Australian Banks – in a Sweet Spot
c Investment Strategy Update #47 Australian Banks – In a sweet spot • Australian bank stocks are in a sweet spot where banks offer a sensible hedge against this backdrop. both macroeconomic and stock specific factors Rising long bond yields and a steepening yield curve are providing a strong tailwind for further are positive for bank margins which have been performance. crushed by low rates and a flat yield curve. • Despite a rapid valuation re-rating since October In addition, as the economy has reopened, for the 2020, we see more upside as earnings (and most part faster than expected, and the housing dividends) continue to be upgraded and as the market has responded to policy initiatives and low sector benefits from a steepening yield curve, borrowing rates, the bear case for banks has been lower than expected bad and doubtful debt quickly unwound and we think the earnings and charges, improving credit demand and a reversal dividend upgrade cycle still has some way to play out. of underweight positions as reflation drives Investor sentiment has also shifted since 4Q20, with further value stock rotation. institutional investors closing their underweight positions, with rising dividends expected to further • Macquarie upgraded banks’ earnings by 10-25% through the recent reporting season. For a large- stimulate retail investor interest. cap sector, this is substantial, and while medium- Relative price performance improving term structural challenges remain, there is still Banks versus ASX200 scope for additional valuation expansion. $ Relative Price vs EPS Performance 130 • Macquarie’s order of preference within the sector 120 is ANZ Bank (ANZ), Westpac (WBC), National 110 Australia Bank (NAB) and Commonwealth Bank 100 (CBA).
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