Banks are front of mind again after ANZ and Westpac recently announced higher bad debts expense from exposure to the mining industry. Bad debts have bottomed; the question is the pace of normalisation from recent historic lows.
John Abernethy and StocksInValue analyst David Walker discuss the outlook for bank earnings, valuations – and those all-important dividends, which will largely be flat but could fall in ANZ’s case. Payout ratios, bad debts expense, interest margins, funding and operating costs are all in the mix.
In terms of share prices, fear and speculation are haunting bank stocks with the result ANZ and NAB are not priced aggressively even assuming a housing downturn. ANZ is arguably oversold. In contrast, CBA at two times book is priced for a sunny banking outlook – which we do not see. We think dwelling prices have peaked and average prices in the major cities will deflate, making life harder for banks.
Tax policy, especially on negative gearing, is a key risk for house prices and banks, with some adjustment likely after the election.
Disclosure: Clime Asset Management owns shares in ANZ, CBA, NAB and WBC on behalf of various mandates where it acts as an investment manager. David owns shares in ANZ, CBA, NAB.