Shares in the Commonwealth Bank and its key competitors surged 15% in the last three months of 2016, enjoying the gains off the back of the post-US election global markets rally. The banks outran the broader industrial stocks by 8% in that period, making them relatively expensive.
Macquarie Group analysts have cut their bank sector rating from outperform to neutral, forecasting that earnings growth won’t keep pace and the chances of bank profits growing faster than the industrial companies was limited.
Here are five reasons why Macquarie changed their view:
1. Dividend yield attraction has narrowed: Banks’ current dividend yield of 5.6% is in-line with the long term average and below the 10-year average of 6.2%. On a relative basis to the industrials, the banks’ yield premium now has largely disappeared. At 1.1% the premium is slightly below the long-term average of 1.2%.
2. Spreads to bond yields falling: Banks’ real valuation advantage, over the last five to seven years has been relative to bond yields. However as this chart shows it has also started to narrow in recent months as the chart. On a grossed-up basis, banks still offer a 5.3% premium vs the 4.5% 10-year average.
3. Yields not much better than deposit rates: Bank’s relative yield attractiveness to special deposit rates is a good way to measure the appeal of bank stocks to retail investors. On a gross basis, banks offer 5.3% yield premium to prevailing special deposit rates, while still above the long-term average that spread has also been declining.
4. Margin pressure: Macquarie does’t see a “material benefit” from higher global interest rates in 2017 as Australian banks aren’t deposit heavy and rely on credit markets for a third of their funding needs. While lending rate increases especially on mortgages should boost net interest margins, a key measure of lending profitability by as much as 7 basis points in 2017, it is coming off margins near record low levels
5. Slowing loan growth: Macquarie expects “relatively benign credit growth” to persist. It forecasts a 3% to 5% loan growth over the next two years underpinned by slowing housing credit growth and broadly similar business credit growth trends