Has the tide really turned on bank stocks?
Commonwealth Bank of Australia (ASX: CBA) shares have dropped more than 10% recently as investors clue in to coming changes to bank capital rules.
A decline in quarterly profit compared to last year says a lot about the state of the banking sector, while the number of bad debts also looks to have hit rock bottom – and there's only one way to go from there.
(Contributor Ryan Newman wrote on today's results release from CBA in this article)
While Commbank hasn't yet shed any light on how it will deal with potential changes to its capital requirements, comments from its competitors have been very illuminating.
Westpac Banking Corp (ASX: WBC) bit the bullet on Monday and announced a $2 billion dollar dividend reinvestment plan to shore up its balance sheet. Ultimately $2 billion represents only a small fraction of Westpac's $111 billion market cap and won't make that much of a difference to its stability.
It's a smart move though, given that bank shares have recently been trading at all-time highs and market commentators have pointed out that a stock issue is the best way to get bang for their buck.
Competitor Australia and New Zealand Banking Group (ASX: ANZ) sits at the opposite end of the spectrum however, and has its eyes firmly on the dollar signs.
In comments reported by Fairfax media, ANZ chief Mike Smith announced that the bank would not be hurrying to hold extra capital, and was instead considering 'reallocating' its capital by selling some assets in order to channel the funds into avenues of higher performance.
Mr Smith is focussed on delivering returns to shareholders, and his ANZ bank beat performance expectations in its results yesterday.
However the differences between Westpac's approach and ANZ's strategy are marked, and investors would do well to remember that the banks aren't just carbon copies of one another despite the similarity of many of their businesses.
National Australia Bank Ltd. (ASX: NAB) also reports tomorrow, which will round out the big four and complete the current snapshot of the banking sector.
With potential changes to the banking system coming (which may lower earnings), the style of the management team is going to become increasingly relevant.
I haven't owned bank shares for several years and I again encourage existing holders to evaluate whether they're comfortable with the size of their bank shareholdings.
