Tug-a-war over bank shares

Retail investors want yield while institutional investor want growth. It’s hard to see how one won’t be disappointed.

If there’s one thing to come out of the recent profit season and the ensuing volatility that saw the market retreat to the 5000 point mark for the Top 200 was the absolute necessity for boards to maintain dividends.

Some large sector leaders even increased payouts despite a lower profit number.

This point was reinforced by the fact, reported by Bloomberg, that individual investors were actually more active in bank shares during the downturn than experienced previously.

Online share trading platform CommSec reported it highest level ever as individuals plunged into bank stocks. These investors obviously discounted predictions that banks earnings growth was slowing, that banks capital requirements were increasing, that transactional income was under threat from fintech start-ups and more importantly that banks main source of income – the property market – was slowing down.

No the only thing that interested those ‘moms and pops’ investors was the bank’s average yield of a little over 6 per cent, boosted by the lowest bank prices in three years.

Even if the banks get run over by their own cost structures no one expects them to cut dividends any time soon and with an implicit government guarantee they are too big to fail. For those looking for income support bank yields compare favorably with the banks’ own fixed rate deposits of 2.5 per cent (if you’re lucky) or even property rental yields, which are starting to feel some pressure, of 3.4 per cent for houses and 4.3 per cent for apartments.

In the best case scenario bank stocks stop going down an that yield can be juiced up with some capital gains but this if going to take some hard grind through better-cost controls. Banks have been exceptionally good at this in the past, but in the future it looks like a juggling act as the banks spend money in developing new customer platforms in the digital space to enable them to start closing their high-cost branch networks.

With little hope of expanding their market share via takeover the only bank with a growth strategy outside Australia is ANZ, which is committed to earning more than 20 per cent of its revenue from Asia in the next couple of years.

Which brings us to another theme which dbdata has expanded on in the past. Cost cutting can only go on for so long before the company runs out of thing to cut or puts itself up for sale. That moment may be approaching.

Two things should be noted. Firstly the number of companies expected to hit the merger and acquisition trail this financial year is rising especially in those industries that have been hard hit in the commodity downturn including energy, iron ore and coal.

But other sectors that are looking ripe for rationalisation include healthcare, medical services, education, and real estate management.

Secondly the initial public offering market is alive and well despite the share rout and with more companies are being prepped to launch onto the market. This is a result of the growing sophistication of the venture capital market in Australia and the newfound ability to raise capital from institutional and individual investors buying into and revamping a lot of midsize privat companies.

Obviously the yield is a lot better than bank shares!

Go Back