Banks - is it time?
There is not much going right for our major banks. Their share prices have been falling relative to the broader market, with declining market sentiment driven by the shocking revelations flowing out of the Royal Commission, and other recent announcements by Government, such as new punitive measures for both Companies and Executives found to be in breach of ethical and regulatory frameworks; increased regulatory and compliance hurdles and; calls for compensation against victims of poor financial advice and fees for no service.
Operationally, there is not much to get excited about either. There are revenue pressures stemming from slowing credit growth, and ongoing competition; modest cost growth underpinned by rising regulatory and technology costs and lastly the outlook for bad debts will be an upward trend from here, as interest rates begin to rise next year, and property prices come under pressure.
So, it is not surprising that banks have performed poorly, given its so easy to make a case to avoid them. However, in this arguably fully priced market, the recent decline in bank share prices makes them now more appealing and their dividend yields are now attractive enough to warrant more consideration.
In our opinion, the anaemic revenue growth and outlook for bad debts supports the consensus view that profit growth is going to be flattish, but we don’t expect a rapid deterioration in bad debts and given their strong capital ratios dividends should be easily maintained.
ANZ, NAB & WBC are all cum their interim dividends, as they are due to report their first half results in May. If you back these dividends out from current share prices, the dividend yield for the following year is close to 7% or on a fully franked basis close to 10% pre-tax!
So, if you are willing not to expect much in terms of share price appreciation, this circa 10% pre-tax dividend yield should be very attractive to most investors?
Interestingly, Telstra (TLS) also offers a similar yield but arguably, its profit outlook is more uncertain than the banks at the current time. However, TLS too is worth considering at these levels.
Within the 4 majors our picks in order are: WBC, NAB, then its line ball between CBA or ANZ.
We believe WBC has arguably the best risk management but NAB’s greater weighting to business credit growth may enable NAB to have slightly better profit growth in the short term.