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How are the banks going?

6 Sep 2021 1 month(s) ago

Australia's financial markets depend on residential property in the first instance and banks in the second instance.

How have the banks and finance sector been performing? These companies are nearly always a significant part of most investors’ portfolios so it is worth tracking their progress. Of course, in Australia, everything depends on house prices. Banks and finance companies do little else but lend to property and with residential property prices high everything seems rosy. Whether that continues is uncertain, of course. Things seem great right up until the moment they are not.

Still, the sector has been doing well. Morgan Stanley notes that banks outperformed the ASX200 in August. The average total shareholder return (dividends plus capital gains) rose 3.8% against the ASX200’s 2.5% in August. However the regional banks underperformed (+1.0%). “NAB (+6.9%), WBC (+5.3%) and BOQ (+4.9%) had a better month than CBA (+2.5%), ANZ (+0.5%) and BEN (-2.8%)”

Here are the one year total shareholder returns for the banks. Not bad considering the lockdowns and 'pandemic':

Morgan Stanley has a positive stance on the major banks. “The major banks have outperformed the ASX200 by an average of ~11.5% this year and by ~28% over the past 12 months. We remain positive on the group given improving revenue growth, resilient credit quality despite current lockdowns, excess provisions, large buybacks, rising dividends, a lower overall risk profile, and relative valuation appeal.”

MS estimates that the forward price earnings multiples (the price of the share divided by the earnings per share) is 15.6 times, which is not excessively high, about mid range for shares.

There is some variation in these estimates for different banks. “Based on consensus estimates, ANZ now trades at ~12.8x, CBA at ~19.0x, NAB at ~14.4x and WBC (Westpac) at ~14.4x.”

Bank shares are also estimated to be about a third cheaper on a price-earnings bases than the wider market. “The average P/E multiple discount of the major banks relative to the All Industrials ex Banks is ~36%, based on consensus estimates.”

The estimated prospective dividend yields are also strong and of course fully franked. “Based on consensus, the average major bank 1-year forward dividend yield is ~4.7%, which compares with a post-2010 average of ~6.1%. Banks are 'cheap' vs the ASX Industrials ex Banks.”

Morgan Stanley also notes that there have been some strong returns in the finance sector ex banks:



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