Why bank buyers must beware of market chameleons

Australian banks are “market chameleons” and long-term investors must expect “boring” bond proxies and not be deluded by decades of double-digit growth, the AFR Banking & Wealth Summit has been told.

When Citi last month forecast the ‘sun to set on bank share price rally’, bank share prices ventured three per cent higher on a simple price average basis (not cap-weighted).

According to Kate Howitt (pictured with Brian Johnson), portfolio manager Fidelity Australian Opportunities Fund, while companies largely stay true to type, investing in Australian banks has evolved into something else entirely over the last 20 years.

Banks are market chameleons, Howitt told the event in Sydney.

“So, when you go through a decade of credit growing in double digits - they’re growth stocks. And when you go through a seven-year recession - they’re economic cyclicals," she said.

Rising imbalances

With ratings agency Standard & Poor’s continuing to signal rising imbalances in the Australian economy as potentially posing a risk to bank credit ratings, Howitt said the timbre of banks was changing again.

“Now we’re more at a point where we hope they’re not economic cyclicals and they’re more likely to be seen as utlilty bond proxy type stocks - where the growth is slower, the yield is good and fairly sustainable.”

Howitt said investors are often tripped up by performing banks when they tend to start seeing them as evergreen growth stocks no longer bound by economic cycles.

“Where investors tend to get caught out with banks is when they invest in them thinking they’re growth stocks forever and suddenly realise, 'oh no, they’re an economic cyclical!'," she said.

“So If the regulators are able to pull off a gentle tapering of the housing market and credit growth, then your upside case for the banks is that they’re bond proxies and they’re nice, stable, utility stocks; hopefully without too much of the downside.”

Risk on two fronts

As it stands, bank credit ratings are at risk on two fronts – individually, and as part of Australia’s sovereign rating.

According to Dion Hersham, managing director and head of Australian Equities at Yarra Capital, this is an unsung function of the banks.

“In many respects they are a proxy for what’s happening in the domestic economy,” Hersham said.

According to CLSA’s Brian Johnson, the long-term outlook for Australian banks is simple: boring.

“When we get to the end of this regulatory reform wave is actually pretty boring,” Johnson told the AFR summit. “Credit growth will run at nominal GDP. Basically, because you don’t have crazy credit growth, you won’t see much in the way of loan loss cycles.

"Basically they’ll just spit out regular dividends. Banks will go back to being really boring credit remediation utilities. It’s boring but probably not too bad.”

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