Really just thinking out aloud about the banks.

Earlier, we wrote about the NIM pressures called out by WBC, ANZ, SUN.

The industry is facing competitive mortgage market dynamics, rising short dated funding costs, and the switch to lower spread fixed rate mortgages.

We are also starting to see wage pressures, non existent in Australia for a long time, slowly building as the unemployment rate moves to 4% (and potentially below).

Credit growth had been very strong, as a result of the pandemic shift to goods, durables goods, and the most durable of all goods, a house, aided by plunging interest rates, which a) raised collateral values and b) made it easier to service a loan.

However, the pandemic “pulled forward” demand, and rising mortgage rates should slow much of this speculative activity.

Also, the “hollow log” of provisions seems well understood (this is the write-back to profits associated with COVID losses that didn’t eventuate, hence unwinding the previously raised provision), which puts us back in the “the-only-direction-for-BDD’s-from-here-is-up” camp.

Against all that, banks are cheap, and the shorthand heuristic of the market is “buy banks when rates are going up”. Also, rising BDD’s are pretty unlikely given that unemployment rate I spoke of.

We own ANZ, and NAB, have been tempted by WBC, and so far, ultimately put off by WBC’s NIM sustainability comments (specifically, their view that NIMs will fall further across FY22).

It certainly makes a very difficult set of narratives to parse, and quantitative factors to emphasise.

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