09 Feb Never Let The Facts Get In The Way Of A Good Story

The wonderful thing when share prices go down is that media is full of all sorts of superlatives “ASX Smashed in 40 Billion Rout”, “Global Banking Fear Strikes Big 4”, “Flood Of Cheap Money Spooks Investors” & “Bank Shares Hammered” are some of the headlines I have seen in newspapers today.

Australian Banks are some of the most well managed, prudently supervised & highly rated (AA-) financial institutions in the world. Our financial system is the envy of many in the world as we know it today. Our Major Banks non-performing loans (i.e. those that they could potentially have to foreclose on) are trending back to what they were before the Global Financial Crisis and are miniscule amounts of what Banks in both the USA & UK have sitting on their balance sheets today.

All of our Major Banks have raised capital in the last year (which makes them eminently more safer & also some of the most well capitalized Banks in the world today), our national unemployment rate is sub 6% & our economy continues to grow at a moderate pace. Added to this the recent decline in the value of the Australian dollar has strengthened our export market & growth in tourism, education & financial services have overtaken the decline in the resources sector.

Home Buyers who have a mortgage are well in front of the curve on their payments (NAB reported in 2014 that 85% of their customers were at least 12 months in front on their loan repayments). Most of Australian Banks business is completed with Australians. Total Bank exposure to Asia is only 5% (and China makes up only 1%) & resources companies exposure ranges from 1% – 2% of Banks balance sheets.

But Bank share prices are down & significantly down on their high water mark from April 2015. Our Banks are a victim of their size (compared to the overall sharemarket), their available liquidity (able to be bought & sold easily) & also the sector they operate in (Global Banks are on the nose).

Just go back to my article from August 2015 (A Game Of British Bulldog ?) Hedge Funds around the world have been shortselling our Banks. Markets are currently pricing in the risk that our Major Banks will default on their bonds (the way in which our banks raise monies from large institutions) & this perceived market risk has increased by > 200% since late 2014. These pricing risks are traded in the market place (known as Credit Default Swaps or “CDS” for short) whereby you can effectively bet for or against financial institutions. Our Banks are now rated on this CDS scale at a far lower level than Banks like Royal Bank Of Scotland, Bank Of America & Lloyds – when these Banks are all rated as being inferior Banks to ours by Standard & Poors (Go Figure).

But lets look at reality, our Banks are trading at prices that we haven’t seen since late 2011 and based on these prices are effectively providing investors with a grossed up dividend (base dividend + franking credits) of > 10% (that is effectively 10% cash in hand income) and a return on equity of > 14% pa

Look At The Trends Over the Past 5 Years Of ANZ as an example (Source ANZ Annual Report October 2015)

Year Ended 30 June 2011 2012 2013 2014 2015
Cash/Underlying Profit (Billion) $5,652 $5,830 $6,492 $7,117 $7,216
Share Price $19.50 $24.70 $30.80 $30.90 $27.10
Dividends $1.40 $1.45 $1.64 $1.78 $1.81

So who wouldn’t want to buy ANZ today at effectively a late 2011 price ($22), but receive 2015/16 profit & dividends ? Virtually every Australian either directly or indirectly owns Bank stock via their super funds. Even if Banks cut their dividends by (say) 10% the income return & franking credits would still represent a 8% – 9% cash return to investors.

The time to be dumping Bank shares is when the economy goes into a deep tailspin (recession), unemployment skyrockets, housing/real estate prices fall rapidly & banks foreclose on numerous loans – think when we had Keating’s “recession we had to have”, NOT the current environment we have today

But Hey That’s Why We Have The Media Isn’t It (Just Saying) – or Don’t Let The Facts Get In The Way Of A Good Story.