The share prices of the banks are now pretty much at the level they were at prior to the onset of the Covid pandemic in late February 2020 (CBA’s are in fact about 5% higher), having returned an average of 55% in the past 12 months. While their earnings are within the ball park of pre-pandemic levels, those all important dividends remain substantially below. What’s going on? In one word: value is back.
What's happening with the ASX banks?
Okay that was three, but you get the point. Investors are looking for security in the form of balance sheet strength and earnings resilience, which leads to income in the form of fully franked dividends. For the banks, those dividends are low, but they are bouncing back to pre-Covid levels, and importantly, investors have a line of sight on this.
Our price targets that banks are not as good value as they were, which is reflective of those above market returns in the past 12 months. The benchmark S&P/ASX 200 Index has climbed 31% over that period.
There is still value in banks
But we think that there is still value. Which bank do you buy? While CBA still looks over valued, it does command a premium for quality, being the biggest and arguably over history, the best run. Of the four, ANZ and NAB are most focused on business banking (ANZ agribusiness, mining, NAB general business) but CBA is making aggressive forays into business, mainly on the general front. CBA and WBC are the biggest retail banks.
All continue to rid their business of what they now term as “non-core” namely wealth management, life insurance, auto-finance. The list goes on. There is an abundance of logic in this, albeit enforced by APRA’s increasing capital adequacy guidelines. The move also reflects the increasing complexity of business, the big banks board's limitations and the desire from investors for banks to concentrate on what they do best: lending money. On this front, the property squeeze strengthens their collective base, while the increasing long-bond interest rates should benefit their net interest margins.
If I was to pick one, it would be Westpac (WBC) because its CEO Peter King has been aggressive on cutting costs on a relatively big cost base; the company continues to recover from arguably the biggest disasters on the PR front (the $1.3bn money-laundering fines it received last year following AUSTRAC’s investigation); finally it is somewhat insulated by CBA’s land grab on the business banking front.
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