{"id":61743,"date":"2014-10-11T06:49:43","date_gmt":"2014-10-11T10:49:43","guid":{"rendered":"http:\/\/countingpips.com\/?p=61743"},"modified":"2014-10-11T06:49:43","modified_gmt":"2014-10-11T10:49:43","slug":"still-banking-on-the-big-four","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2014\/10\/still-banking-on-the-big-four\/","title":{"rendered":"Still Banking on the Big Four?"},"content":{"rendered":"
October 11, 2014<\/div>
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By MoneyMorning.com.au<\/u><\/a><\/p>\n

Australia’s big four banks<\/strong> have been a winner for their shareholders over the past couple of years. <\/p>\n

Their share prices jumped more than 20% each year, on average, for the past two years. Plus, they’re yielding about 6% in dividends too. <\/p>\n

However, are these good times over? <\/p>\n

In just the past six weeks, CBA has lost 7.4%, NAB is down 7.6%, WBC 6.7%, and ANZ 5.7%. They’re each down more than 10% from their highs for the year. <\/p>\n

On one hand, you could argue that at this price they’re a great buy. But not me. There are reasons to expect further pain in the sector, with the past six weeks being just the tip of the iceberg. Here’s why. <\/p>

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Offshore investors are pulling funds from the local market. They don’t want to be stuck with investments in Aussie dollars as the currency sinks. <\/p>\n

The Aussie has now fallen more than 6% against the greenback in six weeks, and there’s talk it could drop below US$0.80. <\/p>\n

If you’re a foreign investor, any further falls in the Aussie dollar<\/a> could easily wipe out the banks’ 5-6% dividend yields. <\/p>\n

It’s a risk many aren’t willing to take. Plus, they don’t need to. Overseas investments are beginning to look more appealing, with signs pointing to rising interest rates in the US. <\/p>\n

Yet the banks’ weakness has not just been due to currency movements. There are a few other issues at play.<\/p>\n

Typically, banks perform worse than the market when interest rates<\/a> are rising — see chart below.<\/p>\n

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\nClick to enlarge<\/a><\/em><\/div>\n<\/p>\n

Although the RBA kept rates on hold this month, the market believes that the cash rate will rise. That view is reflected in rising long-bond rates. <\/p>\n

This is important because the major banks are sensitive to changes in the long term bond rate. For every 0.01% rise in the 10-year bond rate, the banks’ valuations fall by around 1.5%. <\/p>\n

In the first three weeks of September bank share prices dropped sharply as the 10-year bond yield rose by 0.04%. Admittedly, the 10-year bond yield has dropped again going into October. <\/p>\n

But taking a longer term view, bond yields will continue to rise.<\/p>\n

The US Fed’s bond buying program ends this month and, as above, interest rates in the US are expected to be rise from mid-2015. And a further fall in the Aussie dollar will allow the RBA to raise rates to dampen the property market. <\/p>\n

The RBA Board used this week’s meeting as an opportunity to reiterate their concerns around the overheated property market and lending to property investors:<\/em> <\/p>\n

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‘Credit growth is moderate overall, but with a further pick-up in recent months in lending to investors in housing assets. Dwelling prices have continued to rise over recent months.<\/em>’<\/p>\n<\/blockquote>\n

Not wanting to raise interest rates, the RBA have flagged regulations to tighten lending, especially to investors. <\/p>\n

It will be interesting to see how this plays out, considering new regulations that have the potential to make a real dent in bank profits. I’m talking specifically about the impact of more restrictive bank capital requirements.<\/p>\n

Westpac is believed to be the most at risk to any action to slow investor lending and house price growth. Loans to investors make up 44% of the bank’s mortgage book. And the loans are concentrated in NSW which is the most at risk property market. <\/p>\n

CBA has a large exposure to Australian property too. <\/p>\n

NAB and ANZ have the least exposure, as they focus more on business lending. <\/p>\n

Regardless, there is concern for all of them about the level of capital the banks hold as a buffer against trouble. <\/p>\n

The Australian Prudential Regulatory Authority (APRA) also says that Australian banks simply don’t hold enough. This is despite the Aussie banks holding more than most banks worldwide. <\/p>\n

Why do they need to set aside more cash then? <\/p>\n

The regulator says that Australian banks are too dependent on foreign funding, operate in a smaller economy, and — as they are deemed ‘too big to fail’ — they should have a larger capital reserves, presumably to protect the taxpayer. <\/p>\n

The consequence of having to hold higher amount of cash restricts the leverage they have available to make new loans.<\/p>\n

This would not be the first time. Following the GFC the banks were ordered to hold more capital. <\/p>\n

It pushed the banks into riskier lending to maintain profitability and returns. <\/p>\n

It has to be said that, until this point, with the strong property market, losses from these riskier loans and bad debts have been minimal. <\/p>\n

But I wonder if this can be expected to continue indefinitely. I suspect at some point the banks’ returns will take a hit and investors could very well see an end to dividend growth.<\/p>\n

This isn’t to say that dividends will be cut, but their healthy growth can’t be expected to continue at this rate forever. <\/p>\n

For the 2014 financial year, their return on equity for the major banks is expected to be a respectable 15%, but it is expected to trend lower after that. <\/p>\n

They certainly face some short to medium term challenges. <\/p>\n

I know that yields of 5–6% are tempting. But I suggest waiting for now. In a few months we should have more clarity around their prospects.<\/p>\n

Bank prices could very well have further to fall. But if they do fall further you may be able to pick them up at an attractive level — with the downside priced in — and when the time is right. <\/p>\n

At the moment there are better investment opportunities than the Aussie banks. You just need to know where to look…and what to look for. In fact, I’ve uncovered an exciting prospect<\/a> that I’ll be sharing with members of the Albert Park Investors Guild<\/em> later this month.<\/p>\n

Meagan Evans,
\n Investment Director, Albert Park Investors Guild<\/em> <\/strong><\/p>\n

Join Money Morning on Google+ <\/u><\/a><\/strong><\/p>\n

The post Still Banking on the Big Four?<\/a> appeared first on Stock Market News, Finance and Investments | Money Morning Australia<\/a>.<\/p>\n

\n<\/img><\/a> <\/img><\/a> <\/img><\/a>\n<\/div>\n


\nBy MoneyMorning.com.au<\/u><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

By MoneyMorning.com.au Australia’s big four banks have been a winner for their shareholders over the past couple of years. Their share prices jumped more than 20% each year, on average, for the past two years. Plus, they’re yielding about 6% in dividends too. However, are these good times over? In just the past six weeks, […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-61743","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/61743","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=61743"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/61743\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=61743"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=61743"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=61743"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}