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:
- Australian banks net open short positions have recently been rising.
- Performance remains vulnerable to the wild swings in market expectation between China “soft landing” and China “hard landing”.
- The compulsory 9.25% of Aus salaries flowing into superannuation sees ~A$1bn flowing into domestic equities every week.
- 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.
- ANZ share register is more dominated by international investors.
- WBC’s positive rerating had coincided with expansion in dividend payout.
- CBA has the tightest share register of any of the banks given its skew to domestic retail investors leaves institutions structurally underweight.
- Until recently, NAB’s underperformance reflected absence of international buying.
- International investors are surprisingly high holders of BEN/BOQ but BOQ net open short positions have increased sharply in recent weeks.
- 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.