In the event the housing market holds up better than expected and current provisioning proves suffice, after years of holding a negative view on the banks, Michael Wayne, Managing Director, Medallion Financial Group, says his view has shifted somewhat.
“For the first time in at least five years, our view on the banks is starting to shift from outright negative to neutral,” Michael said.
Michael says that ANZ, NAB and Westpac offer reasonable value, although he urges caution as he maintains that the structural headwinds aren’t going to disappear completely any time soon.
“In a market where pockets of companies are very expensive, we feel the banks offer a pocket of value, given the considerable share price declines in recent years.
“A 25% to 30% positive repricing is a possibility as the outlook improves,” he says.
And which of the big banks does he prefer?
“CBA has historically always traded on a premium to its peers, which to some extent is justified, given its early investment in technology and ability to maintain a dividend during this tough period.
“However, as it stands, we feel ANZ, NAB and Westpac are more attractive on a relative basis, given they’re essentially trading at their cheapest level in almost 30 years, with current valuations sitting below book value.”
At this point, Michael says that despite the recent $1.3bn civil penalty for breaches of anti-money laundering laws (the largest fine in Australian corporate history), he has a slight preference for Westpac.
“The fine was provisioned for and at least to some degree already factored into the price. In any case the reality is a $1.3bn fine barely registers for a business that size. As it stands, it is essentially trading at its cheapest level in almost 30 years, with current valuations sitting below book value. As such on a 1 to 2-year view, we feel this is a decent opportunity to pick up a high-quality bank at what we feel is close to the bottom of the cycle,” he added.
And how will the Federal Government’s recently announced initiative to water down the responsible lending laws affect Michael’s view?
“This will ensure less onerous credit rules and help encourage the flow of loans and boost the economic recovery from the COVID-19 induced recession. The banks facing less roadblocks will be able to more easily write loans, boost credit and in our view hopefully kickstart bank earnings growth and ultimately boost share prices given the vast amount of negativity factored into the current prices,” he said.
And his thoughts on the potential lift in Westpac’s share price?
“We don’t necessarily assume the prices will recover to the heady days of five years ago, however, even a bounce towards $25 would deliver a decent return in a fairly low risk business,” he said.
Westpac (WBC)
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