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.
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