Australia’s big four banks have dipped into a “bear market” as investors fret over multiple challenges including falling house prices, a regulatory backlash sparked by the royal commission, and higher funding costs.
With the major banks lagging the broader sharemarket for several years, each of the lenders touched new lows on Wednesday, prompting some experts to suggest now may be an opportune time to buy.
The latest slump means the major banks have all fallen at least 20 per cent from highs reached before last May’s budget shocked the industry with a bank tax, which triggered a slump that has deepened in the 13 months since then.
Commonwealth Bank shares are 22 per cent below their peak of late April 2017, Westpac and National Australia Bank shares have lost 23 per cent, and ANZ’s stock has fallen 20 per cent. The major banks’ total returns underperformed the S&P/ASX 200 by 1 per cent in 2015, 5 per cent in 2016 and 10 per cent in 2017, according to UBS strategist David Cassidy.
Fund managers and analysts blame the poor performance of the banks on the combined impact of slowing credit growth caused by a weaker housing market, and unprecedented regulatory scrutiny including the royal commission.
The potential upside for investors, however, is that experts believe bank dividends are safe, and at current prices the banks’ yields could prove attractive for investors in search of income.
David Walker, senior analyst at Clime Asset Management, said a key reason for the slump was the realisation banks were at “the end of 25 years of strong home loan growth”, and the credit slowdown had further to run.
“That’s a real problem, because mortgages have grown to be two-thirds of the loan book, depending on the bank. As that happens, they will compete more intensely for the remaining share.”
Housing credit growth has slowed from 6.5 per cent to 6 per cent in the past year and banks expect it will dip to about 4 or 5 per cent. Mr Walker said the banks were becoming more like utility stocks – paying healthy dividends, but with little in the way of growth prospects.
“They need to be priced for a slower growth era, and the market is seeing that,” Mr Walker said.
White Funds Management managing director Angus Gluskie said that as well as the weaker housing market, investors were nervous about the impact of the royal commission, and risk of profits being hit by rising bad debts.
“One of these items would have only weakened the sector a limited amount. But because we’ve had one issue coming one after the other there’s a bit of a reinforcement effect,” Mr Gluskie said.
A further challenge is that international funding costs have been creeping up in recent months – a trend likely to cost banks hundreds of millions if they are not passed on to customers.
CLSA analyst Brian Johnson said the royal commission would make it much harder for major banks to raise their interest rates independently of the Reserve Bank – which the market expects will not move rates anytime soon.
“I would have thought a bank CEO would be a brave person if they were going to lift mortgage rates,” Mr Johnson said.
I would have thought a bank CEO would be a brave person if they were going to lift mortgage rates.
Even so, Mr Johnson said he thought after recent share price falls the banks offered “relative value” compared with banks overseas.
Hugh Dive, chief investment officer at Atlas Funds Management, also thought the market had become too pessimistic towards banks.
He pointed out the flipside of weak credit growth was that banks had less need to set aside capital to support lending, which should underpin dividends.
“In a situation where credit is not really growing very fast, and they sold a lot of businesses, that’s going to return a lot of capital,” Mr Dive said.
Overseas bank shares are also suffering, with more than half the 30 lenders classified as “systemically important financial institutions” by the Financial Stability Board also down at least 20 per cent from their most recent peaks, according to Bloomberg.
Clancy Yeates writes on business specialising in financial services. Clancy is based in our Sydney newsroom.
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