Aside from employing over 200,000 Australians and touching every sector of the Australian economy, the four major banks plus the two regionals comprise 25% of the ASX200 and are the four largest stocks listed on the ASX with a combined market value of A$380 billion. Assessing future prospects for the major banks is currently one of the biggest issues facing Australian equity fund managers and retail investors alike. Indeed over the past week the in the financial press there have been articles advocating a zero weighting to banks and another one on Tuesday morning recommending that bank shares are historically cheap and should be scooped up with abandon. We see that the current investment case for the banks lies between these two extremes.
After several years of delivering strong profit and dividend growth, primarily due to the tailwind of declining bad debt charges, in 2016 bank share prices have been sold off, with most of the pain falling on the two banks most heavily weighted to domestic housing, Westpac (-8%) and Commonwealth Bank (-10%). Paradoxically in the current yield-hungry environment, ANZ has been the best performer, despite cutting its dividend in May. In this piece we are going to look at the causes of this correction and some thoughts for the future.
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