If you are reading this article, you probably already know our view of the prospects for the big four banks.
If not, you can find our latest article covering the big four Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) here.
However, we felt you might want to also hear the views of the professionals – the fund managers who have to make the decisions about whether to hold banks in their portfolios and the investment banking analysts who cover ANZ, CBA, NAB and Westpac.
First up, Contango Asset Management's Chief Investment Officer George Boubouras
From the fund manager's latest report, Mr Boubouras says,
"There is increasing evidence that this golden run is over with the sector facing some serious challenges over the next 12 months. My view is that the banks' current bad and doubtful debt charge is unsustainably low. As the Aussie housing cycle matures, as the global interest rate cycle begins to normalise (i.e. rise) and as the fallout from the mining boom spreads through WA and QLD, bad debts will inevitably rise.
"I expect a period of sub-par earnings growth where the majority of the sector's return will come from dividends rather than capital appreciation. Given this outlook, I would prefer to allocate to the sector from a structurally underweight position."
Bennelong Australian Equities Partners (BAEP – chief investment officer Mark East)
In the latest update, Mr East and his team looked at the banks and said the following,
"There are now, however, good reasons to believe that the future will not be quite as rosy as the past few decades.
- "Credit growth has slowed down significantly, reflecting a more highly leveraged and slower growth economy. Slower credit growth will slow down bank's revenue growth, which has been a very important driver of their stellar run of the last couple of decades.
- Regulatory reform has tightened for the banks, and it looks like this will continue.
- Credit charges are at all-time lows, and there is the prospect of a pick-up. During the GFC, many banks provisioned for a much higher level of loan losses than eventuated, and the write-back of those provisions made their way into, and boosted, banks' profits. Credit charges are on the rise.
- There is now the prospect of new competition. As an example, 'fintechs' are beginning to disrupt some of the banks' more profitable niches."
"It is important to remember that banks are both highly leveraged and economically sensitive."
Yesterday UBS analyst Jonathon Mott warned of a substantial increase in provisions and a material rise in charges for the banks thanks to their exposure to Arrium Ltd (ASX: ARI), Dick Smith, Slater & Gordon Limited (ASX: SGH), Dick Smith, coal giant Peabody Energy, and not forgetting struggling transport group McAleese Ltd (ASX: MCS).
One fund manager taking a positive view is Clime Asset Management
"Recent bank share prices have been driven by much media coverage concerning the increase in bad debt charges and exposures. There seems no doubt that bad debt charges and provisioning will increase in coming few years. However, the recent price moves seem well ahead of any real evidence of bad debt exposure. We believe that recent declines in the price of ANZ and NAB are excessive."
"Whilst we have adjusted our forecasts for bank profitability to below current consensus market forecasts, we find that banks, in general, are looking like reasonable value. Indeed, we have even cut our dividend forecasts and they still filter as value. So it would only be a severe recession that could justify lower bank prices for NAB and ANZ at this point – but a recession would hit the share price of CBA harder."
Foolish takeaway
I think that neatly sums up the market's view of the big four banks. We should also remember that Australia hasn't had a recession in 24 years, and the banks have prospered for a long time. The longer we go without having one though, the closer the next one is.
And as always we remind investors that banks are highly leveraged, and it would not take much of a shock to the Australian financial system to ripple through the banks – damaging earnings, dividends and share prices along the way.
