Time to buy banks?

[brianwh]

Have had my SMSF underweight on banks since late last year. Seemed like a good decision early but obviously have missed the substantial rally since March. Analysts seem to be mixed - with a significant number still saying hold and quite a few with "sell". I am leaning towards staying out of the market for the time being - worried about further capital rasings diluting price, increasing unemployment putting further pressure on house prices and defaults and still plenty of bad news to come from business failures. But of course all this may already be factored into the current price levels.

Any thoughts?

 

[Julia]

Brian, I share your concerns and will be staying away other than the small holding I have in WBC.

 

[bluelabel]

I have exactly the same question. Buy banks?
I was thinking a CBA or an ANZ though. Not sure why, i guess i have never really liked the other 2.

Would like to here others thoughts on the Banks

:bier:

blue

 

[brianwh]

This is a summary of concensus analyst estimates from E*Trade: (Numbers indicate number of analysts).

Strong Buy: ANZ 0; CBA 0; NAB 1; WBC 1.
Moderate Buy: ANZ 3; CBA 3; NAB 2; WBC 4.
Hold: ANZ 8; CBA 8; NAB 6; WBC 10.
Moderate Sell: ANZ 1; CBA 3; NAB 3; WBC 1.
Strong Sell: ANZ 4; CBA 3; NAB 5; WBC 1.

Some fairly divergent views here to say the least!

 

[stoxclimber]

Capital raising from WBC, CBA seems to be less likely. Most likely raising is ANZ at the moment. NAB haven't taken a look at recently, from memory they were reasonably well capitalised. ANZ is pretty likely to raise at some point, most likely to fund an acquisition (e.g. RBS Asia) raise a bit extra to top up Tier 1.

In terms of the risk scale, you've probably got WBC/CBA tied for least risky, then NAB then ANZ. WBC/CBA benefit a lot from scale in this market. ANZ tends to be mistake prone relative to the others and is still trying to be a super regional bank, not much progress on this strategy to date. Of course, higher risk generally equals higher expected return...

Outside the majors, BEN is probably the safest, SUN is widely expected to be looking to divest their banking operations, BOQ is suffering from its smaller scale vs BEN.

At the moment the business model of a BEN isn't great since it's BBB+ which means 150bp fee for government guaranteed issuance, compare that to 70bp for the majors (and issuance from the regional banks has tended to price a bit higher than the majors too). All up it means the regionals are at a funding disadvantage at the moment. However, the upside risk is there in M&A activity for the regionals.

Overall however, the prospects of significant EPS growth (and thus probably share price appreciation) for the banks are pretty low. Interest margins are being pressured by deposit competition thanks to the government deposit guarantee, this is counteracted by the ability of the majors to reprice their books (i.e. move independently of the cash rate). Furthermore the RMBS market is still pretty much closed, so the opportunities for ~20% RoE growth aren't there anymore. That said the ability of the major banks to reprice their books to maintain interest margins, as well as the scale advantages of the majors vs the regionals & credit unions means that the downside risk to the share price is also somewhat limited.

The elephant in the room is of course the bad debt outlook, particularly general corporate exposure. You'd need to take a look at the projections for corporate losses and see whether you agree with the market on that.

 

[brianwh]

Thanks Stoxclimber - thoughtful reply.

Do you think the Govt will lift the ban on short selling at the end of this month? If they do, is this likely to have an effect on any of the "big four"?

PS: I'd only be interested in the big four at the moment - for reasons that you identified. I also understand that one of them, BEN I think, had significant exposure to at least one of the management investment schemes that have gone to the wall.

 

[bowman]

Here's the 4 major bank charts with the current average target price by the major brokers (as sourced from the FN Arena database).

No value plays there based on those numbers.

 

[Gundini]

I'm holding a small amount of BOQ, based on a tip from a mates best mates cousins Mothers budgie.... that recons NAB is going to make a play for BOQ...

Seems this takeover has gone cold lol

Will dump my holding next week.

I am more of the view the US companies are fudging their balance sheets, and a day of reconing will come.

Has the damage been factored in? I don't believe we actually know the damage. The smoke and mirrors cloud our judgement.

Banks may have a few runs, but, I just hired a person @ $13.50 an hour to clean toilets, and she thought that was good money. Plus I have a standby of 6 people to cover that shift.

If more unemployment comes, there will be a downward pressure on these wages. Surely this will contract the banks business and earnings. (Deflation?)

So, I think it is far too early to get into banks.

My opinion only.

 

[stoxclimber]

Thanks Stoxclimber - thoughtful reply.

Do you think the Govt will lift the ban on short selling at the end of this month? If they do, is this likely to have an effect on any of the "big four"?

PS: I'd only be interested in the big four at the moment - for reasons that you identified. I also understand that one of them, BEN I think, had significant exposure to at least one of the management investment schemes that have gone to the wall.

Short selling ban will probably be lifted, I doubt this will have much of an effect on the majors though. Word on the street is a lot of the overseas funds wanted to short Aussie financials a few months ago, not sure what the position is now, but overall I doubt it would have much of an effect. If it has any effect you'd think the biggest would be on ANZ since they're most likely to raise.

I think Bendigo and BoQ had some MIS exposure, not sure.

NAB or ANZ would be the most likely of the majors to make a play for BoQ, Bendigo would have a more compelling rationale though. Overall there's no rush to make a play for BoQ since the longer the disruption to credit markets continues, the worse BoQ's business gets.

The bad debt outlook is more focused on corporate debt, mortgages are less of a concern for a few reasons - personal guarantee of the mortgage, most of the riskier mortgages the banks hold are insured, and historically losses on mortgages have been quite low. Single name corporate exposures (e.g. Allco, Babcock, Centro etc.) are pretty known risks at the moment, the concern is over a broad based deterioration in the corporate books and what that would mean for bad debts. So if a bunch of small businesses are going broke around your area, might not be the time to get into the banks.

 

[Muschu]

Have had my SMSF underweight on banks since late last year. Seemed like a good decision early but obviously have missed the substantial rally since March. .....Any thoughts?

I agree about the rally Brian. If I had been astute enough to pick the uptrend in the rally then major banks delivered quite well for a period. WBC and CBA in particular perhaps?

Regards

Rick

 

[Bill M]

As a retired person who lives off of the dividends from my stocks I hold all the major 4 banks. I held them when they were at their tops and held them at their lows. At their lows they all came out with share top up plans (except ANZ) so I could not resist what I thought was a once in a life time to buy at very low prices. Biggest I picked up was CBA, 20K worth at $26 (wife and me 10K each), WBC at $15.22 and NAB at $19.99.

Banks always tend to turn around after severe market collapses and the big thumpers go back to doing what they do best. Banks are on the nose with everybody but not for me, I love the dividends. In July 3 of the 4 drop divies into my account and it's quite substantial.

Even after an average 25% cut in dividends across the board they are still paying reasonable divies, works out fully franked as follows:
Approximately
WBC 5.8%
ANZ 6%
CBA 6.3%
NAB 6.7%

Gross those yields up and you got a 9% dividends.

Should the banks take another big tumble from here and revisit their lows I will be in there buying them up again. ANZ and WBC have already gone ex div and NAB goes ex div on June 4, I am watching NAB very closely as if it takes a tumble between now and June 4 I might be picking a few more up.

 

[brianwh]

Bill

Agree with what you say. But my question is more about when to get back to full weighting on the big four. As Stoxclimber points out there is concern over defaults in the small and medium sized business sector - they are finding it more difficult to raise capital and of course defaults here feed into unemployment. And if I am reading your charts correctly Bowman, they don't suggest there is a need to rush back in.

But possibly the biggest concern I have is that there will be a big event o/s - failue of GM or a big US bank; or European banks particularly those with big exposures to Eastern European countries - who knows - that would lead to another leg down and good buying opportunities. Of course such things are not predictable and I'm only punting but just wondered what others thought.

Cheers

 

[Bill M]

Hello Brian, I am friggin hopeless at picking bottoms and highs but generally I tend to buy when prices are low rather than jumping in at the top. The banks have run hard in the last 6 weeks or so, so maybe a pull back might happen. I can't pick it but I will say that nearly everytime I wait for that pull back it usually doesn't come and then I get annoyed with myself. Good Luck with whatever you choose to do.

 

[bowman]

Hi Brian

I have to say I share your concers regarding the broader market and I too am wary of the possibility of another major event which will send the markets tumbling again.

According to average broker targets the banks are all travelling around fair value so I would be looking for pullbacks. The question as always is when to top up.

These 4 charts show the Fibonacci retracement levels (38%, 50%, 62% from the March low to the recent high.

As a trader I find these levels can provide accurate entry targets and they may also be useful to investors looking to top up.

As you can see ANZ NAB and WBC have already bounced off the 38% levels in late April and ANZ is testing those levels right now and looking a bit wobbly.

Maybe a pullback to 50% levels or lower is not out of the question?

 

[Trevor_S]

Banks are on the nose with everybody but not for me, I love the dividends. In July 3 of the 4 drop divies into my account and it's quite substantial.

My portfolio is always overweight banks (aside NAB, after the Homeside debacle, I never did like them, they seemed to stumble from one co_ck up to another). WBC was my choice in the past, I think they learnt there lesson from years past when they nearly went under and I was a big "fan" of Morgan, Kelly does not inspire the same confidence I must admit... that aside

I have a similar philosophy in regards divvies, as John Burr Williams; from "The Theory of Investment Value" (c.1938) said "Earnings are only a means to an end, and should not be mistaken for the end, therefore we must say a stock derives it's vale from it's dividends, not it's earnings. In short, a stock is only worth what you can get out off it."

Going forward ? I haven't added too much to bank stocks for some time ( a few years, I am too conservative I guess). If there is a retreat, I have money aside for LEI, WPL and ASX.

 

[Uncle Festivus]

I could be mistaken, but I thought the short sell ban will be lifted this week?? If that is the case, and coinciding with jitters on global bourses, maybe a week to sit out the buy & hold investment in any bank? I for one can't wait to short trade these again, when the opportunity arises.

Bottom line, any company who's profit is bolstered by non 'core' activities ie fees & charges at the same time as increasing provisions for bad & doubtful debts, is not at the top of my investing list? For the time being.....

 

[Ferret]

I think the aussie banks made fees and charges their core business years ago. Gotta hand it to them, they do that well....

 

[makingmoney]

A post that can relate to any shares.. is it a good time to buy shares...^^^alot of speculation on the banks..lol..in reguards to anz with capital raising <--anyone a director of anz or any hard evidence of capital raising with reguards to anz..i think this post can mis-lead ppl ..a cause of ramping..i thread which possible should be lock..alot of threads with personal thoughts which is fine but suggest sediment of thoughts of where the shares heading either up or down be backed up with evdence..lmao

 

[Julia]

A post that can relate to any shares.. is it a good time to buy shares...^^^alot of speculation on the banks..lol..in reguards to anz with capital raising <--anyone a director of anz or any hard evidence of capital raising with reguards to anz..i think this post can mis-lead ppl ..a cause of ramping..i thread which possible should be lock..alot of threads with personal thoughts which is fine but suggest sediment of thoughts of where the shares heading either up or down be backed up with evdence..lmao

I have absolutely no idea what you are intending to say.
A translation to basic English would be helpful.

 

[Aussiest]

I wouldn't be buying Banks at the moment. If you look at their price charts, most of them have been struggling to break through any sort of resistance that has been present over the past few months. My thoughts on the banks is that they're going to go down before they go up.