There’s been concern in some quarters about the threat to Australian banks from a downturn in the housing market.
But not all analysts are predicting doom and gloom – in fact, Deutsche Bank has moved its position to overweight banks (from neutral). In a research note to clients, analysts Tim Baker and Joseph Kim outlined six reasons to buy the banks.
Among their reasons, Baker and Kim note that the banks stand to benefit from the following:
– Valuations are still relatively attractive, with forward 12 month price-to-earnings ratios trading at a 5% discount to industrial stocks;
– Earnings pressure is easing, with finance commitments improving from 2016 lows which points to increased credit growth; and
– Bad debts are likely to stay subdued, as bad debts usually move inversely to credit growth.
The analysts also note that “US bond yields are likely to rise, given solid global growth and the rise in Fed funds expectations”.
The rising tide of interest rates should assist financial stocks globally and Aussie banks are no exception, they said.
The duo said that the banks’ popularity among analysts has dropped to a four-year low, with the majority of recommendations shifting to hold or sell.
“Historically, this has been positive for share price performance,” they said.
The following chart shows the inverse relationship between banks’ share price returns (Y axis) and their popularity among analysts.
The Deutsche team expects lighter restrictions to be forthcoming in the regulatory environment.
“Increasingly, it looks like Basel-4 will be watered down – both through less onerous credit risk rules and by pushing back the implementation timeline. And APRA’s easing of draft rules for net stable funding ratios late last year haseased fears around a deposit war,” they said
The Deutsche Bank analysts have highlighted Westpac as standout among the big four banks, noting its’ robust capital position and stronger growth prospects. The bank has dropped NAB from its portfolio and added CBA. “CBA is currently the most unpopular bank, and the most unpopular bank has historically outperformed.”
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