the yellow and red iceberg. I don’t fancy his chances with Gonski there though.

      • I moved my savings out of WBC and into RaboDirect, I don’t think any of the Big 4 are safe.

        But I would probably say NAB is the best..

      • On the assumption the market is smarter than all of us, i would say NAB could be the worst. It’s the only major than traded to a new low this week. V bearish. ANZ close behind, followed by WBC, then CBA. Depending on how long it takes for China’s credit crises to roll onto our shores (or backwash to hit from the commodities rout) i’d guess all will break down to new lows soon enough.

      • Today's Empire Tomorrow's Ashes

        Thanks Jim for sharing this.

        If you had a mortgage with one of the risky Big 4, would you be looking to derisk the change of out of cycle variable rate rises by moving to a less risky proposition (presumably NAB, CBA or even a mutual/credit union, AMP, ING)?

        I mean, if things get bad for WBC, variable mortgages are an easy target.

        Or do you see it being so bad, that the worst (ANZ or WBC by the sounds of it), ends up on the taxpayer balance sheet a la X Mac/Mae in the USA and goodness knows what happens to a mortgagee then.

      • Doesn’t WBC reinsure their own mortgages? (if that even makes sense, what’s the point?) I’m pretty sure I read a few years ago they don’t use a third party…

      • There were some stats a year or so ago which showed the number of repossessions at each of the major banks. NAB came out well in front. Many interpreted the stats as NAB having the higher risk loans. I interpreted the stats as NAB being more prudent and getting rid of loans in arrears before they become problematic.

        Anecdote from some friends who found themselves in arrears at CBA. CBA quite willing for customers to continue to be in arrears and draw against equity whilst it exists. A good strategy to maximise profits in a rising market, but quite dangerous in a falling market.

  5. It’s only going to take one forced seller, with few buyers due to bank restrictions, to pretty quickly change the property landscape,…..and hence bank provisioning..
    The amount of my mates who have turned into serious property developers using mezanine debt etc is unbelievable. All of which are maxed to the hill as they have continued to load the dice based on past wins. Now they are sitting on units in over developed areas, trying to tell investors they can rent these 2 bedders once completed, for $900 per week.
    ……If liquidity dries up and asset prices stall,…. stand wide of the doors troops!

    • BoomToBustMEMBER

      Thats our plan !! Some profit on the way up, we missed the gravy train, so we will profit on the way down. Our suffering and misery for the massive rise in the house prices will become their suffering and misery on the way down.

      • scottb1978MEMBER

        Wouldn’t you rather wait and buy after it bottoms out. For sure I’m short selling on the way down but not buying until its fully cratered.