Bank Shares

Earlier today, I was asked whether I thought Australian Bank shares are a good investment in current market conditions.

For the sector as a whole, I expect Capital Gains to be subdued for the next few years as our economy is slowing, interest rates are high and people are borrowing less (or paying back debts). Profit growth will be very small, however I do not expect any cuts in dividends.

For individual banks, the situation is not so clear. ANZ has been in the news due to having increased its provisions for bad debts, as well as the OPES Prime fiasco. NAB has also copped some flack due to exposure to the US mortgage crisis. SGB and WBC have done better, both reporting strong single digit earnings increases.

I am not going to make a call, but I can tell you how I would start my analysis – I would examine each bank to determine the proportion of income from each of the bank’s activities, e.g. Retail banking, business lending, wealth management/financial advice and others. Also, I would look at the proportion of income earned in Australia and the proportion earned overseas. I can then make my own judgement on the future prospects of each activity.

Commonwealth Securities provides research from Aspect Huntley on its website. The above information can be found under the ‘Analysis’ tab.

Be cautious about PEG estimates provided online. These are purely guesses made by the research company’s analysts. It is better to read each bank’s earnings guidance in their annual report and use your own critical thinking skills to see what assumptions lie behind them.

For me, banks are now an income investment, as they pay large, stable, fully-franked dividends. I have been holding ANZ and NAB since last year. Do not consider this a recommendation.

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