ANZ had a good result, coming in ahead of expectations, with the stock trading well on an otherwise down day for the market.

We are overweight ANZ, although we run a 700bps underweight to the banks.

Mostly, that underweight comes from our expectation of a) more modest loan growth, as households are effectively maxed out / over-leveraged and b) cyclical upside pressure to rates causing a slowdown in the housing cycle. We have additional concerns such as the carrying value of the collateral (house price sustainability) and of the quality of the credit underwriting (which is a reference to the UBS “liar loans” work).

But, abstracting away from that top down narrative, and just looking at the long run historical earnings growth, note the following. No earnings growth for over a decade, despite the greatest housing bull market we’ve ever known.

Equally, that lacklustre performance is what gives rise to the generally attractive sectoral valuation, with ANZ and NAB (our other direct holding in the sector) screening as good value, with only the mortgage insurers (GMA, which we aren’t inclined to hold given our top down views) and smaller regional (BEN) / carve outs (VUK) ahead of them (with the regionals lacking the scale to meaningfully compete, in our view).

Outside of these concerns, the banks are generally well capitalised, these days.

Are well funded, by sticky deposits, as opposed to flighty wholesale funding markets.

And continue to enjoy the writeback of prior provisions, as COVID related bankruptcies turned out better than expected.

Those write backs likely have further to run, and do provide a useful “hollow log” for the banks to tap moving forwards, however our general view is that credit conditions are sufficiently benign, and that outside of COVID bad and doubtful debt charges can’t really get any lower, and as such are more likely to move up, over the next cycle, than they are to remain near zero in perpetuity.

So, in general, reasonable valuations (ex CBA) and some earnings tailwinds (which aren’t sustainable) against the headwinds of lower growth, higher BDDs, and concerns over the housing cycle. The net effect of all that is our fairly material sector underweight, which funds better opportunities, elsewhere.

Important Information: This document has been prepared by Aequitas Investment Partners ABN 92 644 165 266 (“Aequitas”, “our”, “we”), a Corporate Authorised Representative (no. 1284389) of C2 Financial Services, (Australian Financial Services Licensee no. 502171), and is for distribution within Australia to wholesale clients and financial advisers only.

This document is based on information available at the time of publishing, information which we believe is correct and any opinions, conclusions or forecasts are reasonably held or made as at the time of its compilation, but no warranty is made as to its accuracy, reliability or completeness. To the extent permitted by law, neither Aequitas nor any of its affiliates accept liability to any person for loss or damage arising from the use of the information herein.

Please note that past performance is not a reliable indicator of future performance.

General Advice Warning: This document has been prepared without taking into account your objectives, financial situation or needs, and therefore you should consider its appropriateness, having regard to your objectives, financial situation and needs. Before making any decision about whether to acquire a financial product, you should obtain and read the relevant Product Disclosure Statement (PDS) or Investor Directed Portfolio Service Guide (IDPS Guide) and consider talking to a financial adviser.

Taxation warning: Any taxation considerations are general and based on present taxation laws and may be subject to change. Aequitas is not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and investors should seek tax advice from a registered tax agent or a registered tax (financial) adviser if they intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.

Receive our investment insights

Something went wrong. Please check your entries and try again.