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Are The Banks A Buy, Or Due For A Dumping?

FYI | Aug 07 2018

By Peter Switzer, Switzer Super Report

Are the banks a buy or due for a dumping?

The question I get asked all the time is: “Should I stick with the banks?” And so today I’ll give you my best guess ahead of the CBA reporting on Wednesday. Of course, I’m not expecting the country’s biggest bank to report brilliantly, but it could be unwise to use short-term analysis to assess the future share price movements of our big banks.

In case you’ve missed it, the smart guys, like Magellan’s Hamish Douglas, have argued that the old Oz bank model has a “limited half-life.” He thinks the challenges of the hi-tech, digital world will mean the basis upon which banks have built their profits and share prices will gradually change and work against them.

And all of us have to be worried that the backwash from the Royal Commission, which has led to banks either dropping or changing their links to their financial planning and insurance operations, must eventually hurt profits and, in turn, share prices.

Right now, FNArena’s survey of analysts has ANZ targeted at $29.23, while its price on Monday morning was $28.64. That’s a 2.1% upside. CBA has a 1.1% upside, NAB 11.4%, with a target of $30.78, and Westpac has an 8.4% upside, if the smarties are right.

The contrarian view

But maybe these guys aren’t seeing the banks like my old mate from Coolabah Capital Investments and the AFR, Christopher Joye, is right now. Chris thinks the banks are well-positioned to benefit from a world of hi-tech, despite fin-techs, peer-to-peer lending and big FANG-like companies that could get into banking!

Chris and others have shown that while the Royal Commission and the Murray Financial System Inquiry have made it harder for Asian and property investors to borrow, credit growth is still pretty strong. And that’s despite APRA making life harder for those who were once allowed to borrow interest-only money from the banks.

This is the way Chris, who can be quite acerbic at times, deals with the threats to the finance sector and, specifically, the future of the banks: “Embarrassingly for the hedgies, UBS and other perma-bears [on banks], Aussie housing credit growth remains stubbornly positive (as we predicted), expanding over both May and June, and by 5.6 per cent over last 12 months.”

Like yours truly, he sees the current and future house price falls as measured and not likely to end in tears, which is another plus for the banks’ balance sheets and, ultimately, their share prices.

Back to the techno-threat and this is where Chris makes a great point around other industries and the relative concentration of power. Think about this question he poses: “How many search engines, social networks, photo-sharing apps or online shopping sites do you use?”

In most cases, the answer is just one: Google, Facebook, Instagram and Amazon. When I read this, it reminded me of what Roger Montgomery said on my Money Talks program last Monday, when he explained why he was now a lover of Telstra, after being a long-time hater!

He made the point, if history can be trusted in the telco space, that the biggest player comes out on top. And that may well be the future for our banks, no matter how the finance world changes. I’ve always argued that if a new, smart hi-tech rival came up with some game-changing online financial product, then what would stop our banks buying it?

Amazon, Facebook, Microsoft and Google have all been buyers of potential threats so why wouldn’t our banks be watchful for challengers who could become opportunities?

A matter of trust

Banks have another big asset that I think will help them win through over time — they are trusted with our money, even if we know they behave badly at times. Rivals to banks won’t have this trust factor so this will only be the domain of the thrill-seekers. They will need a trusted bank brand wrapped around them to be a serious player.

And don’t forget that our big four banks number in the biggest 10 banks in the world, which means they have a lot of leverage to battle against their demise and, more importantly, it tells me that they are worth risking investing in.

But wait there’s more about the technology threat to our banks, which will really end up being an opportunity. Here’s Chris again: “The advent of a real-time payments system, online application processing, electronic conveyancing and artificial intelligence will allow banks to eliminate most of their workforce and become almost entirely automated, much as factories have done,” he predicts. “Branches are going to disappear. And the 60 per cent of the major banks’ operating costs currently accounted for by people will drop like a stone. This will bequeath huge opportunities to improve returns on equity notwithstanding the unprecedented deleveraging they have had to endure since 2014.”

Government regulators and the ACCC won’t allow a monopoly ‘Financial Amazon’ but they will accept the kind of oligopoly of four banks, with the biggest share of the finance sector along with regional minnows, which will probably merge to get the critical mass to compete on costs and services.

This was behind my thinking that had me telling you that CBA looked like a good buy in mid-June, when its share price went to $67.45. It now looks pricey in the short-term but for a long-term investor it (and the other big banks) looks like a reasonable bet for the reasons outlined above.

They might not shoot the lights out in the short- to medium-term but they remain a sensible play for anyone’s core investment holding. And yes, you can bank on that! 

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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