Aussie Banks & Unintended Consequences

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Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | May 16 2018

In this week's Weekly Insights:

-Aussie Banks & Unintended Consequences
-Conviction Calls
-Rudi Talks

-Rudi On TV
-Rudi On Tour

-At The AIA Conference

Aussie Banks & Unintended Consequences

By Rudi Filapek-Vandyck, Editor FNArena

The easiest way to judge how companies are performing in Australia is by comparing stockbroker price targets before and after the release of financial results. It's a pretty straightforward measure and cuts out all the noise about one-offs and taxes, currencies and good/bad management and execution.

Cloud accountancy software provider Xero released its FY18 financial report on Friday. Price targets went up. Property listings platform REA Group updated on the March quarter. Price targets went up. The same happened for News Corp, though that was largely REA-inspired. After Macquarie Group released their financial report on the Friday prior, price targets jumped.

In most cases, however, price targets declined in the first two weeks of May indicating all is not going smoothly beneath the surface of rallying share prices and ongoing expectations for robust economic growth domestically. Incitec Pivot. Down. Orica. Down. Pendal Group. Down. Perpetual. Down. Village Roadshow. Significantly Down.

And the banks? Every single one has seen price targets decline this month on the back of either financial results or, in the case of CommBank ((CBA)), a quarterly trading update. Many a commentator continues to point at "cheap" valuations for the banks in Australia -all the banks, except Bendigo and Adelaide ((BEN))- and certainly that would seem to be the case given most share prices are trading below consensus price targets but maybe not as far off as one would be inclined to assume; between 6-8.5% for the Four Majors.

Yet, the observation remains banks are finding it difficult to participate in the broad based market recovery, regardless of all the value calls, the fact that cheap looking laggards have been regaining investor interest, and the fact most banks are paying out above market half-yearly dividends this month.

Clearly, something else is going on and it's not just about ongoing despicable embarrassments at the Royal Commission.

****

Sector analysts at IBISWorld, widely known for their specialised sector research reports such as on retail spending and new trends in consumer electronics, published their initial findings on Monday about what most likely lays ahead for the sector once thought of as the closest thing to God by Australian investors (but no longer).

On their assessment, Australian banks will be hamstrung with higher capital requirements, tighter regulation, and higher costs as a result of the public outrage about their misconduct in years past, and the regulatory and political scrutiny that follows as a result. While IBISWorld suggests higher costs will at the very least be partially passed on to clients, the sector analysts now forecast declining revenues for the sector over the next five years.

Another consequence of the Royal Commission should be tightened standards for lending to investors, consumers and businesses, suggest the analysts. While this opens up a drive for increased market share by smaller competitors, including non-bank lenders, this will also have consequences for credit growth in general, which closely intertwines with economic momentum and house prices in Australia.

If anyone wonders why the team of banking analysts at UBS retains a negative outlook for the banks overall, there's no need to search any further.


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