Australia's big four banks haven't exactly had the best of runs lately.
To refresh your memory, we're talking about the multi-billion-dollar market leaders here: Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group Ltd (ASX: ANZ), and National Australia Bank Ltd (ASX: NAB).
Between royal commissions, plummeting interest rates and an economy-stalling global pandemic – to name just a few issues – it would seem they just can't catch a break.
Indeed, the share prices of all 4 of the big four are still well down in 2020. Worse still, if you'd bought shares in any of the big four banks 5 years ago, in November 2015, every one of them would currently be trading at a lower share price. (Note, we're not talking total returns here, as we're not taking dividend payments into account.)
The NAB share price, for example, is down 19% over 5 years. The CBA share price is down a more muted 1%.
To put that in some perspective, over that same 5 years, the S&P/ASX 200 Index (ASX: XJO) is up 27%.
The tide could be turning for Australia's banks
Like most every ASX share, the banks were savaged during the wider COVID-driven market panic in late February and March. But they've defied a lot of gloom and doom forecasts to come back strongly.
Since the 23 March low, the CBA share price is up 46%. That leaves shares only 0.5% down since 2 January.
NAB's share price is up 66% from 23 March. Though NAB shares remain down 6% so far in 2020.
The past month has been particularly promising for shareholders in the big banks. NAB's shares are up 24% and CBA's have gained 15%, both outpacing the 11% gain posted by the ASX 200.
And there could be more good news to come.
Party like it's 1976!
According to the Australian Financial Review, growth among Australia big four banks in the September quarter is forecast to be between 3% to 4.1%. The last time the banks posted that kind of growth?
1976.
Earlier this month, Morgan Stanley (NYSE: MS) analyst Richard Wiles wrote:
For the Australian banks, tail risks have decreased given highly supportive fiscal and monetary policy, the end of the Victorian lockdown, an improving outlook for the housing market, and recent progress on a COVID-19 vaccine.
UBS Group (NYSE: UBS) analyst Jon Mott, quoted by the AFR, is also cautiously optimistic, saying:
While the banks are no longer cheap in absolute terms, we remain positive for the cyclical recovery. However, we are very conscious of the structural headwinds to revenue and pre-provision profits from sustained near-zero rates.
The banks' CEO's have joined in the optimism that Australia's economic outlook for 2021 now is much better than what most analysts had forecast just a few months ago.
CBA's chief executive, Matt Comyn, speaking to the Australian Financial Review Banking & Wealth Summit on 18 November, said:
The speed of their recovery has been faster than we'd anticipated and a lot better than we'd feared, and we're increasingly optimistic. To give you an example, we were previously forecasting, I think, 2.75 per cent GDP growth in calendar 2021 – that's now at 4.5 per cent. I think where we have an even more optimistic view is on unemployment, I think the RBA had 6.5 per cent by the end of next calendar year, and we're at 5.75 per cent.
NAB's chief executive officer, Ross McEwan, added:
Shoe sales went up 1600 per cent in the first week [after lockdown]. It's like everyone went out and bought a pair of shoes. We're now expecting the Australian economy to get back to pre-COVID levels by late 2021, much earlier than we originally thought. There are still a number of big issues to manage, but overall the current picture better reflects the best-case scenario we presented at our recent financial results.
In a research report released by investment manager Ausbil earlier today, Paul Xiradis, Ausbil's chief investment officer, labels the banks "one of the best risk-adjusted opportunities" to take advantage of Australia's resurging economy:
As the economy builds strength, and companies complete their repositioning for a changed world and earnings growth returns, we believe one of the best risk-adjusted opportunities for leverage to a resurging economy is in the banks. Banks are still trading well below their long-term multiples, have experienced less delinquency and bad debts than first thought, and are all well-capitalised.
With leniency recently expressed by APRA in terms of dividends, we expect a resurging banking sector to return to paying more normalised dividends on the back of a resurging economy in 2021.
Although shares in all the big four banks are down today, along with the wider ASX 200, the better than expected economic news offers renewed hope for the year ahead.
