by Share prices underperformed on the day of the APRA decision, with CBA down 0.9 per cent at $83.18, NAB down 0.9 per cent at $23.34, ANZ down 1.3 per cent at $22.89, and Westpac down 0.9 per cent at $19.86. However, the sector has advanced strongly since the start of November.
CBA shares are up 21 per cent, NAB is up 25 per cent, ANZ is up 22 per cent, while Westpac has only managed to match the market with an 11 per cent gain.
ST Wong, chief investment officer at Prime Value Asset Management, said the rally in bank share prices from early November was partly driven by investors already factoring in higher dividends as the economy improved.
Consensus forward estimates for bank dividends already indicate that payout ratios are expected to rise to around 60 per cent in 2021, and then again, to 67 per cent, in 2022, the fund manager said.
“That’s not a surprise as we are looking at a much better economic environment in the next two years.”
Investors appreciate that capital levels are much stronger than they have been in the past. On Tuesday, the Reserve Bank of Australia underscored that the average Tier 1 capital ratio for banks in Australia is almost 14 per cent, near double the 7.5 per cent ratio for the banks in 2007.
And sector provisioning levels compared to six months ago “now seem on the high side,” said Mr Wong. A large percentage of bank customers have started repaying their loans, sharply lowering loan deferrals.
The fund manager described the bank sector’s six-week rally as a “catch-up” one.
Bank sector investors worried about the ability of customers to repay mortgages and loans, and whether provisions set aside to cover any losses were enough.
Now, with economic data exceeding forecasts, that’s driving investor expectations for lower credit losses and improved earnings, Mr Wong said. “We should be looking a bit more positive on the banks from an earnings perspective.”
The fund manager is expecting further gains, based on the improving economy, and estimates “on a ballpark basis” the bank sector rally is about 60 per cent complete.
“Valuations are still not on the expensive side,” unlike in the tech sector, he said. “Pre-provision profits are not going backwards anymore. They are stabilising and that’s what the market is pricing in,” he said.
While loan volumes should improve in the next 18 months, banks continue to face structural pressures from low interest rates and revenue growth is hard to find.
Still, the better backdrop gives the banks “some flexibility on capital management” and the market is now speculating share buybacks could arrive, he said. While it’s too early, the second half of calendar 2021 is a more likely time for investors to contemplate capital returns, the fund manager said.
UBS banking analysts are pencilling in $16 billion of buybacks from the big four: $3 billion from ANZ, $8 billion from CBA, $3 billion from NAB and $2 billion from Westpac.
Capital returns to shareholders could be funded from retained earnings and from selling assets but any buybacks are unlikely until the end of calendar year 2021, when the economic recovery is entrenched and the pandemic is likely to have passed, according to the broker.
