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Writing in its October monthly update, the Chester High Conviction Fund said it is "less than convinced banks offer any real downside protection should economic conditions worsen over the next 12 months."
The comment came after the fund noted the strength in the S&P/ASX 300 Index (ASX: XKO) in October was led by the banking sector, with Bank of Queensland Limited (ASX: BOQ) reporting results that highlighted an increasing net interest margin, a key driver of profitability for banks.
For the month of October, the Bank of Queensland share price jumped 13% higher. The Commonwealth Bank of Australia (ASX: CBA) share price soared 15% for the month, a great return for shareholders, but solidifying itself as even more expensive than when reporting results in August.
The Chester High Conviction Fund said "banks are capturing the benefit of higher interest rates, without yet feeling the impacts of those higher rates on impaired loans."
Yet the fund views banks as "leveraged exposure to the Australian economic cycle," effectively sounding the alarm bells for bank shares should the economy weaken. The sharp increase in interest rates will hit many mortgage-holders from next year onwards as they transition off low fixed rate mortgages.
Chester notes the rising pressure on commercial property pricing. Writing on Livewire Markets, Christopher Joye recently said commercial property owners and residential developers "have been the single biggest bank killers over the last 150 years," noting "ANZ and Westpac almost went bust because of their commercial property exposures in the 1991 recession."
Most economists are forecasting Australia will dodge a recession, but clearly economic growth is set to slow next year. Recession or not, bank shares, for so long the darlings of the S&P/ASX 200 Index (ASX: XJO), could be in for rougher days ahead.
