Via UBS:
The Aussie banks are very good companies. They are profitable, resilient, well capitalised, well managed, shareholder focused and have a very strong industry and regulatory structure. However, following the significant leveraging of the Australian & NZ households over the last thirty years they are now low growth and remain heavily exposed to housing, funding markets & unemployment risk.
And yet…
So, what gives?
We are conscious of the bull case for Aussie banks and all ‘yield’ stocks: further Quantitative Easing; rate cuts; falling Term Deposit rates; asset allocation flows into equities; the ‘least worst investment’; value of franking credits. However, bank dividends are a result of significant leverage; they are not annuities comparable to TDs. It must be noted Aussie banks are trading on a Record PE of 14.9x (CBA is on 16x).
Banks as yield plays! Now, we’ve heard it all.
That said, it would be brave punter to bet against further share price appreciation. After all, markets can remain irrational longer than you can remain solvent — especially when the world’s biggest central banks are determined to drive down yields on haven assets.
Back to UBS for a final word.
As with all asset bubbles, they can go higher and for longer than many expect. With a solid near term earnings outlook there is nothing stopping the market bidding dividend yields in to ~4.5% (historical lows) implying about 10% share price upside. As Chuck Prince (former CEO of Citi) famously said “As long as the music is playing, you’ve got to get up and dance”. All we can say is buyer beware.
Indeed.
Related links:
Banks enter bubble zone: analysts – Australian Financial Review
Chart du jour – Australian bank edition – FT Alphaville
Australian lenders: Oz-pop – Lex
Australian banks in focus ahead of results – FT.com