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Investors and analysts turn bearish on banks

Australia’s banks have been on a tear in recent months, catching a tailwind from the so-called “Trump” trade that enabled one major Australian lender to outperform the soaring US banks which have helped drive indices like the Dow and S&P500 to record highs.
Nanjing Night Net

But this month, a period of extraordinary investor returns appears to have dramatically come to an end as the entire Australian banking sector was heavily sold down – and analysts and fund managers are less than hopeful a recovery is in sight.

Between November 8, the day of the US election, and May 1, NAB soared 29.8 per cent. CBA rose 21.4 per cent, ANZ added 21.9 per cent, while Westpac rose a more modest 16.7 per cent.

None of the banks most directly affected by the US administration matched NAB’s spectacular performance up to the start of May.

JPMorgan gained 24.3 per cent over the period, Goldman Sachs rose 23.6 per cent, while Morgan Stanley added 28.3 per cent. Another similar bank, Wells Fargo, was hit with a lending scandal and so rose only 19.6 per cent over the period.

This is despite the US banks being far more exposed to the reflation trade, as well as US President Donald Trump’s unwinding of the Dodd-Frank regulations in February. The partial repeal pushed Goldman Sachs to a record high, but it has declined since. Local investors didn’t expect the changes to significantly feed through to Australian banks.

Since the start of May, Australia’s big four banks have lost ground, shedding a combined $50 billion in market capitalisation and between 7.2 per cent and 13.7 per cent off their share prices as they went ex-dividend, were hit by a banking levy in the budget, new macroprudential regulations and as ANZ’s earnings disappointed.

The rapid pace of the decline, JPMorgan’s equities team wrote, is surprising, but even after it the banks are not necessarily at fair value.

The big four don’t tend to do well in May, losing on average since 2000 1.6 per cent over the month. But that hasn’t stopped them surging the rest of the year before.

Two and a half decades without a recession and a decline in local interest rates “created a fertile backdrop for Australian banks to outperform both global banks and the broader Australian market”, wrote UBS equity strategist David Cassidy this month.

Since 1997, the MSCI World Bank Index, from a base of 100, hovers just above 200 index points. Australia’s banks are almost touching 1400 index points.

Peak performance in the Australian banks, Mr Cassidy wrote, was actually around the April bank reporting season in 2015. But since then, the bank bull market has proved “surprisingly stubborn”.

“Australian banks seem to have hitched a ride on the global banking rally which began in mid-2016 as bond yields started to inflect upwards. This is despite no direct benefit on Australian banks from a steeping yield curve.”

But looking ahead, Mr Cassidy is one of many analysts who now expect bank performance to decline. “Banks appear a ‘market performer’ at best from here … Headwinds and clouds seem to be accumulating”.

JP Morgan’s equity sales team wrote that “caution around house prices and impending APRA capital requirement announcements could see the sector needing to look optically cheap to increase interest on the long side”.

Many fund managers are also cautious on the sector.

The big four banks, which together comprise over a quarter of market capitalisation of the S&P/ASX200 index, are favourites with income-investors by virtue of their high dividends. But the bank levy, two of the banks said on Monday, would hit dividends – a view also expressed by many fund managers.

In his monthly note, Contango Asset Management chief investment officer George Boubouras said investors could still rely on high payouts from the banks, which in absolute terms would continue to be attractive. But “investors should simply expect that initially the growth of dividends will slow at first before we eventually see a dividend cut in the years ahead”, he wrote.

The big four have recovered somewhat in recent days, but Katana Asset Management portfolio manager Romano Sala Tenna said the “opportunistic buying” was unlikely to signal a recovery. “I’d suggest the balance of probabilities is still weighted to the downside,” he said.

This story Administrator ready to work first appeared on Nanjing Night Net.

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