The Banks have over-provided for an Armageddon economic outcome that was based on over-cautious medical advice – The Australian bank sector has risen 14.13% in three days as it wakes up to the realisation that the economic recovery is coming faster than expected meaning GDP forecasts are too low (brokers are upgrading GDP forecasts), bank sector earnings forecasts are too low, and just possibly, deferred dividends may be reinstated. The sector fell 45.98%, bounced 23.2% and is still down 33.5%. After the energy sector, it is also the second worst performing sector in Australia.
The theme is that the economic damage is not going to be as bad as first expected in which case the banks have over provisioned against bad debts and will be adding provisions back, which flatters profits in future results allowing them to return to more significant dividend payouts and maybe paying the deferred dividends. The NAB under a new CEO is in the box seat having raised $3.5bn in new capital at their recent results whilst the other banks passed on the opportunity. The NAB also has a more significant online banking presence with UBank as it looks like COVID-19 has moved banking further online with the use of physical cash and a physical presence on the high street becoming unpopular.
Here are the Australian indices and sectors with sectors listed in order of biggest falls from the top to now. As you see, banks and energy are the worst.
Getting back up to weight in banks – We have been going a bit underweight banks in the Growth SMA in the last few days (still overweight in the income SMA) as the market as a whole broke up again on the assumption we could get better bang for our buck in other recovery plays. In the last three days with the bank sector up 14.13% we have still managed to outperform in the Growth SMA (easily outperformed in the Income SMA), despite that slightly underweight position – our recovery plays have performed better.
The debate today is whether to chase the banks again, whether this recovery bounce is the start of a bigger recovery rally. The charts say yes. The chatter says yes. A break-out often starts a trend. As a massive sector (25% of the index) institutions can’t afford to be underweight; a big bottoming sector so they are scrabbling to get back in or they underperform.
I see the WAM Leaders fund is in the press for going overweight banks for the first time in history saying they are trading well below book value. UBS (big distribution) has an analyst called Jonathan Mott, a perma-bear on banks, who has written research talking about a catch-up rally in the sector as they trade at a bigger than usual discount to book value. Their order of preference is ANZ, WBC, NAB then CBA (always looks the most expensive). They say they are optimistic in the short term. Most brokers have the banks trading at least 20% below their target prices (except CBA).
The long term outlook (zero rates, tiny margins) is for a very low growth/no growth sector, but there may be a sentiment recovery - a recovery trade, to be had.