Investor sentiment towards the banks has markedly improved over the past month with valuations in the sector pulling back from overvalued territory ahead of the crucial reporting season. But banks are by no means out of the woods.
While bank stocks look inexpensive compared to the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) and are likely to report pleasing FY17 numbers thanks to the upward repricing of loans by the sector, I fear the near-term outlook is going to be more subdued.
Commonwealth Bank of Australia (ASX: CBA) is the only Big Bank to report full year results in August, but National Australia Bank Ltd. (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ) will issue trading updates.
I am advocating an underweight position in the big banks but that could change if the banks deliver any pleasant surprises. From that perspective, there are six things investors should look closely at in August, according to Credit Suisse.
- The outlook for loan balance growth: Look out for further evidence of downside risk due to pressure from authorities to tighten lending criteria and competition from offshore lenders on business lending.
- More upside for net interest margin: The banks have raised interest rates on just about all loans, particularly residential property investment. They have raised rates four times since December 2016. The question is whether they can keep doing that to improve profitability as loan growth slows.
- Possible peak in financial markets income: Credit Suisse fears income from this business will decline following the last reported figures and outlook statements from the sector. The banks most affected are ANZ Bank and Westpac Banking Corp (ASX: WBC).
- Further costs savings: The banks have indicated that they intended to cut costs even more and investors should pay close attention to what cost cutting levers they are looking to pull. There could be some upside surprises on this front.
- Loan book quality: Past due loans have been rising (albeit from a low base) and investors should look closely at whether this trend is manifesting itself and if its cyclical or structural in nature – particularly now that retailers are coming under increasing pressure.
- Capital requirements: APRA's latest comments and capital ratio requirements have been resoundingly good news for the Big Banks and it will be interesting to hear what the banks have to say about their capital management plans.
In case you are wondering, Credit Suisse has a buy on ANZ and NAB, and a "neutral" rating on the other two Big Bank stocks.
Investors have profited handsomely by holding Big Bank stocks since the end of the GFC in 2009 and how they perform during the August reporting season will determine how much of these stocks you should hold.
However, there are three stocks that you should avoid now, according to the experts at the Motley Fool. Click on the link below to get your hands on the free report.
