Banks continue to be staple holding for passive and active portfolios, mum and dad investors, super funds and really anyone involved with the Australian stock markets. When the Financial sector makes up 46% of the ASX200 stocks, it’s not hard to see why everyone is always talking about them.
Source: S&P Dow Jones Indices http://au.spindices.com/indices/equity/sp-asx-200
So how did 2014 fair for our Aussie Banks. As at 26th Nov, we see CBA is leading the way, up 4.13% with NAB struggling at 6.8% loss. But overall as a group, an equal weighting in each stock would currently see you down 0.07% before dividends are considered.
as at 26th Nov 2015
So by this very simply illustration, it looks like shares in the Banks was as good as cash in the Banks, when it came to capital growth, or lack there of.
But if Banks are making records profits quarter after quarter, how is this not helping out the shareholders. Well, we haven’t yet discussed dividends.
as at 26th Nov 2015
What’s is interesting is that the average yield provided was 5.5%, just a tad over the cash in the bank, however with all the added risk associated with holding stock. Furthermore, the highest yield was seen from NAB, which was also the worst performer. Just goes to show that chasing the highest yield is not always best practice either!
But will these dividends continue into 2015?
Historically Banks have maintained a steady payout ratio for their dividends of around 65-75% of their earnings per share. NAB however is currently positioned closer to 90%, which means NAB is likely at the highest risk of lowering its dividend compared to ANZ, CBA and WBC. ANZ is at the other end of the scale having the lowest payout ratio, so should have greater opportunity to maintain or even increase its dividend more so that the others.
However 2015 will also bring some new challenges for Banks in the way of financial industry reform and in particular, capital adequacy requirements.
Coming into the end of 2014 we expect the David Murray Financial System Inquiry (FSI) report to be released. Expectations are that in the efforts of creating a more stable financial system, major banks will need to have more capital held in the safest and most liquid assets.
In fact it is estimated from leading analysts that as much as $41 billion may need to be added to the safest assets over the next 2-4 years. Given the earnings of the big four during 2014 collectively reached $29 billion, this is a significant amount to new capital to obtain.
We expect that for shareholders, these new capital requirements will restrict Banks from any additional or “out of step” increases in dividends. Furthermore, in an effort to raise this newly required capital, new shares offered could lead to dilution for existing holders.
One of the more notable risks that major banks are facing is that of the property market, and the potential for short-term price bubbles to pop.
This is being hyped up right now when considering the likes of Sydney and Melbourne. If we saw quick price declines and a depression in confidence, despite the obvious risk of foreclosures etc, the more pressing risk to earnings is the slowing of lending.
Our expectations for 2015 are not that banks will simply slip into a “trading coma” and run sideways. In fact we think the complete opposite. While we think getting stronger than average capital gains from the banks will be a tough ask, we do think that the process of price and value discovery from investors will actually provide a very attractive ‘traders market’ in the Banking stocks during 2015.
This will be due to the fact that investors won’t simply see the banks as a place to park their funds the way they have in the last few years. Greater competition from smaller upcoming banks and tighter regulations will see investors apply greater scrutiny to which Banks are the pick of the litter.
This change in attitude should bring about swings in price behaviour, and less of the slow grind rises that we saw in the second half of 2013. Just look at Sept to Dec 2014 for example. These prices swings are great for the active trader across a range of strategies, and we expect such conditions will emerge as we get stuck into 2015.
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