Are Banks A Good Buy Or A Good-Bye?

FYI | Aug 21 2019

By Peter Switzer, Switzer Super Report

Are banks a good buy or a good-bye?

Two significant actions last week have made me more confident that our big banks remain a pretty sensible play for anyone who'd love term deposits to be 5% or 6%, which, of course, is a forlorn waste of time to even contemplate.

These two notable developments were the ASIC belting by the Federal Court over its fine imposed on Westpac for failing the responsible lending test; and then Donald Trump blinked as the bond markets inverted yield curve gave rise to recession headlines and a tumbling stock market. I know it wasn't an easily remembered blink but he did show he doesn't want a stock market rout, which would be a forerunner to a recession in 2020 — his election year.

So why are these two events good for the outlook for bank share prices?

Well, the first is pretty obvious, as banks will be able to lend more freely, which will not only be good for bank profits, it will also help the economy rebound. And this is good for banks, as they'd be bigger lenders in a faster growing economy.

Will we be a faster growing economy? In my Switzer Daily piece today, I pointed to reasons to believe our economy should be on the comeback trail. Here's my list:

  • Two interest rate cuts and possibly two more.
  • Tax cuts are now being embedded into many Aussies tax refunds. About 70% of taxpayers will get up to $1,080.
  • The dollar is falling. A year ago, it was 73 US cents. It's now 67.7 US cents. And someone (other than me) should be telling Aussies that a low dollar is good for economic growth and jobs.
  • Last week, we saw employment rise for the 33rd time in 34 months, up by 41,100 jobs in July. Full-time jobs rose by 34,500, with part-time jobs up by 6,700. Economists had tipped an increase in total jobs of around 14,000!
  • On Friday, we learnt that the annual number of permanent and long-term overseas arrivals rose to a fresh record-high of 850,770, up by 5.2% over the year to June. That was a record migration number! These have to be new customers for small business.
  • Banks are now lending more freely and this should continue, following the court decision to stop ASIC's fine for Westpac over a failure to lend responsibly.
  • House prices have stopped falling and auction clearance rates are on the way up.
  • And there's better news on wages. In seasonally-adjusted terms, average weekly ordinary time earnings (AWOTE) rose by 3.1% in the year to May – the fastest growth in six years. The average annual wage is $85,010.

Recently we've seen a rebound in consumer and business confidence and this could well be early signs that the pre-election negativity effects are disappearing. Recall we lived through the big fall in the stock market in the second-half of 2018, the Royal Commission fallout, the biggish house price drop, restricted bank lending and the threats of Bill Shorten's proposed policies before the election. These negatives are no longer hurting confidence and the economy.

Last week, banks copped it but it coincided with talk about bond curve inversions, recession predictions and a slumping stock market. CBA dropped 5.4% to $75.12 (although this included going ex a dividend of $2.31), ANZ gave up 2.3% to $26.39, NAB lost 2.2% to $27.03 and Westpac fell 1.4% to $27.82.

However, these will be the stocks that will spike if a trade deal comes and recession fears abate. Meanwhile, the fact that Justice Nye Perram of the Federal Court has given the thumbs down to ASIC's interpretation of what responsible lending means, should help banks lend more going into the future.

So that's the gamble but the riskier event is ‘if and when' Donald will do a trade deal.

Last week, it was reported that he surveyed business leaders and big bank CEOs on their outlook for the US consumer and the global economy, as stocks went down the gurgler. He showed that the stock market will make him take actions to ensure that this trade war doesn't threaten the US and world economies with an irreversible pathway to recession.

He doesn't need this with an election due in November next year. The President's calls to business bosses and his quickness to tell the market that he would be calling President Xi Jinping ahead of a September trade talk sessions was a blink, that's making others (and me) assume that he won't drag out the trade war.

If I'm right, our big four banks look like a good play.

CBA's current price is around $76.14 and the target price from FNArena's experts is $72.43 or a 4.9% downside. Westpac has 2% upside call, NAB a 1.5% downside prediction and ANZ a 4.6% upside tip.

Let's look at the dividend yield of CBA, NAB and ANZ. CBA's yield is 5.6% and goes up to 8.0% if we build in franking. To ANZ and the dividend return is 5.9%, which would be nearly 8.4% with franking. NAB's returning a similar yield.

The market agrees with me today with a reversal of the negativity that the stock market sell off delivered upon our banks last week but I'm less short term when I invest than the traders who have a big influence on our bank stocks.

Sure ASIC, other regulators and fin-tech rivals will try to snipe at the banks and inhibit their profit-making potential but like it or not, they are professional operations with a good stock market track record. All they need is a better economy and a Federal Government that finds the right balance between consumer protection and profitable business practices, as well as a stock market that isn't enduring the black clouds of Donald Trump's trade wars, an inverted bond yield curve and falling interest rates.

I believe the local economy will deliver but we do need Donald to get this trade war drama done and dusted. If that happens, banking on the banks might not just give a nice yield but there'll be capital gain as well. This chart of the CBA will remind you what potential lies out there.

In case you've forgotten, CBA was once a $95.80 stock!

Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.

Content included in this article is not by association the view of FNArena (see our disclaimer).

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual's objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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