Short ‘n’ sweet – bank breakdown

Editorial director of Switzer
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As the banks soared ever higher following their interim results, we thought it would be a good time to review our overall view of, particularly, the big four.

So Paul picked apart the sector on Monday.

Banks are very well valued at the moment, but sometimes things are expensive for a reason. And can we remind you again that we have been upbeat on the banks, even when others were calling for caution? In his February article Chasing dividends – folly or fortune, Peter was already predicting CBA would reach $80 and now Paul is predicting that for the ASX 200 to get to 6000, CBA will go as high as $88.

Fan love

Ron Bewley is also a big fan of Commonwealth Bank. CBA and Westpac have been the two standout banks for him.

“I have owned both of these stocks for many years and I have never owned the other three,” he said in early May of the big four plus Telstra.

“Their current consensus recommendations are not great but, in my opinion, the current ratings are because investors have bid up price to the point at which yields have been compressed to a figure just above 5%. They are both – in my opinion – really good companies with impressive fully-franked dividends.”

There are risks, of course, but banks would need some pretty big disruptions – like a big rise in the unemployment rate that prompted an increase in loan write-offs – for there to be any big drop offs in earnings.

Another fact when it comes to the banks is that loan prepayments, on average, are up to 24 months in advance, according to Alphinity Investment Management principal and portfolio manager, Andrew Martin.

“In Australia, you just don’t get losses from mortgages,” he says.

Although this is good for reducing defaults, and means there would be a buffer if the unemployment rate were to rise sharply, the banks would prefer it if we remained indebted to them for longer.

Most banks have, for some time, left your automatic loan repayment amount unchanged when interest rates fall, which effectively means you are paying back more. But recently, at least one major bank has moved to drop the repayment amount automatically when interest rates fall. This increases your discretionary spending power but it doesn’t do anything for prepayments.

Alphinity aren’t as positive as we are on the banks, but they don’t think they’re headed for a crash any time soon. That outlook fits in with Charlie’s re-rating of the sector to neutral as well.

The alternative

And a new report from PwC, Asset Management 2020: A Brave New World, has the global funds management industry moving to $102 trillion in assets under management by 2020, from the current $64 trillion. Alternative investments – read hedge funds and private equity – are also expected to increase at a greater rate than general funds under management – to $13 trillion.

This means alternative investments will become more accessible for the retail investor, so don’t be too surprised if your favourite Aussie manager starts offering a hedge fund in the not-to-distant future. Just make sure they’ve got the right people to manage it before you invest.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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