CLSA: Foreign funds selling OZ banks

From pretty much the best in the business, Brian Johnson at CLSA:

The four-year rally in Australian banking stocks had been fuelled by near-relentless buying from structurally underweight international institutions chasing dividends as funds have flowed into international income funds.  Recently however, China contagion risk, weaker equity markets, rising bank funding costs, incremental data points suggesting Australian banks are discounting front book housing lending and continuing indications of looming capital shortfalls have seen the selloff of Australian banks resume over January 2016, likely under the weight of continuing international investor selling and increased short-selling.  While 4QCY15 incremental domestic institutional buying triggered the outperformance of CBA and WBC,  international investors continued to sell Australian banks and net short selling increased. The long running Australian bank AUD dividend yield carry trade which triggered incremental buying by structurally underweight foreign investors is reversing. International institutions, which are underweight but far less so after relentlessly buying over the last three years sold ANZ (-0.5%), CBA (-0.2%), NAB (-0.9%) but were modest net buyers of WBC (+0.1%). International investors still own far more ANZ (25.9% vs ~21% for others) than the other banks.  Brian continues to recommend underweighting the sector given our expectation of significant capital raisings over CY2016 to address our estimated pro forma A$32bn CET1 capital shortfall. However, for those investors who don’t believe capital raisings/dividend cuts are coming, the Australian banks possibly offer value.

Ten implications of Australian bank share registers:

  1. Australian banks net open short positions have recently been rising.
  2. Performance remains vulnerable to the wild swings in market expectation between China “soft landing” and China “hard landing”.
  3. The compulsory 9.25% of Aus salaries flowing into superannuation sees ~A$1bn flowing into domestic equities every week.
  4. International investor interest in Aus banks is currency sensitive given the AUD status as a “risk asset” with the Aus banks over-represented in the critical USD denominated Asia Pacific ex-Japan MSCI index.
  5. ANZ share register is more dominated by international investors.
  6. WBC’s positive rerating had coincided with expansion in dividend payout.
  7. CBA has the tightest share register of any of the banks given its skew to domestic retail investors leaves institutions structurally underweight.
  8. Until recently, NAB’s underperformance reflected absence of international buying.
  9. International investors are surprisingly high holders of BEN/BOQ but BOQ net open short positions have increased sharply in recent weeks.
  10. Prima facie attractive FY16CL dividend yields of ~6.5% and PEs of ~11.4x are vulnerable to rising capital intensity.

The big one for me is the domestic economy which is nowhere near as strong anyone is admitting and will tilt more and more towards recession as the year goes on. Bad loans are going rise further than anyone is forecasting and, given the huge payout ratios, dividends get pounded.

David Llewellyn-Smith
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Comments

  1. Defaults on loans with decent employment? A penny for your thoughts on why more defaults. Interest rates low as……….

    • The official measure of employment starts with people working one hour per week, which any sensible person would say is utter nonsense….or at least I do, anyway. So I’d say that the idea of us having “decent” employment is questionable. The real unemployment rate is a lot higher than the bogus government figures suggest, and it’s going to get a lot worse (mining decline, car industry shutdown etc) before it gets better.

    • life is not linear -> and if you have a 6 figure mortgage there is a natural attrition rate which has not been modelled

      what are assumptions around personal disaster -> not just loss of job, yet a car accident, family illness, other stupidity or divorce? A divorced couple defaults pretty much straight away.. and financial stress and other society factors contribute to this.

      • Why would you assume those events haven’t been modelled, especially when the major banks such as CBA also sell insurance products that cater for a significant subset of those events (not divorce per se, but car accident, family illness under Temporary and Permanent Disablement and Life Insurance lines)?

        Page 23 and onwards below covers the reasons for default:

        mams.rmit.edu.au/ism65sdawn8j.pdf

        Interest rates being ‘too high’ was the cause of around 30% of delinquencies in this study, but it is easy to see other causes which can come into play – change in work circumstances, including keeping your job on less hours/pay seems the dominant one.

  2. The only way I can see the banks maintaining a good share price for investors is by jacking up interest rates.

  3. “Brian continues to recommend underweighting the sector given our expectation of significant capital raisings over CY2016 to address our estimated pro forma A$32bn CET1 capital shortfall”

    May I ask, would this 32billion come off the GDP or just more CAD liability or both?

  4. Diogenes the CynicMEMBER

    BOQ is probably exposed to QLD property. in QLD there is a tourism effect (positive) and a mining effect (negative) so take your pick. On balance probably negative.

  5. Aussie Banks have been falling since April 2015 and will continue down unless the US does more QE.